COVER STORY /ECONOMY

ILLUSTRATION BY SAAHIL ~c

1 0 OUTLOOK I OCTOBER 24, 2022

 Springboards
and Safety Nets
The primary role of the government 1s to ensure its citizens are enabled
to achieve their full potential
pandemic has brought the work of
THE government into focus. Over the
- past three years, as governments
across the world have struggled to
respond to the rapidly changing circum-
stances, they were forced to prioritise their
expenditure and ask themselves: what is the
work of a government?
India has been asking this question now for
over 30 years, ever since the reforms of 1991
(and some may argue, since 1947), but while it
has achieved some clarity on what the govern-
ment should not be doing-for instance, it
should not be running hotels, textile mills or
information technology firms-it is not.clear
what it should be doing and how.
In large swathes of what was thought of as the
domain of government, such as telecom, elec-
tricity, pipelines, roads, ports, airports, airlines,
bus services and so on, today private providers
abound, with myriad contractual and regula-
tory arrangements. India has always had ro-
bust private provision of health and education,
especially higher education, and the past few
years have only accelerated their participa-
tion-in 2005-06, there were no state private
universities that were listed by the UGC. By
2013-14, there were 175 and by 2020-21, this
increased to 375, accounting for 54 per cent
and 63 per cent of the increase in the number
of institutions. And, as far as hospitals are con-
cerned, while we do have a national registry of
automobiles, a similar registry of hospitals is
yet to be in place.
How should we think about this? Should the
government quit any activity that the private
sector is capable of discharging? How can the
interest of those unable to pay be protected?
Can this be paid by the government? Would
that be less expensive? Can it be a regulatory
mandate? Is it easier to hold a private provider
accountable vis-a-vis a public provider?
OUTLOOKINOIA.COM
These answers are still in the process of
being developed. The government still has a
residual presence in airlines, but it has largely
~ exited the space after the sale of Air India to
the Tata group. The mechanism of serving air-
'
¼w_;_,t ports with a smaller population base is still a
work in progress-route dispersal guidelines
Partha Mukhopadhyay
IS A SENIOR FELLOW,
are a regulatory mandate. In addition, a
CENTRE FOR POLICY Regional Air Connectivity Fund Trust
RESEARCH, DELHI
(RACFT) has been established where the gov-
ernment pays for various aspects of service.
This is funded by a per-aircraft departure
charge on specified routes. Till March this year
about Rs 2,500 crore was collected and
Rs 1,800 crore disbursed.
In telecom, the regulatory mandates are
much less binding and its rapid expansion
implies that the Universal Service Obligation
Fund in Telecom is a much larger and well-
funded entity, which reportedly had an incred-
ibly large balance of Rs 60,000 crore this
August, funded from license fees levied on tele-
com operators. Almost half this fund is now
being used to get BSNL to install 25,000 mobile
towers across the country and also to kick-start
a technology development initiative.
In buses, the recent bid by CESL
(Convergence Energy Services Ltd.) consists
of gross cost contracts, drawing upon the Delhi
If THE Transit cluster bus contracts (the orange
buses), where operators are paid a per-km fee
GOVERNMENT for a fixed period, and the private operator nei-
DECIDES TO GET ther does decide on fares nor does it benefit
OUT OF SERVICE from the revenue collected, if any. Here, the
government has full flexibility to set the fare
PROVISION IN and can even offer fare-free buses (as Delhi did
A PARTICULAR for women) if it felt that that was the correct
SECTOR, IT IS NOT policy choice to incentivise theuse of green
public transport.
THAT ITS ROLE In one sector after another, such arrange-
IS NECESSARILY ments have been put in place. Even coal min-
REDUCED. ing, long restricted to the public sector, is filled
OCTOBER 24, 2022 I OUlLOOK 11
COVER STORY /ECONOMY

with mine development operators (MDOs), owned banking sector and thus ultimately by
who operate the mines under contract to the the public exchequer, which wipes out the an-
public sector firm. Highways are built using ticipated gains from the transfer of operations
hybrid annuity models, where concessionaires to the private sector.
are responsible for both construction and This brings out the need to think through the
maintenance and are paid partly upfront and contractual arrangements that involve the pri-
partly over time, thereby creating an incentive vate sector and the regulatory ecosystem in
to build better roads to reduce maintenance which they operate much more deeply than has
costs. Port terminals are now private busi- been done thus far. The approaches adopted and
nesses, and even the regulator has been dis- modified have been in sectoral silos with little
banded. Pipelines are a similar story, though learning across sectors. The regulat~ry architec-
the regulator continues to exist. Electricity ture and capacity has received limited attention.
transmission lines are built and maintained by It is important to note that if the government
concessionaires, and in electricity distribution, decides to get out of service provision in a par-
a variety of models have emerged, including a ticular sector, it is not that its role is necessarily
franchisee model, where private franchisees reduced. Instead, it may just morph into a vari-
retain part of the gains from reducing ety of regulatory functions which are tasked
aggregate technical and commercial with developing appropria~e contractual ar-
losses in the sector. ~an~em_ents, building and staffing regulatory
Is this a positive development or is this insututions and finding ways to generate re-
a wanton sale of family silver? s~urces needed to meet necessary social obliga-
The answer to this question is whether the tions. Increasingly, it will also be called upon to
citizen is receiving better or comparable qual- ensure that service provision occurs with the
ity service at a cost that is equal or less than
what the alternative would have provided. In
many cases, the answer could be yes. This is the Precarious times
case if the efficiency gains from privately run Workers standing
operations and more closely supervised and on a scaffolding on
costed private investment outweigh the higher the ~oastal Road
financing costs of the private provider (includ- construction site at
ing profit on equity and higher cost of borrow- Haji Ali. Mumbai
ing) and possibly higher operating costs of the
public provider. For example, in the case of bus
services, the private provider may routinely be
able to put a higher proportion of its fleet on
the road, compared to the public provider,
thereby reducing the capital requirement.
However, the operational savings may come
from a less generous labour contract, with
lower salaries and benefits than in the public
sector, and as such the reduction in costs to the
citizens can be said to come at the expense of
workers in the enterprise.
The other risk is that the concessionaires
may default on their obligations. This is more
likely where revenue risk is with the private
sector, for example, for airlines that failed to
compete, like Kingfisher, for many toll highway
projects that failed to meet their revenue pro-
jections, for gas power plants whose fuel link-
ages failed to materialise or for coal plants
where contracts did not provide for pass
through in fuel prices or where regulators were
reluctant to increase tariffs, even when al-
lowed. In all such cases, while the private sec-
tor may lose their equity investment, the bulk
of the losses are borne by the largely publicly

] 2 OUTLOOK I OCTOBER 24, 2022

 minimal use of carbon. Currently, this is re-
flected in renewable purchase obligations-reg-
ulatory mandates-of electricity distribution
companies, in subsidies to electric vehicles etc.
This policy space will only become more fraught
as the carbon constraint tightens.
But all this may make us forget that one of the
primary roles of the government is to ensure
that its citizens are provided an environment
that enables them to achieve their full potential.
Better air, land and sea connectivity, digital net-
works and reliable electricity are all essential to
ensure that sustainable economic opportunities
will be available, but they can only be availed of,
if we have youth that is appropriately educated.
and/or skilled. We often do not realise the ex-
tent to which school education determines the
longer term future of our youth-in that it is dif-
ficult to remedy deficiencies that result from
poor initial education. While attention is being
paid to skills development, more needs to be
done for basic education. The Right to
Education does exist on paper and there are
THE GOOD regulatory mandates on private education that
are being reluctantly accepted, but the size of
NEWS IS THAT IN high-quality private education remains small in
DIFFERENT STATES, relation to the size of the student population
THE IMPORTANCE that needs such education.
Concomitantly, while good education is a re-
OF IMPROVING THE liable springboard for growth, a strong health-
QUALITY OF PUBLIC care system is an equally necessary safety net.
EDUCATION IS Negative health shocks are the primary cause
ofregression into poverty and if there is one
BEING RECOGNISED. lesson from the pandemic, this must be it. We
learnt that we can ramp up our health system
in a crisis, but having ratcheted it up, we must
build on these gains and not let it go back to its
previous state. Here too, it is possible to in-
volve the private sector, and indeed that seems
to be the intent of the Pradhan Mantri Jan
Aarogya Yojana (PMJAY) insurance scheme,
along with the electronic Ayushman Bharat
Health Account. But, here too, it is important
to recognise the need for better regulation and
oversight if the government and the citizenry
are not to be taken for a ride.
The good news is that in different states, the
importance of improving the quality of public
education is being recognised. The credentials
of public school teachers are already superior
to their private counterparts, the challenge
now is to motivate them and provide them and
the students, often first-generation learners, a
supportive environment that will generate the
learning outcomes necessary to enable them to
benefit from the.economy of the future. For in-
stance, Andhra Pradesh is not only experi-
menting with the language of instruction but
also investing significantly in upgrading its
school infrastructure, as in Delhi, which has
also made changes to its curriculum, though its
primary schools may not have been sufficiently
supported to keep up with the improvements
in post primary education.
However, when we look at budgetary alloca-
tions, we find a mixed picture. While the share
of health in total expenditure has risen in most
states, even before the pandemic, compared to,
say, 15 years ago, in the case of education, there

~!:.,~ ~~:11 ~!!11

are more states where the share has fallen,
especially in the last few years and even after

1
1 the pandemic.
The situation to be avoided is where resources
are spent to make the environment friendly for

ila~iall ■■,.,:-■Ill■•• growth, and safety nets are in place, but where

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the springs of the springboard are rusted and

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broken, depriving the youth of the benefit of the

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public investment. This is one area where the
government needs to perform. It would be a
tragedy if it lost the game by default. 0

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