The long-term effects of government failure

In a good blog post on FirstPost, R Vaidyanathan writes that one of the possible reforms for the new government to take up would be to invest massively in electricity and water supply infrastructure and ensure 24 x 7 supply of these two commodities throughout the county. In his post, he explains that a move such as this will help Indian households (especially “middle class” households) and industry save a sum total of Rs. 1 lakh crore per year. While his numbers are not particularly convincing, his point is well taken – that irregular supply of basic infrastructure leads to additional private investment in such infrastructure which is an unnecessary cost. Electricity and water supply have “natural monopolies” and it helps to have a single supplier (in a local area at least) supply these goods rather than people making their own private supply arrangements.

Setting aside the problem of creating capacity for 24 x 7 universal power and water supply (priced at marginal cost, I assume), the problem reform such as this is likely to face is that there will be entrenched players who have a vested interest in such reform not taking place. And the  reason such vested interests exist is because of past government failure.

In the absence of reliable public supply of infrastructure, private companies have come up to fill in the gaps. You have, for example, companies that manufacture invertors (to store and supply electricity in times of power failure), those that manufacture diesel generators, companies that supply water in tankers when there is none in the pipes (or worse, pipes don’t exist) and so  forth. None of these companies will like the reform that Vaidya has proposed – for reliable supply of water/power will put them out of business! Hence they can be expected to lobby against such reform! Notice that the primary reason such companies exist is because of past government failures. Had past governments intervened and invested at the right time to provide reliable power and water supply, there would have been no gap in the market for such companies to fill.

Power and water supply are only two of several examples. Take for example the basic public good of law and order (strictly speaking power and water supply are not public goods). The lack of effective law and order enforcement by the state governments has led to a mushrooming of private security agencies. Every apartment building, every office building, malls and hotels are all now patrolled by a heavy posse of private security guards. In the presence of effective policing, these agencies have no business being in business (except perhaps in very limited cases)!

The point I’m getting at is that government failure at a particular point in time can lead to continued government failure. When we encounter policy paralysis, it is not just a temporary slowdown in decision-making and policy-making we face – it can lead to significant long-term consequences.

Here is an old related blog-post on my personal blog on private supply of what should be provisioned by the government.


Water Subsidy in Bangalore

Pavan Srinath yesterday wrote about the water subsidy in Bangalore, arguing in favour of “crisis pricing” of water in order to tide over the current water shortage. To support that he has produced the chart produced below which shows the total subsidy a household gets as a function of consumption.

The interesting thing to note is that there is “indefinite subsidy”. Ideally you would expect to get subsidy only up to a certain level of consumption. However, the data here shows that irrespective of how much you consume, you still get a significant subsidy for the marginal liter of water that you consume.

Subsidised Water in Bangalore

Pavan’s own comments on this chart can be found on his post at The Transition State

Site Allotment

In Bangalore, you have two kinds of residential layouts, BDA Layouts and Revenue Layouts. The former are layouts that have been created by the Bangalore Development Authority (BDA) or its predecessor the City Improvement Trust Board (CITB). These agencies acquired land from villages which were then on the outskirts of Bangalore, planned layouts with sites of different sizes, roads, “civic amenity sites”, etc. and then “allotted” them to applicants based on certain criteria.

To get a site allotted, you had to declare that you didn’t own a house in Bangalore, pay an upfront amount and wait for a few years before you would get your plot at a fairly subsidized amount in what was then the outskirts of the city. There were also layouts that were created and allotted to different PSUs. For example, you have ISRO Layout near Banashankari where sites were allotted at low prices to employees of ISRO. Similarly there are several “bank colonies” all over Bangalore. These sites were again allotted at subsidized rates. The government would acquire land from villagers, pass it on to the PSU employee association who would then allot them to employees. Interestingly, the resultant sale deed would be between the original owner of the land (typically a farmer) and the employee. The government and PSU’s name would be absent.

Revenue layouts did not have a government middleman. Original owners of the land (typically farmers) would cut it up into plots, allot area for roads and sell it directly to people to build houses there. Initially these areas would be deemed “illegal” thanks to their violation of zoning laws. In due course of time, they would get “recognized” by the BDA or BBMP and then BWSSB would provide water supply and drainage (till then people would rely on borewells and septic tanks).

If you drive a few kilometers out of Bangalore, especially in the eastern direction, you are likely to see a few mini Gurgaons. There has been absolutely no planning here, and so you have skyscrapers (either apartments or office complexes) interspersed with vast tracts of empty land. It is a sprawl out there, and there is no way one can live in these parts without a car. The vast empty spaces also mean these areas are ripe for criminal activity, and the buildings usually have private sources for their public goods (such as water or drainage).

While this makes a case for planned urban development (with its associated “site allotments”), there is also the issue of corruption. If you look at some of the corruption cases that have been filed recently against Karnataka politicians and bureaucrats, you will notice that they mostly have to do with land use and site allotments. Yeddyurappa went to jail in a “land denotification” case – that corrupt act was made possible because the government controls zoning. Former Lok Ayukta Shivaraj Patil had to resign because he got allotted a site when he already owned a house in the city.

So on one hand you get well planned and manageable cities, but significant scope for corruption and rent seeking. On the other, you have chaos and unplanned development, and several mini Gurgaons rather than proper cities. It seems like we have a no-win situation here. How do we handle it?

PS: I know that revenue layouts also involve heavy corruption, in terms of “regularising” or changing land use. However, surprisingly given the amounts involved, this kind of corruption seems to have remained at the lower levels of bureaucracy

Expat Living

When you live in a city other than the one you’re comfortable living in, and if you have a lot of disposable income, you try to live like an expat. By that, I mean you will try and use your disposable income in order to insulate yourself from the parts of the city that you’re uncomfortable with. You basically try to take the city out of your lifestyle, and try and live in a way that wouldn’t be different from the way you’d live in any other city.

So for example, two years back I had to relocate to Gurgaon since my well-paying job took me there. And I knew that water supply, electricity supply, security and public transport were major issues there. So the first thing I did when I got there was to find myself a comfortable apartment with assured water supply and “100% power backup”, with round-the-clock security. I also transported my car to Gurgaon to hedge against the bad transport system there. All shopping was done in malls, so I could avoid the heat and dust, and the unreliability of the traditional markets there. As long as I wasn’t driving on those roads in my air-conditioned car, I could have been living just about anywhere else. I had tried my best to take Gurgaon out of my life.

You find people like this wherever you go, except perhaps Bombay (where the cost of living is so high that very few people have “disposable” income), but is perhaps more pronounced in Gurgaon where there are few natives with disposable income so most of the people you’ll meet turn out to be fellow-expats. So essentially a lot of your income goes in just hedging yourself against the city.

Like in Bangalore, you’ll find that “expats” always want to take a “Meru cab” wherever they’ve to go, while us native folks prefer to take the humble auto. I don’t blame the expats – they are yet to learn the skills required in finding an auto here that will take you where you want at a “fair” price, so instead of choosing to learn the system, they get around it by using their disposable income. “Expats” usually shop in malls, try and travel only to those places where they can easily take and park their cars, live in the outskirts where they can get big houses with “amenities” like the one I had in Gurgaon, send their kids to “international schools”, and the like.

So this tendency to live like an expat shows up the cost differential between living in your “own” city, and living in another where you would rather prefer to buy your way around the parts you don’t like rather than trying to blend into the city. And this tendency to live like an expat means that expats will always be expats, which is an accusation (not unjustifiably) thrown at the Koramangala types.

When I returned to Bangalore from Gurgaon about two years back, the thing that struck me was about how comfortable I suddenly was. So many of the worries that had been worries in Gurgaon ceased to be worries now. I was comfortable enough with the system to not bother about any of those. And as I ran across my road and jumped on to a moving bus to take me to the city centre, I realizeed I was back, where I belonged.