Monday, June 13, 2011

Exploring India's "dynamism-dysfunction" paradox

The NYT has a thought-provoking article that uses the example of Gurgaon to highlight the increasingly obvious paradox with India - "dynamism wrestles with dysfunction"! Its conclusion - dynamism comes from private sector and the dysfunction can be traced to the government.

As the Times article writes with the example of Gurgaon, "economic growth is often the product of a private sector improvising to overcome the inadequacies of the government". In Gurgaon and elsewhere in India, the answer to the country's economic growth paradox that has gained currency is that "growth usually occurs despite the government rather than because of it". It is argued that if governments - central, state, and local - could get their act together, then everything could be so different. Is it as simple as that or does it merit a more nuanced perspective?

It is undoubtedly true that governance remains generally weak and ineffectual across the country. Bureaucracy is stifling, professionalism scarce, political populism rampant, and corruption all pervasive. It is also true that India's private sector, especially in the services, have been remarkable global success stories and have played a major role in placing the country into a robust growth path. Private entrepreneurship has blossomed spectacularly over the past decade despite numerous governance related obstacles.

Therefore, is the problem merely one of a dynamic private sector and a dysfunctional government? Will the problems and deficiencies in public infrastructure service delivery disappear and entrepreneurship bloom if governments become efficient? As always with public policy debates, there are several critical dimensions to the issue that have been brushed under the carpet in our eagerness to find answers and fix blame.

However, even if governments become more efficient and outcome focused, there are certain other critical pre-requisites for any government action to deliver results. Efficiency improvements and planning can only create the platform for effective public service delivery. It cannot be a substitute for the massive capital investments required to actually deliver public services. Further, a substantial share of such resources, for setting up the infrastructure and more importantly for its operation and maintenance, have to come from its users. Governments will have to bear the subsidy burden for the poor.

Let me illustrate both these issues with reference to the Times article.

1. Development requires massive financial investments. Development spending in India resembles a trickle-down drip, whereas the need of the hour is a large-sized pipe. The Times article writes about Gurgaon's deficiencies,

"Gurgaon... does not have: a functioning citywide sewer or drainage system; reliable electricity or water; and public sidewalks, adequate parking, decent roads or any citywide system of public transportation. Garbage is still regularly tossed in empty lots by the side of the road.

With its shiny buildings and galloping economy, Gurgaon is often portrayed as a symbol of a rising 'new' India, yet it also represents a riddle at the heart of India’s rapid growth: how can a new city become an international economic engine without basic public services? How can a huge country flirt with double-digit growth despite widespread corruption, inefficiency and governmental dysfunction?"

Addressing all these deficiencies require huge investments, running into thousands of crores. Each major city would require a few thousands of crores. After they are put in place, issues of governance assume importance. Governance improvements with deficient infrastructure is equivalent to running a complex software on a low-end and out-dated computer. However, unfortunately the trends in this direction have been far from encouraging.

In recent years, an impression has gained ground that government investments in infrastructure services could be substituted with private investments in the name of public private partnerships (PPP). All it requires is for governments to either contribute land as its equity or agree to pay an annuity to the developer to deliver the service, and private investors will que up. Governments at all levels across the country have been chasing PPP investors in the past few years to partner with governments in delivering civic and public infrastructure services. As can be seen, except in a few inherently private investment friendly sectors, the results have been dismal everywhere.

This outcome is to be expected. In its broad historical sweep, no major country in the world, including both developed and now emerging economies, have developed their public infrastructure except through massive direct public investments. Nowhere in the world have private investors replaced governments as the major or even a significant provider of services in sectors like urban civic infrastructure, mass transit, roads and bridges etc. These investments have been and continues to be the preserve of governments.

There is no secret for this. Investments in these sectors are capital intensive and require high user charges or tariffs to be sustainable (some like public transit run into problems even with high tariffs). The user charges and tariffs in India are too small that it is inconceivable that any government could permit raising them by the many times required to recover these user charges. The other alternative of governments subsidizing private service delivery would require massive annuity type payments, which are again beyond the resources of most local and state governments.

This gridlock is unfortunate because atleast some Indian cities have fairly robust and professional governance systems in place. There are a few cities which even have excellent City Development Plans, professionally prepared, which could not be operationalized for lack of resources. In fact, urban governance has improved considerably in many cities across the country in the past few years. But the hardware is missing.

2. Where do these massive investments have to come from? If these services are to be sustainable, there is no denying that users have to bear a considerable share of the cost, much more than what they are paying today, of accessing these services. Sample this from the Times,

"To compensate for electricity blackouts, Gurgaon’s companies and real estate developers operate massive diesel generators capable of powering small towns. No water? Drill private borewells. No public transportation? Companies employ hundreds of private buses and taxis. Worried about crime? Gurgaon has almost four times as many private security guards as police officers."

Herein lies another paradox - people are individually paying exorbitant rates to access services from private providers but collectively unwilling to agree to pay for the same from government agencies. The politics of taxes and tariffs is a major stumbling block to any increases in them. There is also the fact that only a small proportion of the population are actually paying for these high-priced private provision of civic services. (The anecdotal examples of poor people accessing drinking water from informal bore and tanker operators etc is a misleading generalization)

The misconception that privatization is the alternative for government service delivery and government service delivery is inherently inefficient has merely amplified this collective reluctance to pay for services. Why pay the government for a service, when its delivery is unreliable and quality questionable?

It is ingrained into the public discourse that government providers are inefficient and expensive, whereas private service providers can deliver the same service with much greater quality and cheaper. This misconception persists despite the fact that private service delivery costs much higher. Critics counter this argument by claiming the people are willing to pay higher user fees or prices if they are assured of reliability and quality. While theoretically unexceptionable, as I have argued here, this stumbles when faced with real world implementation.

The rich live in near complete isolation. They have their reliable and world-class utility services - water, sewerage, electricity, telephone etc - delivered by private service providers. They hire private security guards to maintain law and order in their gated communities. These self-contained communities have their own parks, gyms and other recreational facilities. They have all the exclusive global brand retail outlets and shopping malls to satisfy their desire for conspicuous consumption. Though they still have to endure the traffic congestions and bad roads, they can afford to do it from the luxury of their chauffeur driven limousines. (It is surprisingly less discussed in all debates about public transit systems about how the rich have no incentive in establishing it) And when they want to get away from even these, they have access to world-class airports and luxurious resorts.

In other words, the rich and upper middle-class are increasingly finding diminishing incentive in improving public infrastructure. And unfortunately, they are among the only category of users who can afford to pay the high prices required to establish and deliver world class civic services. If they abdicate, the ability of local governments to finance and sustain such services become even more tenuous.

None of this is to absolve governments and its machinery off blame for the dysfunctionality of our governance systems. It is just that the society and its government need to face up to the reality that world class public service delivery requires massive investments in infrastructure and a willingness by citizens (and wherever they cannot, by governments) to pay much higher than what they are paying now in the form of tariffs and taxes. Simplified explanations that attribute the dysfunction-dynamism paradox to the standard private-public sector stereotypes are merely brushing issues under the carpet.

Gurgaon's fundamental problem is that it requires massive investments in civic infrastructure. Possibly tens of billions of dollars. The city has grown far too fast for its cash-strapped local government (India is possibly the only major country where local governments do not get any share of the larger central and state taxes) to sustain any meaningful investments. It is of course important that the urban governance systems have to be competent and efficient enough to professionally plan and execute these investments and then effectively maintain them. But the finances for the hardware has to come first.

No major Indian city is presently capable of executing projects on a scale that cities like Gurgaon need nor have the financial resources to do so. I am also not sure whether the supply side has the expertise and capability to deliver on them even if the financial bottlenecks are overcome. After all, for all talk of government lethargy, the actual execution is done by private contractors.


Indian Power Market said...

That article in NYT hurt me too, but it was good to have broader perspective of the "Urbanomics".

But once again, though I find a very good explanation of the problems at hand the "plausible solutions" are not mentioned.

Do we increase the Tax rate in Urban areas? If yes, who ensures the accountability for quality of service? PPP is the only answer that comes to people's mind. Any other options would be more than welcome.

I think everyone would be wary of a tax increase when such a track record of quality of service.

KP said...

Dear Gulzar,

With this comment you actually lead into what may be the bigger problem in our economy.

"I am also not sure whether the supply side has the expertise and capability to deliver on them even if the financial bottlenecks are overcome. After all, for all talk of government lethargy, the actual execution is done by private contractors."

The capabilty deficit on the supply side, and a less than competitive market, that may be closer to an anti-competitive cabal, and a governance structure where there is a greater chance of nexus between the regulator and the regulated - is an ideal soup - for well - a soup.

While large infusion of funds could improve the economy through factor productivity, we are so compromised strucurally, that we get little bang for the buck, and a huge siphoning of money rather than its productive use.

We should be disappointed that we have not created a strong, competitive and transparent private sector market (supply side) to ensure we get the best output for what the government spends ostensibly on our behalf.

Only governments can make the massive investments necessary, but we should be less than happy, if only the govenment can execute projects - there is no incentive for the government to be efficient - and that is not to say that there are no efficient / honest/capable government officials - I think we survive because such a tribe exists.

But, our public discourse on systems and correctives we need to apply, is of poor quality and easily distracted - a case in point is the agitation against corruption - where the media - politician - bureaucrat nexus has ensured that the initiative has meandered.

The better off can/should and will pay - I am not sure if that is the problem.


gulzar said...

IPM, the problem is in your question itself,

"Do we increase the Tax rate in Urban areas? If yes, who ensures the accountability for quality of service?"

so we have this stalemate. quality public services require investments, which demands higher user fees. but government's reputation for shoddy quality means citizens are unwilling to pay higher user fees. as I pointed out in the post, the alternative of private sector has its limitations.

in any case, three things are undeniable - massive investments are required, governments have to finance a major share, and citizens have to pay a much larger tariff or user fees.

good points KP. I will post on this. but in brief, here is my thesis

1. any project or investment should be conceived on objective considerations and its bid process should be professionally managed.

2. the project execution should be done by competent private contractors, selected in a transparent and competitive manner.

3. governments should bear the up-front investments required.

4. Post construction operation and maintenance (O&M) of the project should be preferably contracted out to private service providers.

5. government should have competence in contract management.

6. tariffs or user fees should be fixed to enable cost recovery as far as possible.

7. subsidy should be targeted to cushion those who cannot afford the higher tariffs. the design of the subsidy assumes great significance.

this model, though not universal, is possible in most infrastructure sectors.