July 14, 2011

The dynamism-dysfunction paradox

The need for public investment, government competence & willingness to pay

A recent article in the New York Times highlights the increasingly obvious paradox with India—”dynamism wrestles with dysfunction.” It points to the example of Gurgaon and writes that “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 acts together, then everything could be so different.

Is it as simple as that or does it merit a more nuanced perspective? 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 merely if governments become efficient?

Photo: Meghana Kulkarni

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 services, has spawned remarkable global success stories and has played a major role in placing the country into its current growth path. Private entrepreneurship has blossomed spectacularly over the past decade despite numerous governance-related obstacles.

However, even if governments become more efficient and outcome focused, there are certain fundamental 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. Development of the magnitude that India needs will require huge investments. Unfortunately, development spending in India resembles a trickle-down drip, whereas what is needed is a large-sized pipe.

Our cities and villages have abysmal civic infrastructure, electricity supply is deficient and notoriously unreliable, ports are choking, and roads are woefully inadequate. Addressing all these deficiencies require investments. Each major city would require thousands of crores of rupees. To just put our infrastructure requirements in perspective, the flagship programme for infrastructure development in our 63 major cities, the Jawaharlal Nehru National Urban Renewal Mission, had an outlay of $20 billion over five years. In comparison, the recently started 1318 km long Beijing-Shanghai high-speed rail link, one among the many infrastructure projects in China, itself costs $33 billion.

In recent years, a perception has gained ground that government resources could be substituted with private investments, especially through 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 queue up. Accordingly, governments at all levels across the country have been chasing PPP investors for the delivery of civic and public infrastructure services. However, except in a few inherently private investment friendly sectors, the results have been dismal elsewhere.

This outcome was expected. In its broad historical sweep, no major country in the world, including both the developed and the now emerging economies, has constructed 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, bridges and so on. These investments have been and continue to be the responsibility of governments.

Even assuming the availability of resources, it is unclear if the private supply side in India has the expertise and capability to deliver infrastructure facilities and services on the scale required. Capacity remains constrained at many levels—skilled workers, engineering personnel, heavy equipment, inputs like steel and cement, access to finances, and so on. There are just a handful of service providers, most of them already heavily over-stretched, who have the resources to deliver infrastructure services on a reasonable scale.

Apart from the massive up-front capital investments by governments, most of these facilities have considerable operation and maintenance expenditures, and therefore require high user charges or tariffs, much more than what they are paying today, to be sustainable. However, user charges and tariffs in India are too small that it is inconceivable that any government could permit raising them by the quantum required to recover these user charges. In addition, governments will have to bear the subsidy burden if the poor are to access these services and facilities.

In cities like Gurgaon and elsewhere, an increasing number of people pay much higher (than prevailing tariffs) to access good quality civic services from private providers. 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. Why pay the government for a service, when its delivery is unreliable and quality questionable? There is a circular ring to this oft-repeated argument that people are willing to pay higher user fees or prices if they are assured of reliability and quality.

The misconception that privatisation is the alternative for government service delivery and that the latter is inherently inefficient has merely amplified this collective reluctance to pay for services. It has become ingrained into the public consciousness 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 ample evidence that private service delivery, while more efficient, comes with a much higher price-tag.

The rich live in near complete isolation. They enjoy high-quality utility services—water, sewerage, electricity, telephone—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. Our cities 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. 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 becomes even more tenuous.

None of this is to absolve governments off blame for the dysfunctionality of our governance systems. It is undeniable that governance systems have to be competent and efficient enough to professionally plan and execute infrastructure projects and then effectively maintain them. It is just that we need to face up to the reality that good quality public service delivery requires massive investments in our 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 mere brush issues under the carpet.

At a macroeconomic level, the persistent problem of inflation is also a reflection of the capacity deficiencies in the Indian economy. Basic economics teaches us that the outward movement of an economy’s production possibility frontier has to be complemented with proportionate investments in infrastructure and other requisite structural changes. For an economy used to trundling at about 5 percent annual GDP growth rate for decades, the sudden spurt in growth since 2003-04 has evidently taken its toll. Investments in infrastructure have failed to keep pace with the demands of sustaining high economic growth rates for long periods. It was only a matter of time before the strains started to show. No amount of monetary tightening and policy manoeuvrings can be a substitute for the fundamental capacity deficiencies of the economy to support such high rates of economic growth over long periods.

These gridlocks are unfortunate because at least some Indian cities have fairly robust and professional governance systems in place. There are a few cities which even have excellent and professionally prepared City Development Plans, which could not be implemented for lack of resources. In general, urban governance has improved considerably in many cities across the country in recent years. However unless the aforementioned issues are satisfactorily addressed, the dynamism-dysfunction paradox could degenerate into pure dysfunction.

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