National

Deconstructing A Phenomenon Called Privatisation

The dictum that ‘government should not be in business’ is fine, but while giving a push to privatisation the government should also fulfill its primary responsibility toward citizens: ensure its citizens are provided an environment that enables them to achieve their full potential. In his enlightening piece on the phenomenon, Partha Mukhopadhyay tells us why it is necessary.

Deconstructing A Phenomenon Called Privatisation
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The pandemic has brought the work of government into focus. Over the past three years, as governments across the world have struggled to respond to the rapidly changing circumstances, 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 government 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, electricity, pipelines, roads, ports, airports, airlines, bus services and so on, today private providers abound, with myriad contractual and regulatory arrangements. India has always had robust private provision of health and education, especially higher education, and the past few years have only accelerated their participation—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 concerned, 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?

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 airports with a smaller population base is still a work in progress—route dispersal guidelines are a regulatory mandate. In addition, a Regional Air Connectivity Fund Trust (RACFT) has been established where the government 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.

If the government decides to get out of service provision in a particular sector, it is not that its role is necessarily reduced.

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 incredibly large balance of Rs 60,000 crore this August, funded from license fees levied on telecom 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 Transit cluster bus contracts (the orange buses), where operators are paid a per-km fee for a fixed period, and the private operator neither does decide on fares nor does it benefit from the revenue collected, if any. Here, the government has full flexibility to set the fare and can even offer fare-free buses (as Delhi did for women) if it felt that that was the correct policy choice to incentivise the use of green public transport.

In one sector after another, such arrangements have been put in place. Even coal mining, long restricted to the public sector, is filled with mine development operators (MDOs), who operate the mines under contract to the public sector firm. Highways are built using hybrid annuity models, where concessionaires are responsible for both construction and maintenance and are paid partly upfront and partly over time, thereby creating an incentive to build better roads to reduce maintenance costs. Port terminals are now private businesses, and even the regulator has been disbanded. Pipelines are a similar story, though the regulator continues to exist. Electricity transmission lines are built and maintained by concessionaires, and in electricity distribution, a variety of models have emerged, including a franchisee model, where private franchisees retain part of the gains from reducing aggregate technical and commercial losses in the sector.

Is this a positive development or is this a wanton sale of family silver?

The answer to this question is whether the citizen is receiving better or comparable quality 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 case if the efficiency gains from privately run operations and more closely supervised and costed private investment outweigh the higher financing costs of the private provider (including profit on equity and higher cost of borrowing) 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.

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Precarious times Workers standing on a scaffolding on the Coastal Road construction site at Haji Ali, Mumbai Photo: Getty Images

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 projections, for gas power plants whose fuel linkages 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 allowed. In all such cases, while the private sector may lose their equity investment, the bulk of the losses are borne by the largely publicly owned banking sector and thus ultimately by the public exchequer, which wipes out the anticipated gains from the transfer of operations to the private sector.

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This brings out the need to think through the contractual arrangements that involve the private sector and the regulatory ecosystem in which they operate much more deeply than has been done thus far. The approaches adopted and modified have been in sectoral silos, with little learning across sectors. The regulatory architecture and capacity has received limited attention. It is important to note that if the government decides to get out of service provision in a particular sector, it is not that its role is necessarily reduced. Instead, it may just morph into a variety of regulatory functions, which are tasked with developing appropriate contractual arrangements, building and staffing regulatory institutions and finding ways to generate resources needed to meet necessary social obligations. Increasingly, it will also be called upon to ensure that service provision occurs with the minimal use of carbon. Currently, this is reflected in renewable purchase obligations—regulatory mandates—of electricity distribution companies, in subsidies to electric vehicles etc. This policy space will only become more fraught as the carbon constraint tightens.

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The good news is that in different states, the importance of improving the quality of public education is being recognised.

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 networks 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 extent to which school education determines the longer term future of our youth—in that it is difficult 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 regulatory mandates on private education that are being reluctantly accepted, but the size of high-quality private education remains small in relation to the size of the student population that needs such education.

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Concomitantly, while good education is a reliable springboard for growth, a strong healthcare system is an equally necessary safety net. Negative health shocks are the primary cause of regression into poverty and if there is one 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 involve 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.

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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 instance, Andhra Pradesh is not only experimenting 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.

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However, when we look at budgetary allocations, 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 are more states where the share has fallen, especially in the last few years and even after the pandemic.

The situation to be avoided is where resources are spent to make the environment friendly for growth, and safety nets are in place, but where the springs of the springboard are rusted and broken, depriving the youth of the benefit of the public investment. This is one area where the government needs to perform. It would be a tragedy if it lost the game by default.

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(This appeared in the print edition as "Springboards and Safety Nets")

Partha Mukhopadhyay is a Senior Fellow, Centre for Policy Research, Delhi

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