The Telegraph
Since 1st March, 1999
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- Health, education and water are too important for the profit motive

The author is former director general, National Council for Applied Economic Research, and chairman, Central Electricity Regulatory Commission

For many years I have been convinced (as I still am) that the government should play a minimalist role in the management of the economy. The government’s participation as owner-controller-manager should be even less. Instead, it should leave it to the entrepreneurial instincts of individuals and companies to build capacities, introduce new technologies, create markets, make profits, and exit as well as enter new businesses. Even in product areas in which the public sector has performed well in financial terms (as with Bharat Heavy Electricals Limited or National Thermal Power Corporation) it might be desirable for the government to hand over ownership, control and management to private parties and to focus on tasks that only it can undertake. But it should not hand over to private enterprise in a mindless fashion. There must be clear rules and regulations and strong policing with severe penalties for violation so that the citizen and consumer do not get exploited and monopoly situations do not develop.

But I have reservations about the government exiting social aspects of the economy like health and education and necessities like water. These are areas from which government cannot exit because they are too important to be left to the mercies of the profit motive and because too many vulnerable people could get adversely affected.

Margaret Thatcher’s Britain was a good example of a good idea, namely the exit of government from the ownership and management of companies. It was carried too far. When she privatized loss-making steel and a declining BOAC and other such companies, she laid the foundations for their revival and transformation. The buoyancy of the British economy over much of the Nineties can be attributed to a great extent to the unleashing of private enterprise. However, when she privatized railways and prisons and social services, she carried a good idea beyond its boundaries.

Government ownership in British Rail was sold in 1996. Passenger trains were to be run by 25 train operating companies on franchises, while the railway signaling, tracks, bridges and stations were to be handled by a private company — Railtrack. But Railtrack went bust. Reductions in expenditure on maintenance and repairs in order to improve profitability led to an increase in accidents and delays. These proved costly since the independent rail regulator fined the company. It also had to compensate train operators for each delayed train. Investigations into train crashes revealed that the number of Railtrack workers had fallen by over 60,000 from 159,000 in 1992, even though the number of trains had increased. Railtrack went bankrupt last year and was replaced with the government-controlled Network Rail. It may be that even the train operating companies have to come back to government ownership.

Similarly the London Underground is probably stepping back from privatization. Maintenance work may be moved away from the private sector. What has happened in Britain is that private interest in the railways (trying to maximize company profits) ended up with a huge social cost, not just higher fares and delays, but also fatal accidents due to negligence. The present British government is struggling to correct some of those mistakes. Private sector contracts for the maintenance of the 32,000 kilometre network were cancelled after a series of fatal train crashes, while the performance of rail companies deteriorated, with 20 per cent of trains running late and passenger complaints up by 8 per cent over the past year. Despite the dismal service record, some train fares were raised by more than twice the rate of inflation earlier this year.

Services like mass transit in urban areas, railways, water, roads, health-care delivery, pharmaceutical pricing, milk production, education, sanitation, and such others in India with so many very poor, cannot be left to the market for determining service quality and prices. Nor can they be left entirely to private enterprises. There will be classes of consumers or geographical locations that need special social support. Only the government can give it. Where private enterprise can enter with investment and efficient operations, it must be regulated with clear rules, firmly and transparently, in the public interest. Liberating enterprise from state intervention cannot be a general rule. We cannot also have a blind faith in markets working without rules and tight independent regulation.

The conflict arises because companies have to respond to shareholders’ short-term interests. Especially with mandatory quarterly reporting of results now demanded from companies, no company lightly announces a slippage in a quarter’s results over those of the previous quarter, even in the rate of growth, let alone in absolute terms. Such a company in railways, water or a similar area in India may not be able to show profits for many years. Profits may not show much growth from year to year. Citizens, consumers and (hopefully) independent regulators will closely scrutinize profits in relation to quality and safety. These are services that cannot be dealt with on the basis of short-term concerns. Private and social interests must be adequately matched. If they cannot, the social interest must come first, especially in countries like India.

This list of exceptions to the rule that government must stay out of business or business-like situations must not be allowed to become a victim of vested interests expanding it. We should not revert to the bad old days when the government commanded and controlled the economy. What the private sector can do best must be left to it. Tough regulation, as with stock markets, must ensure that markets work and do not get used to favour special interests. If regulation can make the private delivery effective, takes care of all consumer classes and interests and enables private operators to make a reasonable return on investment, the private delivery is preferable because it is more responsive than government (at least in India) to calls for improved effectiveness.

Take, for instance, pharmaceuticals production or commercial hospitals and nursing homes. An independent drug price control authority that sets prices of essential drugs, a well-funded drugs regulatory authority to ensure quality and adherence to the requirements in dispensing dangerous drugs, and close and transparent monitoring of the working of hospitals and nursing homes can enable private delivery of good services to those who can afford it while the public hospitals look after the poor. Public hospitals may not be as plush as the private, but they can also be independently regulated to ensure that they do their job better than today. We need them to serve the poor at subsidized rates.

Similarly, mass transit the world over has not earned a good and consistent return on investment. Mobility for people puts a heavier burden on the low-income groups than on others. There has to be government involvement to ensure that they do not have to pay a high proportion of income on transportation. Safety standards are bad today under government ownership, but more because of poor work discipline, corruption and wrong investment priorities. With private investment, mass transit, especially in urban areas, could become worse. So could long-distance travel and roads, if they are left to private initiative and investment. It is not surprising that there has been little investment, for example, in toll roads. We have to wait and see whether experiments like the long-awaited Bangalore-Mysore road will be cost-effective for investors.

Milk is a major source of additional income for the rural landless and poor. We cannot open it to private corporate investment until there are alternatives for the millions who benefit from it today. Water is another instance of a service that cannot be handed over to private investment, given the massive investments required, the unlikelihood of remunerative tariffs and consequent poor returns.

The government will have to stay not merely in social services but also in some areas of infrastructure services. It could share the burden with private enterprises which can serve those who can afford its rates. But the rules and standards must be clear and strongly enforced.

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