GOVERNANCE REFORMS CONFERENCE

13 and 14 April 2013, New Delhi

DRAFT SLIDES FOR PUBLIC

CONSULTATION26 March 2013

WELCOME ADDRESSSanjeev Sabhlok

Objective of this Conference To identify reforms to governance

frameworks that will lead India to world-class governance Public administration framework Economic policy framework Regulatory policy framework

The Conference will not identify policy reforms to specific sectors, eg. Education, etc.

Structure Two part presentation by Sanjeev Sabhlok

Will be uploaded later on Youtube Detailed workshops by participants on key topics

Some papers to be presented and discussed Action plan/ recommendations prepred for use

by: Government of India Major political parties Future political parties and reform movements

Conference Report to be published

INAUGURAL ADDRESSGurcharan Das

Inaugural Address: Gurcharan Das

World renowned authorIndia Unbound

and India Grows at Night

CHAIRMAN’S REMARKST N Chaturvedi, Chairperson IIPA

HOW WE - TOO – CAN GET WORLD CLASS GOVERNANCE

Sanjeev Sabhlok, former IAS (1982 batch)

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

Given limitations of time I will focus on frameworks (systems): Public administration system Economic policy system Regulatory policy system

Plan of my presentation Part 1

1) Theory of good governance2) India’s system compared with Australia’s system3) Public Administration reforms for India

Part 24) Economic policy reforms for India5) Regulatory policy reforms for India6) Transition from India’s system to world-best system

1. THEORY OF GOVERNANCE

Crucial importance of meta-policy: policy about policy

We need to start at the highest level of thought

What is policy and what should it consider?

We need a policy about policy Frameworks and systems

Without clarity on the policy concept and policy process (frameworks) bad policy will invariably emerge

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

OurGoal

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 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

We must 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

Chanakya wanted a strong, minimal state, with mastery of incentives

Two axes: liberty, incentives

Liberty

Ince

ntiv

es

Key dimension #1: Liberty Liberty is an end in itself. But it is 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

जहाँ का राजा हो व्यापारी वहाँ की प्रजा हो भि�खारी

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)

Ideasdon’t

come fromgovernments

People create ideas, and wealthGrowth = f (freedom, opportunity)

Innovationpushesout the frontier 2) Social control

• interfering religious beliefs• science and critical thinking insufficiently valued

People innovate better if the

government getsout of their way

1) GovernmentNanny, paternalistic state:• interfering policies and laws• “Food police”

Injustice• contracts not enforced

Key dimension #2: Right incentives

Chanakya thoroughly understood incentives: He wanted the best talent in government He wanted high salaries for top officials and

Ministers But vigorous 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

The problem of government failure

“Power corrupts, absolute power corrupts absolutely” Politicians lavishly spend taxpayers’ money Bureaucrats maximise their empire

Policy makers typically focus on market failure.

The real elephant in the room is government failure.

Understanding incentives

Institutions (rules)Incentives

Response

EndowmentLocal circumstances

(beyond the control of the policy maker)

SystemCreated by policy maker}

Examples: Incentives explain behaviour

Disposing our personal rubbish Indians don’t throw rubbish on the roadside in

Singapore

Tenure Without job tenure an IAS/IPS officer will focus on

delivery of outcomes, for fear of losing his job

Corruption Indians were incorruptible when British merchants

first came to India. They were astonished! But today Indians are world-famous for corruption.

Incentives are at work 24-7We 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?

=> Our system guarantees corruption. Chanakya would have easily understood

why India is so corrupt today

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 predict what someone will do

But incentives are hard for most people to analyse They are invisible They are complex, layered, and conditionalDespite this, 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 are subtle but very real And predictable

Need not just be economic, but economic incentives often overwhelm others

Myth: Indians are special Apparently Indians are “different”

they have a natural tendency to be corrupt

Not true They respond EXACTLY as predicted, to

incentives

China has moved toward incentives and markets-based governance

Teachers are dismissed in China if a class’s academic results are not up to par In India some teachers get paid

even if they don’t ever go to school

Results of this are as predicted

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

The problem of control (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) plus2. Performance pay (incentive compatible wage)

And hire/fire instantly based on performance

Controlling bureaucrats is much harder

Citizens are the masters in a free society but:

How to control our representatives (politicians)?

How do politicians control bureaucrats?

Citizen

How to control

?

How to control

? Black boxof incentives

Black boxof incentives

Problem: Hidden actions, complex incentives

Politicians’ interests generally don’t align with 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, being a requirement of Indian electoral system

How can we get politicians to look after our interest? At least meet the participation constraint

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 Australia pays politicians very well, thus attracting top

talent and minimising corruption Partly fund elections by the state to reduce

use of black money Australia pays about $2 per valid vote cast

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 main goal: to expand his empireSo: Meet participation constraint

High salary to attract good people Pay incentive compatible wage

Performance based reward/pay Abolish tenure (at all executive levels) Stern punishment for underperformance/ corruption

Chanakya’s insight 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.” (source: B.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) Just suggestiveEven a top salary of Rs.1 crore will go a long way

The current situation (re: bureaucracy)

Top talent not attracted to government jobs Salary not high enough to prevent corruption

Indeed, rewards for corruption No punishment for non-performance

Tenure Tenure is particularly insidious

Articles 310,311

The politician therefore can’t expect bureaucrats to perform

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. It empowers but expects total accountability Secretaries appointed by Prime Minister/Chief

Minister Contractual; with specific KPIs

Secretary empowered to hire (and fire) others Secretary appoints Deputy Secretary, who appoints

Directors, etc. Open market recruitment by application for each

position Market competitiveness of remuneration Contractual service at all executive levels Hire and fire option with 4 months notice Portability of employment contributions for retirement

Australian government doesn’t dabble too much with the economy

Limited role of government in managing economic activity Virtually no administered prices 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 have private sector experience) Head of civil service is often as young as 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 accountable for contracted results Independent review of Secretaries’ performance

Performance bonus contingent on performance

Not uncommon to have executives dismissed/demoted for non-performance

Organisational culture Blue culture on the

"circumplex“ Self-actualising No one is called "Sir",

only first names. Everyone is 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 quality 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

Best tools and engagement with experts

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

jurisdictions and world-best academics Eg. Centre for Market Design in University of

Melbourne

3) PUBLIC ADMINISTRATION REFORMS FOR INDIA

Political incentive reforms Key reforms needed:

State funding of elections High salaries but no perks Performance bonus based on

increased GDP reduced corruption, etc.

Bureaucratic system reforms

Key reforms needed: Eliminate tenure

Contractual appointments at Under Secretary and above

Performance pay and outcomes related wage contract Salaries and incentives comparable with private sector

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 always designs a 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

… contd

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

4)ECONOMIC POLICY REFORMS FOR INDIA

Chanakya’s insights, again Chanakya does not prohibit anything

Alcohol/ prostitution He regulates it He promotes trade, particularly imports

Open economy is the key to prosperity

India: the world’s laboratory for policies of freedom

Freedom has been increasing rapidly since 1990s in India Most sectors have been liberalised

Mobile phones Some sectors are free because the government doesn’t deliver But overall, still low levels of freedom

Need to liberalise most sectors Education Health

Liberalisation does not equal deregulation

India’s output has responded rapidly to the 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

What more is needed?Key reforms needed: Dramatically review and reduce any

unnecessary role of government Fiscal system reform Financial sector deregulation Privatisation across the board including utilities

and defence production Open economy (trade) Urban/regional planning reforms Infrastructure reforms (PPP etc.)

5) REGULATORY POLICY REFORMS FOR INDIA

We need optimal regulation: just right

Liberalisation does not equal deregulation

Enough to avoid harmful effects No more than that

When social marginal cost equals social marginal benefit (SMC=SMB)

Can be assessed through a cost-benefit test

Regulatory Impact Statement

Gatekeeping role Bad policy is reduced (not perhaps

eliminated) Includes consultation, cost benefit test

Concept applies to all projects (eg. infrastructure/ public private partnerships)

Independent gatekeeping mechanism

Independent Commission in Victoria assesses RISs

Treasury advices Cabinet

10 questions that eliminate bad policy

1: What would happen without any role for government2. Identify problem/s with the base case and explain why these are problems3. First principles test (should government intervene at all)4. What can government do about the problem/s?5. Freedom test

10 questions that eliminate bad policy

6. Strategic gaming test7. Government failure test8. Real experience test9. Cost benefit test10. Transition path

For details see template for policy competition held by Freedom Team of India

Regulatory reforms for IndiaKey reforms needed: Legislate a requirement for RIS Create independent Commission to

assess adequacy of RISs

Reducing red tape

How to measure the change Standard Cost Model method (European) Regulatory Change Measurement

method (Victorian) Benefits businesses and the community

6) TRANSITION FROM CURRENT SYSTEM TO WORLD-BEST SYSTEM

First, this is not impossible Good economic and governance policy is

not a secret

Indians are EXACTLY the same as other humans

There is no doubt that given the determination India can achieve world class governance

Chanakya School of Governance needed. Now! India has tens of technology, medical and

management schools. Not even one School of Governance!

LBSNAA (where I taught) is the most dismal place for teaching governance

This explains India’s dismal governance performance

We need a world class Chanakya School of Governance

How can we set it up in India?

PLAN FOR THE REST OF THE CONFERENCE

Three streams Public administration reforms Policy framework and regulatory policy reforms Economic policy reforms

The task: You are Prime Minister’s main policy adviser Prepare a strategic plan (with transitional steps)

to deliver governance reforms in each of the above sectors

Follow the template on the next page

Example of Conference outputs

What? Restructure the civil servicesWhy? To better align bureaucracy and citizen objectivesHow much?

Significantly increased salaries for top officers. About Rs.100 crores needed

How hard?

Ways need to be found to overcome legal obstacles, but theoretically there is no obligation for government to make everyone from IAS into a Secretary

When? A total of two years from start to finishHow? Provide details [eg. the ones discussed in my talk]

CONTRIBUTE FUNDS

Request to contribute funds Please contribute to the India Policy

Institute and IIPA To meet cost of this Conference To expand reform work