PPP: Private Profits Promoted

In a PPP framework, the private sector partner needs to maximize profit, which is not always compatible with the stated objective of providing universal access to quality services

The news of how much a private hospital recently charged a patient’s family for dengue treatment, despite not being able to save the patient’s life, has was met with outrage and revulsion. The private healthcare facility, based in the National Capital Region, has denied accusations of over-charging and has justified the bill raised on the family of the deceased.

While social media users may have been hasty and impulsive in apportioning blame for the alleged fudging, it is imperative that the matter be investigated and, if wrongdoing is proven, future remedial measures provided. This is easier said than done. This simple act, normal in any rules-based jurisdiction, is unlikely to reach any logical conclusion or create mitigating circumstances for avoiding repeat performances in the future. One reason is the lack of a proper regulatory framework—whether sector-specific or for entities shadowing the public-private partnership (PPP) model.

At its core, this unseemly incident also questions the nature of government’s ties with the private sector. While there is no doubt that the government needs to partner the private sector in multiple areas, one unavoidable question keeps popping up: How is the lack of sectoral regulators, coupled with the government’s increasing and unflinching faith in the private sector’s capacity to deliver social sector targets despite evidence to the contrary, affecting outcomes?

NITI Aayog vice-chairman Rajiv Kumar hit the nail on the head during a conversation with The Indian Express staffers recently: “All these private hospitals...they have been given land at a very cheap cost—it is really like a public asset—on the premise that they will do what they promised.... I am convinced that private hospitals in the tertiary space need far better regulation than what is in place now. They must be made to stick to what they have promised.”

Indeed, the lack of sectoral regulators is aggravating the risk profile of numerous sectors. In many sectors, the government doubles up as both service provider and regulator, creating serious conflict of interest. It also raises questions about sequencing: should private sector be allowed entry into various sectors without first establishing independent or autonomous regulatory structures? In the absence of a credible regulator or a regulatory framework, empirical evidence shows the sector often falls prey to regulatory capture and cronyism.

Even the Vijay Kelkar committee, set up to revitalize the PPP model in infrastructure, endorsed the setting up of independent regulators: “The committee cannot overstate the criticality of setting up independent regulators in sectors going in for PPPs.”

The Indian healthcare industry is a prime example of how lack of sectoral regulation has resulted in government ceding space to the private sector, even in urban primary healthcare centres in some cases. This has multiple consequences, especially with regard to levy of user charges which remains unregulated. From there, it is just one step to billing a patient for over 600 syringes during a two-week stay, which works out to an absurd consumption figure of 43 syringes a day.

Ironically, the National Health Policy 2017, while advocating a larger role for the private sector, has reserved the regulatory role for the ministry, albeit with a deadpan display of diffidence: “The regulatory role of the Ministry of Health and Family Welfare—which includes regulation of clinical establishments, professional and technical education, food safety, medical technologies, medical products, clinical trials, research and implementation of other health related laws—needs urgent and concrete steps towards reforms. This will entail moving towards a more effective, rational, transparent and consistent regime.”

The PPP framework has many in-built infirmities: there are asymmetries in how the government and the private sector partner share revenue and risks.

There is another fundamental problem with PPPs in the social infrastructure space: the private sector partner needs to maximize profit, which is not always compatible with the stated objective of providing universal access to quality services.

The World Bank’s page on public-private partnerships, while describing the Indian model, says that bids are usually evaluated based on the lowest cost to government. It is common knowledge that the lowest cost bid mode is a slippery slope and prone to abuse and sub-optimal outcomes.

Perhaps, as McKinsey, World Bank and the World Economic Forum have told us on different occasions, the PPP model is indeed the way ahead to improve healthcare delivery in India. But, it is also important to get the design right to make the delivery cost-efficient, timely, affordable and profitable for all stakeholders.

Beyond the PPP nuts-and-bolts, there lies a larger moral question centred around the philosophy of social contract and the elasticity of powers afforded to an elected government. Part of the understanding or compact between the citizen and the elected legislative is that taxation revenue will be used to provide public goods, especially to those who are unable to pay user charges. Over the past 10-15 years, the government has steadily relinquished its space to the private sector as the sole provider of public goods and services, with the private sector player gradually introducing arbitrary and unregulated user charges. This breach of contract has serious implications for society.

The above article was originally published in Mint newspaper and can also be read here

The Rich Know How to Sidestep Responsibilities

The Paradise Papers show how the wealthy and powerful use tax havens—some do it legitimately, others for re-routing illegal wealth—to avoid or evade tax liabilities

Three developments over the past few weeks provide pointers to how the rich, whether individuals or nations, behave when it comes to meeting obligations.

The Paradise Papers have revealed how wealthy and powerful individuals use tax havens—some do it legitimately and some for re-routing illegal wealth—to either avoid or evade tax liabilities. The examples also highlight how this corrosive affliction equally infects industrialists and politicians.

The second example relates to the behaviour of rich nations, which have unabashedly deployed evasive tactics at Bonn, host to the 2017 UN Climate Change Conference to implement the Paris Agreement signed in 2015. The rich countries have been trying every trick to avoid meeting commitments on reducing greenhouse gas emissions, arresting climate change and funding developing and poor countries to help counter the effects of climate change. The US, European Union and some other rich countries—including Australia, Canada and Japan—have blocked efforts by developing nations to review the developed world’s performance vis-à-vis commitments.

Developing nations have been blaming the rich for sidestepping commitments made under the Kyoto Protocol, which placed mandatory emission reduction targets to be achieved during 2012-15. Later, through what is known as the Doha Amendments, the target date was extended to 2020. Developing countries have been arguing that to finalize the rule-book for the Paris Agreement, as the successor to the Kyoto Protocol, it is necessary to understand the achievements so far.

For instance, as part of the Copenhagen Accord of 2009, the developed countries pledged to provide developing nations with $30 billion during 2010-12 and $100 billion every year till 2020 to help mitigate climate change effects. The understanding was that since the industrialized nations were historically responsible for greenhouse gas emissions and the consequent global warming, they have a moral obligation to help poor countries, especially island nations, offset the adverse effects of climate change. But, as data shows, the rich are not only in breach but have been dissembling: Apart from reneging on their promise, they have also been padding funding data.

The third example crosses the Atlantic Ocean to Washington, DC, where the annual meetings of the World Bank and International Monetary Fund were held a month ago. Among other things, the agenda included the Bank’s pivot towards a new financing mode, for which it has been laying the ground over the past few months. The new strategy is called the “cascade approach”, under which Bank president Jim Yong Kim proposes to convert “billions into trillions”, essentially by leveraging the Bank’s financing and crowding in private investment.

The Bank released a document in September titled “Maximising Finance For Development: Leveraging The Private Sector For Growth And Sustainable Development”. This builds on a preceding March 2017 document called “Forward Look—A Vision For The World Bank Group In 2030, Progress And Challenges”. This document defines the scope: “... The Cascade first seeks to mobilize commercial finance, enabled by upstream reforms where necessary to address market failures and other constraints to private sector investment at the country and sector level. Where risks remain high, the priority will be to apply guarantees and risk-sharing instruments. Only where market solutions are not possible through sector reform and risk mitigation would official and public resources be applied.” Currently focused on infrastructure, the approach will be later extended to financial services, healthcare, education and agribusiness.

On the surface, it sounds like a logical progression of the Bank’s strategy and, at a theoretical level, the right thing to do. The Bank, in some senses, seems to be heeding conservative economists who have for long contended that the Bank crowds out the private sector and, therefore, must step back and facilitate private sector project funding. But there’s no avoiding the tricky questions: How do you manage the political economy of reforms, who will bear the risks, how will risk be eliminated, what will be the role of user charges, what is the private sector’s exact role, and, what happens in countries with minimal private sector presence? There are also concerns about involving the private sector in healthcare and education, especially because private and public interests are rarely aligned. Many of these concerns have already played out in India.

To be fair, the Bank’s hands are tied because the rich countries, especially the US, have refused to provide additional capital. India’s finance minister Arun Jaitley was forced to comment at the annual meeting: “The possibility of generating sufficient resources through the management levers has had only a marginal impact given the scale of capital requirement, and hence, early capital infusion into WBG (World Bank Group) is an imperative... The excessive emphasis on the ‘Cascade Approach’ to determine suitability of the financing source and mechanism does not have potential to make a big difference. Applying cascade approach to every project posed to the World Bank will lead to considerable delay. We should be careful in applying this approach especially to social sector projects.”

What is worrying is that the lessons of 2007 and earlier crises are being forgotten as soon as the first signs of economic growth are visible in the Western economies.

The above article was originally published in Mint newspaper and can also be read here

Bank Recapitalisation: Slow-Mo Replay

Scepticism over bank recapitalisation plan is fuelled by the government’s predilection for grandiose policy announcements without adequate preparation or execution

Like all things Indian, there are multiple ways of viewing Union finance minister Arun Jaitley’s comprehensive presentation on the Indian economy and the package of measures formulated to provide some momentum to a decelerating economy.

One is to view government as profligate: throwing caution to the winds, raiding the exchequer and reaping subsequent political dividends. With state assembly elections due in Gujarat and Himachal Pradesh, this package seems custom-built to address concerns over slowing growth, rising unemployment and the severe economic dislocation which followed demonetisation and implementation of the goods and services tax.

Some may even view this development as a snub to the reconstituted Prime Minister’s Economic Advisory Council (EAC). Convened to suggest measures to revive the economy, the council rebuffed calls for a fiscal stimulus programme during its maiden 11 October meeting. EAC chairman Bibek Debroy ostensibly acknowledged, during his post-meeting press briefing, that there was indeed an economic slowdown but, puzzlingly, declined to publicly list the reasons. The new package can thus be seen as realpolitik trumping good economic sense.

Viewed through a different lens, the package can be seen as an attempt to generate temporary feel-good with all the right ingredients thrown in—large numbers, a dizzying number of projects, heady growth estimates. This scepticism is fuelled by the government’s predilection for grandiose policy announcements without adequate preparation or execution. What further bolsters the cynicism is the inordinate rush to announce schemes without fleshing out details: for example, the Rs2.1 trillion bank recapitalisation plan lacks all the relevant details. There is another reinforcing factor: the government has front-ended announcements of funds injection, but all mentions of painful restructuring, if any, have been kept for later.

There is another nuanced view. Keeping the political compulsion as a constant, since the impact of the economic distress on impending elections cannot be ruled out, Jaitley’s package tries to walk a fine line by providing an economic stimulus while also heeding fiscal concerns. While this assessment does seem closer to reality, implementing it is unlikely to be easy. For example, it will be difficult for the government to undertake all the listed infrastructure projects without any budgetary support, given the private sector’s current inability to pitch in with capital.

Many observers and analysts have inveighed against the recapitalisation programme even though the final design is yet to be revealed. They see it as rewarding banks with a free get-out-of-jail card without any corrective measures to avoid repeating past mistakes. There’s also the moral hazard question: recapitalisation studies conducted globally have shown that banks receiving fresh government capital tend to exhibit increased risk-taking activity compared with banks deprived of capital infusion. There are other studies which show that recapitalisation stimulates the credit cycle for only larger banks and existing borrowers. This then contradicts the government’s assertion that recapitalisation will lead to increased credit availability for the micro-, small- and medium-enterprise segment.

While these are legitimate concerns, the recapitalisation programme seemed like a fait accompli, especially since banks were caught in a vicious cycle, leading to a credit impasse which exacerbated the economic distress. As the largest shareholder, it was incumbent on the government to recapitalize banks to kick-start the credit cycle and growth process. Banks could have raised fresh capital from the market by diluting the government’s stake, but their contaminated books made that impossible.

Ideally, recapitalisation and restructuring should go together. The government’s current plan incorporates one without the other or, at best, inserts a time lag between the two actions. Many commentators have been clamouring for an accompanying restructuring programme. One suggestion is to reduce the government’s stake in public sector banks, which, then, one naïvely assumes will provide banks with operational autonomy. Will, say, a 30% or 40% stake prevent ministers and government officials from calling up a bank’s chief executive and influencing credit decisions? Government intervenes in a bank’s credit operations in many other ways.

The Banking Regulation Act mandates that a bank’s board, apart from the executive directors and the regular government nominee (usually a conscientious bureaucrat), should also include professionals with knowledge of accountancy, agriculture and rural economy, cooperatives, small-scale industry, among others. Governments often exploit this section to appoint party loyalists and sympathizers under one category or another since the eligibility criteria is not rigid. These nominees then enjoy unofficial government imprimatur to intermediate between the bank and Big Business. This gap must be plugged.

The other demand is for complete privatization but, realistically speaking, the political economy will not allow that. And, even if that goes through, it is not fool-proof because some of the largest private banks are also struggling with mountains of bad loans featuring the usual suspects: large corporations. A sustainable, long-term solution must therefore include punitive measures for all wilful defaulters, especially majority shareholders, and not just politically convenient soft targets.

The above article was originally published in Mint newspaper and can also be read here