During the recent decade, India has seen its haste for privatization, without having proper systems in place. The following paper might have a biased view, but only to understand, that due to the incumbencies of the government and public sector alike, people have lost trust in the provision of services by the government. But this has also led to inefficiencies in the private sector market. The subsequent examples shed some light on the need to take urgent cautionary measures.
“ The Chhattisgarh government handed over a stretch of the Sheonath River to a private company to manage water distribution without setting up independent regulatory authorities that could establish guidelines under which a private firm could manage a common resource.”
Chhattisgarh is a newly formed state in India, constituted on November 1, 2000. This region has historically been an important electricity and steel producing area, contributing to 15% of the steel produced in the country. However, in contrast to this manufacturing intensity, the state has one of lowest standard of living in India, with an income index below the national average and around 80% of its population residing in the rural areas. Opposing milieus of race for development and common man’s needs, elaborate the picture of this state. The state of Chhattisgarh is not a water starved state. It had an average of some 126 ponds in every village. It receives approximately 1400 mm rain every year. Most of its 2.5 crore people, however, depend on the rivers for water and other needs. With five river basins – the Mahanadi, Godavari, Ganga, Narmada and Brahmani Kachar, and several rivers — Mahanadi, Sheonath, Indravati, Jonk, Kelo, Arpa, Sabri, Hasdev, Eib, Kharun, Peri, and Maand — water scarcity should not be a problem in the state. (Putul, 2008) Given the nature of existing water intensive industries, public and private, like distilleries, sponge iron and thermal power plants, there has been a great demand for water from the rivers. The issue of industrial usage of water has existed since the late 1980’s. The intensity of industrial usage of water has only increased with economic agglomeration of industries. Instances of government putting a ban on using the river water for irrigation during summer seasons has been leading to protests by many villagers. The purpose of constructing dams for irrigation is now shadowed by industrial usage. Water has thus ridiculously become an exclusive, private good.
The case in point is the privatization of a part of the Sheonath River, in the Borai and Durg district of Madhya Pradesh as seen in the map above. Borai is a newly developed industrial hub and is promoted by the Chhattisgarh State Industrial Development Corporation (CSIDC). (Binayak Das, 2006) ‘Radius Water’ is a division of Kailash Engineering, was contracted a part of the river on ‘build-own-operate-transfer’ (BOOT) basis in 2001 by the State government. This scheme involved supply of water from the river in bulk to the industries as a part of an agreement with CSIDC. Also another agreement was that the villages downstream would get water free of cost but also keeping in mind that the industries will be provided, under any circumstance, 30mld of water. (Binayak Das, 2006) There have been ongoing petitions and litigations happening from both sides, industrial and agricultural, with arguments made for growing the state’s industrial economy and water rights of farmers on the other[1].
Clearly here is a case of markets dominating over needs and basic rights. Hayek’s point that markets are organic and take their own course, often efficiently, is defeated here. Also his mention about knowledge being individual centric, and helping the organic structure of society-markets to function, also fails (Hayek, 1945). Knowledge has been individual centric here with respect to the industrial conglomerates. However, during the signing of the contracts, this knowledge did not pervade to the community of farmers. The knowledge of the farmers and that of the industrialists did not work in tandem. Also during the signing of the contract or the monitoring of it, there was no regulatory authority appointed. As long as there were few public enterprises, it did not create havoc; as it is now with a number of private industries springing up around the rivers, due to competition. Regulation at any level, be it zoning, water rights, amount of water diverted, were all ignored. Prevalence of Pareto inefficiency is thus observed. Here we could also apply the concept of transaction cost economics by Williamson 1996, wherein the opportunity of private companies supply water to industries was considered profitable at the cost of not knowing how much water to draw in excess, has definitely led to information asymmetry ( causing the farmers and villagers to suffer in the end). For example, it said in the contract that villagers would be provided water free of cost ‘downstream’, ignoring the fact that large scale drawing of water ‘upstream’ would eventually dry out groundwater tables, wells and thus water down the river. We can assume that social institutions in this case were weakened by the drive to make profits. The markets became pareto optimal ( no one’s situation can improve unless someone else’s is diminished). For the institutions to fit within this fact pace of growth has and probably will become difficult, unless a very strict regulatory authority is in place.
Second case that I want to mention here is about a manufacturing firm based in Pune, India, with whom I had a recent conversation regarding some ongoing research. The firm started its operations on a very small scale in the year 1977 with import substitution and has innovated in its technology and labor force management. To briefly introduce its relation to the subject of public private partnerships, is the way the firm has managed wage, cost, marginal cost , hold ups, relational contracting and asset specificity within the boundaries of it. Such an experiment, because of its asset specificity is very firm specific and correspondence to other firms may fail.
Technological innovations: During the years 1972 to 1985, India had implemented the import substitution production regime, coupled with strict caps on custom duties (around 150%) of imported goods. This prompted industries to innovate and develop indigenous products. Innovations were forced due to limited resources and limited technology available. In 1977 the firm started with manufacturing of small lathe, which was priced at Rs. 50,000 as an import good. It innovated and manufactured the small lathe at a cost of Rs. 3000. This product was sold at research laboratories and ITI’s. The structure of the firm consisted of 5 to 10 people then. The owner was working on the basis of “sustaining for self” and earning for these 5 to 10 workers. In 1979 it developed high speed drilling machine, priced at Rs. 2000 v/s an imported product of Rs. 30,000. Then, it developed feet operated drilling machine, which was initially a machine operated by unskilled women workers working on it ambidextrously , making it a tedious and time consuming. The new machine (feet operated) helped to increase the efficiency of these women who were earning salary of Rs. 3 to 4. This resulted in heightened demand and hence the sales of the firm increased that year. The firm was still employing 5 to 6 workers and the owner did skilled job of assembly. Another innovation was mica undercutting machine used by ‘mixer’ manufacturers. The cost was again drastically reduced from Rs. 50,000 to Rs. 5000. In the progress of things, the owner benefited from an exhibition in Bombay where he displayed the product range and was approached by Indian railways, who asked him to apply his technology to the products of railways.
I don’t want to elongate this process further, as there were many innovations at the technological level that happened after this. As the firm started manufacturing heavy-duty products, the labor force also increased and the firm multiplied its manufacturing bases. The innovations were not only cost efficient but also reduced the time and effort of labor. And hence helped the labor to work efficiently but at the same time to earn more.
Labor force innovations: 1984 – As the manufacturing capacity of the firm increased, Union was formed as a result. The location of the firm also played a part in the formation of Union. Pune had developed an industrial ZONE called as Maharashtra Industrial Development Corporation (MIDC). The concentration of firms had led to the springing up of Union Leaders. Any firm that employed more than 20 workers was subject to union formations. Worker unions thus multiplied. From the point of view of the owner such politically influenced worker unions (sometimes militant) were also responsible for choking or holding up the production in industries, which were detrimental to the time sensitive value chain. By this time the manufacturing bases of the firm had multiplied to 3, the factories were subject to 1 labor Union. However the owner was of the opinion to segregate the labor unions factory wise. So even if production was held up in one factory, it continued in the other (Holmstrom, 1998). This led to conflict of opinions between union leaders and the owner.
“Owners right to give work and workers right to receive payment/wages”- In the context of this statement, the owner stopped giving work to labor but continued giving them payments (a risk taken). The workers were fed up sitting idle and hence had to resolve to the decision of separating unions factory wise. During a period of 3 years hence, the workers got acquired to the job and developed their own individual skill set, which also led to on site innovations. However, the union and political conflicts in MIDC area were also raising a lot of concerns for the production chain in the firm. This led the owner to experiment on work distribution and wage structure. One can describe this experiment as incentivized relational sub contracting. The experiment was to give the manufacturing of a machine on a lump sum contract to the workers. There were penalty contracts on both sides. On the part of the workers if they didn’t complete within the time period that ‘they themselves’ had specified and on the part of the owner if he did not supply material/design drawings on time. It was disbelief to the owner when the workers came up with a plan of manufacturing the machine in 45 days, which usually took 5 1/2 months. This work contract was implemented successfully and the workers received 3 months of wage earnings in a span of 45 days. This incentivizing of wage -labor benefitted the workers as well as the firm. However this extra money earned was against the terms and condition of the Unions. Hence the Unions in both the factories became contractors (but still functioning in some way as a union). Such incentives led to innovations on site in the working methodologies and efficient self-organization of the labor. This was first of its kind experiment in the MIDC area and was also appreciated by a militant union leader in private. Percentage of profit sharing amongst the contractor led worker group and the owner was 2% and 5% respectively. There is a difference in profit sharing because of the extra risks of capital, investment and liability borne by the owner. This method led to the contractor led worker groups forming sub groups in themselves and affecting penalties amongst themselves. The payment structure amongst these sub groups was also based on penalty contracts (formed by the workers themselves). This process could be summarized as micro management and micro organization to the minutest level, which has not only helped the productivity of the firm but also welfare of workers themselves. (workers in the end creating assets for themselves). It can also be characterized as co operative profit sharing business, wherein the processes are self sustaining.
Due to the ‘asset specificity’ and ‘opportunisms’ for different firms and different worker organisations, experiments are limited within the boundaries of a firm. Experiments in work ethic and structures, wage labor nexus differ for organised and unorganised labor force. Logically, adaptations of work structure also differ according to the scale of businesses. Also according to Akerlof in Market for lemons, not every owner of a firm tends to bother himself about labor welfare. Hence one experiment in one context, may be a failed experiment in the other. We also observe that basic reorganization within the firm saved on costs. The firm could also have chosen to outsource it. But then it would have then cost more than reorganization.
The last case to be shed some light on is the increasing participation of ‘for profit’ private institutions in the higher education sector of India, which has also led to the deterioration of education in the public sector along with many teachers’ posts lying vacant. Education which has been traditionally considered as a social sector service, has now been branded and re-formed for the market at quality assuring prices and price premiums. But as there have been institutions, which charge more for higher education, it also has led to the infiltration of a flurry of institutions in the private sector. Ultimately, the increase in number has got down the utility of education. (Klein, 1981)With no regulatory body in place, unlike that in the public sector, education has become a commodity which could be bought and sold, and has led to infiltration of many bad lemons alongside, thus leading to adverse selection among consumers. Therefore there have also been instances of private higher education institutions providing fake degrees.
Bibliography
Putul, A. P. (2008, February). Privatisation unlimited: Rivers for sale in Chattishgarh. Retrieved October 2012, from InfoChange India: http://infochangeindia.org/water-resources/analysis/privatisation-unlimited-rivers-for-sale-in-chhattisgarh.html
Binayak Das, G. P. (2006, February 18). In Chhattisgarh, a River Becomes Private Property . Economic and Political Weekly .
Hayek, F. (1945). The Use of Knowledge in Society. American Economic Review , 35 (4), 519-530.
Holmstrom, B. &. (1998). Boundaries of the Firm Revisited. Journal of Economic Perspectives , 12 (4).
Klein, B. a. (1981). The role of market forces in Assuring Contractual Performamance. Journal of Politcial Economy , 89, 615-641.
Akerlof, George A. (1970). “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”. Quarterly Journal of Economics (The MIT Press) 84 (3): 488–500
Oliver E. Williamson, “The Economics of Organizations: A Transactions Cost Approach,” The American Journal of Sociology, 83, 3, November 1981, 548-577
[1] The Madhya Pradesh Irrigation Act of 1931 and the National Water policy prioritize the use of water by agriculture over industries and that natural resources cannot be signed over to individuals without taking all stakeholders into confidence.