This slideshow summarises the systemic failures of India's governance system and points to solutions to address these systemic failures.

1. 13 and 14 April 2013, New Delhi
India Policy Institute
Hyderabad
Indian Institute of
Public Administration
Delhi
GOVERNANCE REFORMS
CONFERENCE

2. INTRODUCTION TO THE
CONFERENCE
Sanjeev Sabhlok

3. 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

4. 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

5. HOW WE - TOO – CAN GET
WORLD CLASS GOVERNANCE
Sanjeev Sabhlok, former IAS (1982 batch)

6. 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

8. 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

9. 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

10. 1) THEORY OF GOVERNANCE

11. 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

12. 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

13. 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

14. This is what we want
Goal

15. 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

16. 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

17. A word re: Arthashastra

18. 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

19. 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)

20. Chanakya wanted a strong, minimal
state, with control over incentives

21. Two axes: liberty, incentives
Liberty
Incentives
Reminder: incentives
include disincentives!

22. 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.”

23. 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

24.  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

25.  “Any restriction on liberty reduces the
number of things tried and so reduces
the rate of progress”
- H.B. Phillips (mathematician)

26. 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
frontier2) 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

27. 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

28. 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

29. Understanding incentives
Institutions (rules)
Incentives
Endowment
Local circumstances
(beyond the control of the policy maker)
System
Created
by policy
maker}

30. 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?!

31. 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

32. Burying our head in sand won’t make
incentives disappear
Incentives are at work even in our dreams!

33. 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

34. 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

35. 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

36. 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

37. Results exactly as predicted
Half of Class 5 kids in India can’t read Class 2 texts

38. 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

39. 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!

40. 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

41. 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.

42. 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

43. 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.

44. 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

45. 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

46. 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

47. 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

48. 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

49. 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

50. 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

51. 2) INDIA’S SYSTEM COMPARED
WITH AUSTRALIA’S SYSTEM

52. 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

53. 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

54. 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

55. => 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

56. 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

57. 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)

58. 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

59. 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

60. 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

61. 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

62. 3) PUBLIC ADMINISTRATION
REFORMS FOR INDIA

63. 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

64. 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

65. 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

66. 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

67. 4) ECONOMIC POLICY
REFORMS FOR INDIA

68. 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

69. 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

70. 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

71. 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.)

72. 5) REGULATORY POLICY
REFORMS FOR INDIA

73. 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

74. 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

75. 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

76. 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

77. 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

78. 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)

79. 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

80. Reducing red tape (costs of regulation)

81. Measuring regulatory costs
 Standard Cost Model (European)
 Regulatory Change Measurement method
(Victorian)
 Reducing red tape provides significant
benefits businesses and the community

82. 6) TRANSITION FROM CURRENT
SYSTEM TO WORLD-BEST
SYSTEM

83. 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

84. 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.

85. 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

86. 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