13 and 14 April 2013, New Delhi

India Policy Institute

Hyderabad

Indian Institute of

Public Administration

Delhi

GOVERNANCE REFORMS

CONFERENCE

INTRODUCTION TO THE

CONFERENCE

Sanjeev Sabhlok

Root cause of misgovernance:

Policy/system design failure

Policies are badly designed

Policy frameworks are not used

System’s incentives are flawed

Inevitability of corruption

Modern thinking (including Arthashastra) not used

Politicians make policy on whimsy, not analysis

Bureaucrats are totally unaccountable

This Conference is about changing the system

व्यवस्था परिवर्तन

We should not hesitate to adopt the

world’s best ideas

World best practice governance frameworks

Evidence-based economic/regulatory policy

Public administration frameworks

In 1970s/80s, the world discovered economic

and regulatory reforms

In the 1990s, the world discovered

governance reforms

India has adopted neither

HOW WE - TOO – CAN GET

WORLD CLASS GOVERNANCE

Sanjeev Sabhlok, former IAS (1982 batch)

A bit about me

IAS 1982 batch, PhD Economics from USA

Taught at Lal Bahadur Shastri National Academy

Resigned in January 2001 to reform India – from outside

15 years of reform work

Preliminary work in February 1998 (India Policy Institute)

December 2000: Moved to Australia after finding unresponsive bureaucracy/politicians/ citizens

Joined National Executive of Swatantra Bharat Party (2004)

Started Freedom Team of India (December 2007)

Wrote Breaking Free of Nehru (2008)

Organised National Reform Summit at Haridwar on 5-8 April 2013

This talk is:

A distillation of key learnings from over 30 years of experience in the IAS and Victorian Public Service

Given limitations of time I will focus only on key frameworks (systems):

Public administration system

Economic policy system

Regulatory policy system

Plan of my presentation

Part 1

1) Theory of good governance

2) India’s system compared with Australia’s

3) Public administration reforms for India

Part 2

4) Economic policy reforms for India

5) Regulatory policy reforms for India

6) Transition from India’s system to world-best system

1) THEORY OF GOVERNANCE

What’s our policy about policy?

Think from the highest level first: what is

policy and what should it consider?

We need a policy about policy

Frameworks and systems

Without good frameworks, bad policy is

inevitable

Two main questions to ask

What should a government do?

Are there limits to what a government can do?

How do we arrive at these limits (eg. net benefit test)

How should it do it?

How can a government comprising self-interested

politicians and bureaucrats do what we want it to do?

(public choice theory)

Policy that doesn’t consider both these

issues will be fundamentally flawed

The “What” must be well thought out

“Bad administration, to be sure, can destroy good

policy, but good administration can never save bad

policy.”

- Adlai E Stevenson Jr

The “How” must also be well thought out

Policy that is unable to pierce the veil of incentives

during implementation is bad policy

Good policy necessarily considers

implementation issues

This is what we want

Goal

This is what we get

Our

Goal Bureaucrat

(black box)

…. by failing to think about the politician’s and bureaucrat’s incentives

Bureaucrat’s

goal

Sequencing of my talk

I will discuss the “How” first

Public administration (delivery) reforms

Then I will discuss the “What”

Policy framework and gatekeeping

Economic policy

A word re: Arthashastra

Arthashastra underpinned India’s past

success

For 12 out of the past 20 centuries India was the

world’s wealthiest, and 2nd wealthiest in six out of

the remaining eight centuries

Due to the public policy stance outlined in Arthashastra

Let’s put Arthashastra squarely into the

centre of public policy discourse

Most analysts of Arthashastra have missed its

point

its insights are extremely modern

we should read between the lines to understand what

Chanakya is trying to tell us

All about INCENTIVES

(including disincentives)

Chanakya wanted a strong, minimal

state, with control over incentives

Two axes: liberty, incentives

Liberty

Ince

ntives

Reminder: incentives

include disincentives!

Key dimension #1: Liberty

Liberty is an end in itself. But also necessary for people to do their best

Lao-Tse’s advice to the king: “Win the world by doing nothing. How do I know it is so? Through this: The more prohibitions there are, the poorer the people become… The greater the number of statutes, the greater the number of thieves and brigands.”

“I love quietude and the people are righteous of themselves. I deal in no business and the people grow rich by themselves.”

India was much wiser in ancient times

कहावत

जहााँ का िाजा हो व्यापािी वहााँ की प्रजा हो भिखािी

Government should not engage in business Free markets

Free enterprise

The natural effort of every individual to

better his own condition is so powerful, that it

is alone, and without any assistance, not only

capable of carrying on the society to wealth

and prosperity, but of surmounting a hundred

impertinent obstructions with which the folly

of human laws too often encumbers its

operations.

- Adam Smith 1776

“Any restriction on liberty reduces the

number of things tried and so reduces

the rate of progress”

- H.B. Phillips (mathematician)

1

2

3

n

Two obstacles to freedom

Opportunity (technical

frontier)

Governance must

enable liberty (social reform is not a government’s job)

Ideas don’t

come from

governments

People create ideas, and wealth Growth = f (freedom, opportunity)

Innovation pushes

out the

frontier 2) Social control

• interfering religious beliefs

• science and critical thinking

insufficiently valued

People innovate

better if the

government gets

out of their way

1) Government

Nanny, paternalistic state:

• interfering policies and laws

• “Food police”

Injustice

• contracts not enforced

Key dimension #2: Correct incentives

Chanakya thoroughly understood incentives:

Best talent in government

High salaries for top officials and Ministers

But vigorous checks/ audits (even spying)

Instantaneous dismissal and severe punishment for non-performance/corruption

Today we have the OPPOSITE incentives in India!

The results achieved today are inevitable

Singapore follows Chanakya’s principles and succeeds

The problem of government failure

Policy makers typically focus on market failure

But the real elephant in the room is government

failure

“Power corrupts, absolute power corrupts

absolutely”

Politicians lavishly spend taxpayers’ money

Bureaucrats maximise their empire

Understanding incentives

Institutions (rules)

Incentives

Endowment

Local circumstances

(beyond the control of the policy maker)

System

Created

by policy

maker }

Examples: Incentives explain behaviour

Disposing personal rubbish

The same Indians don’t throw rubbish on the roadside in Singapore

Tenure

Without job tenure an IAS/IPS officer will focus on delivery, for fear of losing the job

Corruption

Indians were incorruptible when British merchants first came to India. (They were astonished at such integrity!)

But today Indians are world-famous for corruption. Why?!

Incentives are at work 24-7

We ask our politicians to lose crores of rupees

during elections.

Then we pay them very low salaries.

Question: Will such people serve us or loot us?

=> Conclusion: our system guarantees corruption.

Chanakya would have understood

But we don’t care to see the world scientifcally

Burying our head in sand won’t make

incentives disappear

Incentives are at work even in our dreams!

Incentives are as powerful as a

physical force

Gravity pulls downwards, hence water flows downhill

Incentives drive human behaviour and almost

entirely determine what someone will do

But incentives are difficult to analyse

Invisible, complex, layered, and conditional

Despite this difficulty, we ignore incentives at our peril

Example of the power of incentives

I offer you Rs. 100 or Rs.200. Which will you pick?

Rs.200

Always.

Incentives may be invisible but have REAL,

PREDICTABLE EFFECTS

Incentives need not only be economic

But economic incentives usually overwhelm others

Myth: that Indians are somehow

“different”

Apparently we have a natural tendency to be corrupt

Not true

Indians respond to incentives EXACTLY as predicted

Chankya predicted it

Modern economics predicts it

New public management predicts it

China has moved toward incentives

and markets-based governance

Teachers are dismissed in China if a

class’s academic results are below par

While in India some teachers get paid even

if they don’t ever go to school!

Naturally China does better than OCED in

PISA, India is at the bottom of the world

Results exactly as predicted

Half of Class 5 kids in India can’t read Class 2 texts

The incentive (principal-agent)

problem

Agency theory

Company owners motivate managers through incentive

contracts so manager actions (which are unobserved)

can be aligned to owners’ goals.

Usually:

1. Base salary (for participation) plus

2. Performance pay (incentive compatible wage)

Plus hire/fire instantly based on performance

Controlling bureaucrats is very hard

Citizens, the masters, have to solve a TWO STAGE

problem:

1) First controlling representatives (politicians)

2) Second, how politicians can control bureaucrats

Citizen

How to

control?

How to

control?

Black box

of incentives

Black box

of incentives

Lots of hidden actions & complex incentives!

Politicians’ interests are totally

different to ours

Politician’s goal is to get re-elected

He knows that citizens can’t agree on anything

Impossibility theorem

He can game the system by catering to a niche

Median voter theorem

Lobbying/ pandering (subsidies/loan waivers)

In addition, he must necessarily be corrupt in India,

it being a mandatory requirement of the Indian

electoral system

How we can force politicians to look

after our interest

Meet the participation constraint

Partly fund elections by the state to reduce use of black

money and allow good people to contest

Australia pays about $2 per valid vote cast

High salary to attract good people into politics

Pay incentive compatible wage

Salary high enough to prevent incentives for corruption

Link pay with performance

Reduce tenure (from 5 to 3 years) to keep them on toes

Singapore and Australia pay politicians well, thus attracting top talent

and reducing incentives for corruption – Chanakya would have approved.

Bureaucrats’ interests are different to

ours, too

“Lurking below each public servant is a full-fledged human being

with predictable self-interested behaviour” (Sabhlok,BFN)

His goal: to expand his empire (importance)

Obstacles/ inefficiency/ symbols, not real work

Solution:

Meet participation constraint

High salary to attract good people

Incentive compatible wage

Performance based reward/pay

Tenure totally abolished at executive levels

Stern punishment for underperformance/ corruption

Consider Chanakya’s wisdom re:

incentive compatible wage

"the highest salary paid in cash, excluding perquisites,

was 48,000 panas a year and the lowest 60 panas a

year. The ratio of the highest salary to the lowest,

was eight hundred to one.” (Balbir Sihag)

If lowest salary is Rs.4000 per month, then highest

should be Rs. 32 lakh per month (or Rs.3.8 crores per

year)

Even a top salary of Rs.1 crore will go a long way.

But there must be ability to instantaneously fire.

India’s bureaucracy: The current

situation

Salary is not high enough to:

A) attract demonstrated high quality talent

B) prevent corruption

Indeed, there are rewards for corruption

No punishment for non-performance

Tenure is particularly insidious

Articles 310,311

=> Our politicians can’t control bureaucrats

Paying in “patriotism cash equivalent”

is not always a good idea

Market rate for a particular skill

Australia pays market rate

+ incentives

India pays 1/3rd market rate

+ nationalism

Sacrifice

“for the

nation”

Incentive to

perform and be

honest, else will

lose job – and

money!

Incentive to be

arrogant (doing

“sacrifice” for

country) and

unaccountable

Minimum conditions must be met

Pasteur: Milk must boil before bacteria die

Participation constraint

AND

Incentive constraint must be met

To kill incentives

for corruption

What about transparency?

Can transparency (by itself) eliminate corruption?

No.

Easy for corrupt officials to provide “transparent reasons”

for awarding large government contract to bribe-giver

We can have all the transparency we like, but the corrupt

will find a way

We must attack INCENTIVES, and must not PREACH

Unless participation and incentive constraints have

been met, other factors don’t have any effect

What about Lokpal?

Can punishment (by itself) eliminate corruption? (eg Lokpal)

No.

Low possibility of detection: When 95 per cent are corrupt, chance of getting caught is small, so why worry?

Risk premium on corruption: Lokpal will allow corruption “rates” to increase on due to increased risk of punishment

Unless participation and incentive constraints have been met, other factors don’t have any effect

Commonly advocated anti-corruption

solutions can work after basics are met

Transparency CAN work

Lokpal CAN work

Basic conditions will make 95 per cent people

honest

After that remaining 5 per cent corruption can

be eradicated by transparency and lokpal

Where will money to increase wages

come from?

First, we must remember: “penny wise pound

foolish”

If the top levels can become honest, the rest will follow

Singapore PM is paid $2 million

Government should stop doing things it should

not be doing in the first place

That will give citizens the freedom to produce =>

greater revenues

2) INDIA’S SYSTEM COMPARED

WITH AUSTRALIA’S SYSTEM

Flexible control over bureaucracy

Bureaucracy is controlled by Acts of parliament

Public Service Acts of 1902, 1922 and 1999

In Victoria, recent Public Administration Act 2004

This, being flexible, allows continuous improvement

Agile system. Empowers but demands

total accountability

Secretaries appointed by Prime Minister/Chief Minister

Contractual, with clearly defined KPIs

Secretaries empowered to hire and fire other staff

Hire and fire option with 4 months notice

Secretary appoints Deputy Secretary

who appoints Directors, etc. down the line

Open market recruitment by application for each position

Remuneration parity with private sector

Contractual service at all executive levels

Portability of employment contributions for retirement

Australian government doesn’t dabble

excessively with the economy

Extremely limited role of government in

managing economic activity (in comparison with

India)

Almost no administered price, including in the

utilities sector

Targeted subsidies to the poor

Freely floating currency

Very low duties (free trade)

Almost no subsidies for any sector

=> Starkly different governance!

Superior management (including project management) skills

Self-actualising organisational culture

Strong performance management system

Diverse background of government employees (most with private sector experience)

Head of civil service often in mid-30s

Good performers are rapidly promoted

Extensive delegation of responsibility

Free and frank policy advice

Significant use of modern IT

Strong system for accountability

KPIs and performance contracts for Secretaries

KPIs flow into performance plans of lower officials

All executives are fully accountable for contracted

results

Independent review of Secretaries’ performance

Performance bonus contingent on performance

Not uncommon for executives to be demoted or

dismissed for non-performance

Organisational culture

Blue culture on the

"circumplex“

Self-actualising

No one is called "Sir",

only first names.

Everyone equal as a

person

India's culture is very red

in comparison!

(Aggressive/Defensive)

Staff are expected to:

show concern for the needs of others

involve others in decisions affecting them

resolve conflicts constructively

be supportive of others

work to achieve self-set goals

help others to grow and develop

point out flaws (ie not just accept low standards)

be a good listener

give positive rewards to others

Staff are not expected to:

do things for the approval of others

"go along" with others

win against others

accept goals without questioning them

be predictable

never challenge superiors

do what is expected

oppose new ideas

Focus on world-best policy products

Policy officers conduct world-class research

Short, crisp, professional briefings for Ministers

No “peons”/clerks

Officers organise everything themselves

Rapid turnaround of documents/emails

Independent Board (with non-departmental

directors) provides high quality corporate

governance

Productivity tools extensively used. And

experts/ academics consulted

All documents dealt with electronically

Key documents auto-scanned at time of receipt

TRIM to store documents including emails

Govdex to share confidential documents across Federal and State governments

Telepresence (Huge TV screens)

No unnecessary travel for meetings

Constant interaction with OECD, other international jurisdictions and world-best academics

Eg. Centre for Market Design in University of Melbourne

3) PUBLIC ADMINISTRATION

REFORMS FOR INDIA

Political incentive reforms

As discussed: key reforms could include

State funding of elections

High salaries but no perks

Performance bonus based on

increased GDP

reduced corruption, etc

Lokpal to deal primarily with corrupt Ministers

Bureaucratic system reforms

As discussed:

Eliminate tenure

Contractual appointments (Under Secretary and above)

Salaries comparable with private sector

Performance pay related to outcome

Ability to dismiss without notice for non-performance

(with 4 months salary in lieu)

Reduce clerical staff and hire policy experts

But this is "not practical”!

Good policy maker must design transition path.

Eg. Following steps

0: Stop deputations to centre for two years

Ask an HR company to advertise all Secretary

positions

Month 3: Prime Minister and Ministers appoint New

Secretaries on 2-year contract based on merit

Secretaries not successful in getting these job sent to cadre

New Secretaries then advertise Addl and Jt Secretary

positions and hire in next three months

Month 6: Those not successful return to cadre

Transition contd.

Month 9: Strategic plans

Month 21: Implementation of strategic plans

completed

New Public Administration Act

Any relevant Constitutional amendment

By end of 2nd year, full transition to be rolled

out in the Centre

Similar transition rolled out in the States

Within three years civil service would be fully

restructured and become agile/efficient

4) ECONOMIC POLICY

REFORMS FOR INDIA

Chanakya’s insights, once again

Chanakya does not prohibit anything

Alcohol/ prostitution/ most meats

He regulates it

He promotes trade, particularly imports

Open economy is the key to prosperity

Liberalisation does not equal deregulation

India: yet another proof that economic

freedom works

Freedom is increasing rapidly in India since 1990s

Most sectors liberalised

E.g. mobile phones

Some sectors are free because the government is basically defunct in those areas

Overall, we have very low levels of freedom

=> Need to liberalise most sectors

Education

Health

India’s output has responded rapidly to

very limited increase in freedom Table: Share of world output measured in terms of PPP

Country 1980 1990 2000 2010 2016

China 2.2 3.9 7.1 13.6 18.0

United States 24.7 24.7 23.6 19.7 17.8

India 2.5 3.2 3.7 5.4 6.6

Japan 8.7 9.9 7.6 5.8 5.0

Germany 6.7 6.1 5.1 4.0 3.4

Russia 0.0 0.0 2.7 3.0 2.9

Brazil 3.9 3.3 2.9 2.9 2.9

United Kingdom

4.3 4.1 3.6 2.9 2.6

Australia 1.3 1.3 1.3 1.2 1.1

Economic reforms needed

Review and reduce unnecessary role of government

Fiscal system reform

Financial sector liberalisation (with prudential

regulation)

Privatisation of utilities and defence production where

possible – with regulatory oversight

Open economy (trade)

Urban/regional planning reforms to allow markets to

signal demand and supply

Infrastructure reforms (PPP etc.)

5) REGULATORY POLICY

REFORMS FOR INDIA

Need for optimal (just right)

regulation

Liberalisation ≠ deregulation

We need regulation to prevent/ punish harmful

effects

But no more than that

When social marginal cost equals social marginal

benefit (SMC=SMB – equalised for ALL policies)

Can be assessed through a cost-benefit analysis

(CBA)

Many challenges in CBA but without such test we

get truly bad policy

Points to consider

Policy must not be made in response to a

particular incident

It must be evidence based (cost-benefit/

statistical analysis)

E.g. cost of saving a life must be equalised

across all interventions

Regulatory Impact Statement

Gatekeeping role, includes Cost benefit test

Public consultation (transparency)

Bad policy reduced

The basic idea applies to all projects (eg. infrastructure/ public private partnerships)

But India doesn’t have gatekeeping processes yet

Victoria’s independent gatekeeping

mechanism

Department prepares RIS

Independent Commission assesses the RIS

Minister signs the RIS and publishes for

consultation

The Treasury department advices Cabinet

(where appropriate)

Parliamentary Committee scrutinises RIS for

integrity and diligence

10 questions to eliminate bad policy

1: What would happen without any role for

government

2. Identify problem/s with the base case and explain

why these are problems

3. First principles test (should government intervene at

all)

4. What can government do about the problem/s?

5. Freedom test

10 questions to eliminate bad policy

6. Strategic gaming test

7. Government failure test

8. Real experience test

9. Cost benefit test

10. Transition path

(details in Victorian Guide to Regulation/ policy

competition held by Freedom Team of India)

Urgently needed regulatory reforms in

India

Legislate a mandatory requirement for RIS

for any public policy/ significant project

Mandate the 10 point process as the basis for RIS

Create independent Commission to assess

adequacy of RISs

Ensure public consultation so the truth emerges

Reducing red tape (costs of regulation)

Measuring regulatory costs

Standard Cost Model (European)

Regulatory Change Measurement method

(Victorian)

Reducing red tape provides significant

benefits businesses and the community

6) TRANSITION FROM CURRENT

SYSTEM TO WORLD-BEST

SYSTEM

Strategic plans and transitional

strategy

This is time to our homework

Then good results will be certain

In this conference we will specify each

step of what a good government

should do in its first six months

Transitional path

These goals of good governance are

very easy to achieve

These are PROVEN methods

These are consistent with the views of India’s

greatest economist - Chanakya

Let’s remember that Indians are the same as other

humans

Same species. No difference in behaviour.

We need to establish a Chanakya

School of Governance

India has excellent technology, medical and

management schools.

But not one good school of governance

(Note: Governance goes beyond public

administration)

We need many excellent schools of governance

Suggested: Let the private sector in India establish a

world class Chanakya School of Governance

Federation of reformers recently

created

At the National Reform

Summit in Haridwar recently,

a Sone Ki Chidiya Federation

has been created for

reformers

Vision

Agenda for Change

Let this Conference create

Strategic Plans for reform