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A wise bureaucracy - Views on News from Equitymaster
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  • Jul 15, 1998

    A wise bureaucracy

    There is a view that our bureaucracy is full of knowledge. That may be true. But I have another question: is it full of wisdom? I mean it is nice to know that some of our bureaucrats were great debaters at Oxford or Harvard and went to school with influential folks like Under Secretary Talbott of the US who is now busy punishing India for its nuclear tests. These debating skills, a recent Business India column argued, give bureaucrats a good chance of defending the blubbery Sinha budget. Good debaters win academic wars, but what about real world situations? If the bureaucrats in New Delhi have the knowledge that raising import tariffs is bad for the country and yet, in honour of some unwritten code for the next big promotion in the heirarchy, they keep silent then India is in for a nightmare.

    The budget is only one of the things that the knowledgeable folks seem to have messed up. In the power sector we have heard about all these grandiose power projects. In the 1990's when the initial power policy was set up, the global environment was one of large Asian demand for power but relatively cheap money in a stable fx rate environment. Our policy-makers took this environment as a given and, in a rush to build power capacity, gave guaranteed returns in foreign exchange to "fast track" power projects. Five years later, only the controversial Dabhol is anywhere close to completion. Of the 10,000 MW of power promised or planned by 1998, only 1,200 MW from these fast track projects will come through by 1999. The reason for the failure of this policy is not the opposition to the deals as much as the stubbornness of our policy makers to stick to their original policies in a changed environment. The guaranteed returns for the selected projects led to a lot of (unproven) criticism, such as: allegations of bribery, favouritism in selecting the fast track projects, and fears that padded project costs will inflate tariffs to end users over time.

    The wise response to these criticisms should have been to change the power policy pricing to one of competitive bidding. In July of 1994, at the first India Club meeting in Paris, I asked this question of one of our bureaucrats and he agreed. Yes, he said, maybe we were wrong and should have asked power companies to bid for certain projects. For example, the project at Dabhol could have been awarded to the company that agreed to build a power plant as per specifications listed by the government and agreed to charge the lowest tariff. Instead, we gave (sold out?) power projects on a guaranteed return basis. This led to controversy, which resulted in delays, which has now resulted in the availability of power still being a fairy tale for most Indians. With the Indian rupee going the way it is, power will remain a dream for most of us as we may not be able to afford the future Dabhol rates.

    By the way, in case you would like to know what happens to power projects that have been negotiated by 13 administrations (suggesting that it is a "clean" power agreement), ask one of your journalist friends to do a study on Hub Power Company of Pakistan. Hubco had this sweet deal of return on assets (like the India ones). One fine day in 1998 the Pakistan government realised that they could not afford to buy Hubco's expensive power and sell it cheap to consumers. Their options are to raise power tariffs in Pakistan by about 60% (and face riots) or stop paying Hubco. Last month they decided to stop payments to Hubco. The case is now going to the international court and Pakistan is likely to be branded a "defaulter" nation. Standard & Poor has downgraded Pakistan to a CCC status - likelihood of default.

    In private conversations, we see the wisdom of the bureaucrat and in our daily lives we see his knowledge. The wisdom of good governance says not to have an import tariff, but the knowledge says do it because the political master says so. The wisdom of experience suggests that the power policy is a failure and a rip-off on the country, but your knowledge tells you not to change it because that could be an admission of guilt for having the wrong policy in the first place! Wisdom tells you that banning short sales or asking UTI to bail out the market is the wrong thing to do, but knowledge tells you that your political masters need to see a rising stock market to prove that the budget was a good one. Wisdom tells me that many bureaucrats in this country are good and will agree with my message, knowledge tells me that I may have upset a few powerful folks. But wisdom also tells me that - in the end - things will work out fine for India although knowledge tells me that we may have to go through some more pain to get there.



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