Salvage reforms


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NO man can be the judge of his own cause, so goes an age-old dictum. This is also a basic tenet of jurisprudence in a democratic polity. In cricket too, a player can’t be an umpire if the game is to be worthwhile. Yet, in pursuit of economic reforms in India, this very principle has been compromised time and again.

The command and control structure of the economy that India adopted post-independence was a corollary of the socialistic philosophy of that era. It gave vast powers to government functionaries in the guise of public interest. They ran the nation’s economy through Public Sector Undertakings (PSUs) and the licence-permit raj. Over time, perpetuation of government control virtually became an end in itself while the laudable objectives of socialism took a backseat.

The crisis of 1991 spelt the end of business as usual and economic liberalisation became imperative. The captains in government and in the PSUs, however, were unwilling to part with the considerable fiefdoms that they had acquired. Being in positions of control, they redefined reforms all the time with an eye on their turf. In the process, policies often got subverted and their implementation was compromised.

That explains why reforms in India moved so very slowly in several critical areas. Ten years of ‘liberalisation’ in the power sector have brought little tangible gain; a network of toll roads is still a far cry; private participation in airports has not taken off at all; ports have improved marginally; the railways have only deteriorated; and divestment of state-owned enterprises moved at a snail’s pace except during the past two years. Only the telecom sector has surged ahead in the recent past. An all-pervasive ‘conflict of interest’ seems to have plagued governance in these areas. Are there any lessons to learn?

Going back in history, the administrative system that evolved in India during the colonial era embodied the principle that no one should sit in judgment over his own cause. This proposition was also enshrined in common law as adopted in India. It also became an inviolate norm in judicial functioning, so much so that if a litigant expressed any misgivings about the impartiality of a judge, the latter was expected to transfer the matter to another court. It was recognised that in public affairs, a subjective or partisan approach had no place.



The founding fathers of the Constitution of India carried this principle to its logical conclusion. The Constitution thus prohibits legislators, other than ministers, from holding any office of profit in the government with a view to maintaining separation between the legislature and the executive. Independence of the judiciary is jealously guarded.

The Constitution has also created other authorities such as the Comptroller and Auditor General, Election Commission and Public Service Commissions to perform their roles independently and objectively, without fear or favour. The incumbents are forbidden from accepting post retirement employment from the government lest the lure of favours clouds their judgment while dealing with the latter. Such provisions were necessary as a democratic polity relies heavily on checks and balances. Constitutional democracies in other parts of the world have acted likewise.

In the numerous tribunals and regulatory commissions functioning in India under different laws, a serving member cannot have any subsisting personal interest in the subject matter of his jurisdiction. Similarly, laws governing the conduct of companies require a director to abstain from board deliberations if he has a personal interest in the agenda under consideration.

During the last presidential election in the United States, Governor Bush of Florida refrained from intervening in matters affecting his candidate brother, citing conflict of interest as the rationale. The President of Nasdaq stock exchange is required to divest himself of his broking business before taking office (it took several scams before SEBI in India ruled that brokers cannot be directors on a stock exchange). The Attorney General of USA stayed away from Enron related investigations, as he was recipient of political donations from the company.

During an earlier term of the Labour government in UK, it was revealed that the Labour Party had accepted large donations from organisers of the motor racing Formula 1 Grand Prix events (which were heavily dependent on tobacco advertising), and the government had later agreed to continue the exemption of motor racing from the ban on public advertising of cigarettes. Following much controversy and embarrassment, the party refunded the donations (but the exemption stayed).



More recently, the Labour government was under pressure as a result of its links with Enron. The company had funded a number of Labour Party events, and admitted it did so to facilitate access to ministers. Subsequently, the government took a number of decisions such as releasing the moratorium on building gas-fired power stations, for which Enron had been lobbying.

Public life in USA, UK and other developed democracies is galore with examples where the evidence of any conflict of interest is instantly recognised and adequately addressed. The constant vigil of public awareness does not tolerate any lapses once they are detected. The raging controversy in the USA regarding acceptance of lucrative consulting assignments by the auditors of Enron and the intense pressure of public opinion in favour of banning auditors from accepting other jobs that may cause conflict of interest is a case in point.



Conflict of interest and judging one’s own cause are two sides of the same coin. Be it a court judgment, board decision or policy formulation, conflict of interest leads to outcomes that tend to be fundamentally flawed. Western democracies keep resolving such conflicts as and when they surface. The level of awareness in India being comparatively low, conflicts of interest tend to persist in several areas of public affairs. As a result, delinquent individuals and institutions get away with mayhem.

A survey of economic reforms suggests how persistent interventions of incumbent stakeholders have compromised the outcome. There is no dearth of instances where conflicts of interest are conveniently brushed aside until a crisis or scam forces some action. Routinely, government functionaries who benefit from the powers and privileges of the existing system are entrusted with the task of change and reform that would strike at the very roots of their own authority and patronage. It is only to be expected that they would devise policies aimed at protecting their fiefdoms.

Take the case of power reforms in India. The law enacted soon after independence had created a nationalised industry consisting of the vertically integrated State Electricity Boards (SEBs). These monolithic SEBs were virtually bankrupt by the 1980s and their mounting losses ruled out the possibility of large investments necessary for creation of additional capacity. Reforms became an imperative for improving operations and enabling private participation. Besides the central government, Orissa was the first state to initiate power reforms and seven other states have since followed that path.

Power reforms in India have broadly comprised (a) setting up of independent regulatory commissions for determination of tariffs; (b) enabling private investment; (c) unbundling of SEBs and corporatisation of the generation, transmission and distribution segments; and (d) privatisation of state-owned entities. These are briefly described below.

Regulatory commissions were considered necessary for depoliticising and rationalising tariffs. This was also seen as a device for increasing tariffs, which meant more funds in the hands of incumbent players. It, therefore, received their support.



In 1993, private investment, domestic as well as foreign, was opened up in generation, followed by a similar move in the transmission segment four years later. But such investments could only be made through long-term agreements with state-owned SEBs. Thus government functionaries retained control through monopolistic agreements. Producers were not free to sell their produce directly to consumers, bulk or retail. This was a welcome measure for incumbent players; and the chosen private producers also favoured long-term agreements with state-owned entities in order to mitigate their risks and seek higher prices.

Despite willingness on the part of government functionaries, private investments in generation and transmission could not fructify on the basis of contracts with SEBs simply because they were perceived as bankrupt entities. Financial institutions were unwilling to finance projects based on monopolistic contracts where payment defaults by SEBs would cause the projects to go bust because they were not allowed to sell to anyone else. On the other hand, some of the cases where private investments fructified led to disastrous consequences such as in Dabhol.

Unbundling and corporatisation of SEBs meant introduction of commercial discipline and threat of subsequent privatisation. This was stoutly opposed by employee unions and associations. However, when the respective governments agreed to protect their service conditions through appropriate legislative guarantees, they fell in line. Eight states have so far unbundled their SEBs.



Privatisation of state-owned distribution companies was first undertaken in Orissa about four years ago. But it was based on creation of private monopolies. Control over the power sector was thus apportioned between chosen private entities and incumbent government functionaries through a chain of interconnected monopolies – public and private. Absence of competition and choice inevitably led to rising tariffs and poor quality of service. The recent privatisation of distribution companies in Delhi is also based on a similar model and the dominant private players happen to be the same in both the states. It is unlikely that the outcome in Delhi would be materially different from Orissa.

The above illustrates how reform strategies were influenced by incumbent players to protect their turf. In the process, consumer interest and economic growth took a beating. Tariffs have risen significantly while the quality of service remains poor. Even after a decade of reforms, investments are confined to the public sector and the industry remains virtually nationalised.

The world over, successful power reforms – in developed as well as developing countries – were predicated upon introduction of competition and open access leading to efficiency and price gains for the consumer. In India, a producer of power can sell his produce to a state-owned entity alone; he cannot access the market or a consumer, howsoever large. That is precisely what incumbent players seem to be perpetuating in India and the outcome is there for everyone to see. The power sector in India seems where it was in 1991, perhaps, worse.



The story of reform in the highways sector is no different. Starved of funds in the mid-1990s, the incumbent players settled for public-private partnerships through the BOT (Build Operate and Transfer) approach. A fairly elaborate framework was evolved and approved by the central government way back in 1997. This included a tolling policy for imposing user charges on four-lane national highways, and a stretch of 100 km. was successfully tolled in 1998.

With great fanfare, the National Highway Development Programme was launched in 1999. It consisted of the golden quadrilateral connecting the metros of Delhi, Mumbai, Chennai and Kolkata and the east-west, north-south corridor, all adding up to about 13,000 km. It gave highway development the priority that it had long deserved. As reforms were gathering momentum, the central government imposed a cess on motor fuels to augment resource availability for the sector.

Things changed when cess revenues became available to incumbent players. They took over reins of the entire programme and private participation was quietly buried. A fully evolved BOT project, the Jaipur-Kishengarh section of National Highway-8 was served a lethal blow and made financially unviable by requiring construction of six lanes as against four lanes in the rest of the golden quadrilateral. That caused this single BOT project to languish, enabling incumbent players to declare that private investment was not forthcoming. That was justification enough for awarding construction contracts at breakneck speed.



To show some progress on private participation, a few highway projects were awarded on annuity basis. The scheme was based on deferred budgetary payments by the government in place of toll collection by the concessionaire. Annuity scheme was what construction companies preferred because they took no traffic risks and got assured bi-annual payments from the government. So where private participation did take place on a limited scale, it was designed to suit the preferences of construction companies, public interest and international experience on toll roads notwithstanding.

Seeing the extravaganza enabled by cess funds, there was no stopping the construction contracts. Huge borrowings were contracted for multiplying the funding for this programme even though such commercial borrowings for road construction were hitherto unknown. The World Bank and Asian Development Bank also stepped in with loans of a couple of billion dollars, never mind the accretion to fiscal deficit and setback to the reform agenda.

No government can go on building roads out of debt funds. As soon as the borrowing option gets exhausted, the programme will suffer a setback. Instead, privatised toll roads could have expanded faster without much burden on the exchequer. A great opportunity to build self-sustaining highways was thus missed.

Incumbent players explain that government would undertake direct tolling after construction is completed. This implies yet another series of tolling contracts across the country. It would be perplexing to any independent observer why construction should be contracted out to one set of contractors, maintenance to another and tolling to yet another. A simple BOT toll road arrangement as it prevails in the rest of the world allows a single concessionaire (private entity) to do all this in a far more efficient and cost-effective manner; but that presupposes parting of control by incumbent players.

Some of the states have since ventured into the BOT approach for attracting private investment in state highways. Ostensibly, the objective seems right. But a closer look in case after case reveals that the design of BOT contracts is largely intended to suit the preferences of incumbent government functionaries and construction companies. In a manner of speaking, this is akin to distribution of spoils. Efficiency and economy in investments, or even consumer welfare, seem fairly low in their order of priorities.



Reforms in telecom were initiated in early 1990s and following open competitive bidding, licences were granted for basic and cellular telephony in 1995-96. In the absence of an independent regulator, interconnection and other agreements could not be finalised as the incumbent Department of Telecom (DOT) virtually set conditions that lenders and private investors were unable to accept. In the meanwhile, other developments overtook the process and the licences began to be perceived as unviable. Though an independent statutory regulator (the Telecom Regulatory Authority of India) was constituted in 1997, it could not resolve matters as the requisite policy changes were not forthcoming from DOT. Clearly, the expectation that DOT would help promote competition against itself was flawed.



In order to resolve the continuing stalemate and respond to the demands of private investors, the government set up a Group of Ministers under the chairmanship of Jaswant Singh, then Deputy Chairman, Planning Commission/Minister for External Affairs. The setting up of this group outside DOT enabled formulation of an independent policy that balanced the conflicting viewpoints of prospective investors and the incumbent operator, the DOT. The National Telecom Policy (NTP), 1999 as formulated by the Group, laid the foundation of telecom reforms and galvanised the sector leading to a growth of 19.6% in 2002, next only to China.

The spectacular growth of tele-density, massive inflows of private capital, phenomenal infusion of technology, intense competition, efficiency improvements and lower consumer tariffs are here to stay. Economic growth has thus been facilitated. The lesson is writ large; reform strategies must be formulated and implemented outside the control of incumbent players. Absence of a level playing field does not augur well for growth and progress.

In the implementation of NTP 1999, several issues have since cropped up. It is DOT that determines the policy on matters not covered by NTP 1999; and it tends to help itself to the detriment of its private sector competitors. When the incumbent operator also doubles up as the policy-maker, partisan policies are inevitable. The rising levels of discomfort among private players and the increasing litigation are symptoms of this malady. It is time for another independent group to formulate NTP – II, if the momentum of growth is to be sustained. Better still, an independent arrangement should be institutionalised.



Indian Railways continue to run on a monolithic inward looking model. Several attempts to introduce reforms and restructuring were stillborn. Being a closed organisation that does not entertain much external scrutiny, it determines its own policies and strategies largely on the basis of internal perceptions and compulsions. Few external checks and balances are available by way of self-correcting mechanisms. The vast potential of railways thus lies substantially untapped. On the contrary, a steady deterioration in many of its fundamentals is obvious to any observer.

Given the mould in which railways seem to operate, there is little hope of substantive reforms. It is futile to expect that incumbent players will be harbingers of change. Railways may thus continue to deteriorate unless a multi-disciplinary Railway Commission consisting of eminent persons is set up for devising a reform strategy that would rejuvenate this sector.

For the past several years, there has been talk of privatising the major airports. Here again, incumbent players have been devising the reform strategy over the years. If lessons of other sectors were any indication, successful privatisation would remain elusive as long as incumbent players continue to determine the strategy. If and when privatisation occurs, conflict of interest may well deliver flawed outcomes.

Reforms in ports, water supply and urban infrastructure are undergoing similar centrifugal pulls. Progress is, therefore, visible only in fits and starts.

Telecom reforms can be truly regarded as a success story. Though much ground remains to be covered, what has happened so far is truly of monumental proportions when compared to any other sector. The consumer and the economy share a win-win situation. If such history could be created in the telecom sector, others can surely learn a few lessons.

Another success story that proves the benefits of liberalisation and competition is the policy of open skies. When the monopoly of Indian Airlines ceased and competition was introduced, domestic air travel improved by leaps and bounds.

Creation of a Ministry of Disinvestment has ensured divestment of several government-owned companies. There has been a sea change in the progress of disinvestment after the ministry started functioning. This has proved how important it is to empower an independent entity to carry forward the process of reform and change, unshackled by the forces of incumbent players.



Writ large in these illustrations is the lesson that no person should be the judge of his own cause. It is unrealistic to expect ministers and officials to pursue reforms that would truncate their powers, particularly when contracts and fiefdoms are at stake. It is vain to expect that governance can succeed when fundamental principles of human behaviour are overlooked.

The telecom revolution in India would be unthinkable if DOT was in the driver’s seat. The traveller’s plight could not have improved if Indian Airlines had determined the open sky policy. Would anyone have expected the Ministry of Petroleum to carry out disinvestment of its PSUs if it was in control of the process of disinvestment?

If the lessons are clear and beyond doubt, should anyone expect the incumbent players in power sector to part with their monopolistic stranglehold and let the sector open up? Would you expect incumbent players to give away national highways to private sector concessionaires? Is it realistic to expect incumbent players to privatise railways or airport operations? Would local authorities voluntarily give up their control over water supply or urban infrastructure?



Incumbent players acting in tandem with entrenched interests can not only subvert reforms but also hijack governance. For reforms to proceed in the best interests of the nation, the evolution of a process that vests decision-making in individuals or bodies free of any conflict of interest is a prerequisite. Failure to recognise this basic tenet of governance will only compromise development and economic growth.

In developed countries, their respective finance ministries have guided the reform strategy particularly in critical areas such as infrastructure services. In the Indian context, the Finance Ministry does not seem sufficiently empowered to carry out this task. Incumbent players can thus formulate self-serving policies. In addition, partisan law making is also common, suggesting the need for an independent Economic Laws Commission.

If the methodologies and processes continue to be inadequate, and players act as umpires, can there be hope of successful reforms? The challenge facing the government is not reforms per se; it lies in empowering an independent forum to formulate reform strategies. Indeed, the horse will have to come before the cart.