Private Sector Participation in Public Services

Proceedings of National Seminar on Private Sector Participation in Public Services March 28-30, 2016 Council for Social Development Convener of the Seminar & Editor of the Proceedings: Prof. K. B. Saxena Seminar Coordinator: Ms. Jaya Lekshmi Nair 2 Concept Note The hallmark of a democratic polity lies in a morally binding social contract between government and citizens manifested in former’s political commitment to pursue social goals which are widely accepted as essential human rights. The core of this contract is universal provision of public services that satisfy human needs and creation of essential conditions for individuals to lead dignified lives and realize their human potential. In India, the essentials of this social contract were built into the Constitution itself which put pressure on the State to make these services available to all its citizens. The Government chose to discharge this responsibility by making these services available through state directed, state driven and publicly financed production (facilities creation) and distribution of these services. This mode of provisioning of these services emerged naturally from and integrated well with the political economy of the time which subscribed to the state control over key sectors of the economy and regulation of the private sector therein so as to fit into the larger framework of planned development. These public services /utilities were seen as public goods to be available to all citizens free of cost and without discrimination. State, therefore, created infrastructure for these services and also undertook to distribute them to individual households. These services which included drinking water, sanitation, electricity (with user charges), education, health, supply of food grains, within the limits of its financial capacity were delivered with varying degree of efficiency, adequacy, and access to them by different social groups, and user satisfaction. Improvements were made in policy design and execution of these services on the basis of feedback gathered from their delivery. This continued by and large until the 1980s. Several sectors, despite the policies of equitable distribution, showed evidence of distortions and inefficiencies. However, instead of addressing these, a fundamental shift took place in the economy as a result of Structural Adjustment adopted by the Country. Injecting substantial privatization in both production and distribution of marketable goods and services and dismantling controls which acted as barriers to entry and growth of the private sector was proposed to be the only way out of the morass. This was expected to help Government reduce the fiscal deficit, attract private particularly foreign investment, and improve productivity and efficiency in various economic activities. This shift also extended to State’s role in production and distribution of public goods and services by transferring this responsibility in part or full to the private sector. The directional change was also rationalized as an economic solution to investment constraints and fiscal deficit and an Institutional solution to governance weaknesses in state delivered services. It was also advocated as a poverty reduction measure which would enable expansion of access to these services in the absence of state provisioning. This reform towards privatization and commercialization entailed recovery of most or all its cost from the users to enable fair return on investment. While this shift is increasingly 3 penetrating the Indian economy including the social sector due to International Donors’ pressure, persuasion and loan conditionalities as also the influence exerted by the private sector and some economists within the country, it has essentially undermined the social contract between citizens and State. This was done by firstly undermining the state’s commitment to the social contract and shifting its focus to overseeing the process of privatization rather than focusing on provisioning of services; secondly, the reforms converted the citizens into users and eroded their role of holding the service providers accountable through the democratic process. This model of economic reforms has therefore distinct advantages for the participating private agency. It enables Private sector participant to determine / influence designing and financing, construction, operation, maintenance and distribution of public services and utilities and optimize its profits. In Indian economy this private sector participation has taken various forms such as financing of public services with recovery of cost and forcing public providers of services to partially generate their resources, so as to reduce public expenditure, outsourcing of functions by public sector agencies to private suppliers, reimbursement from public funds of services rendered by private service provider, exposing public sector producers to compete with the private sector, incremental withdrawal of public services and thereby, forcing users to access privately funded services, transfer of management of public funded service provider institutions to private sector agencies, sharing responsibility of implementation of public funded programmes with the private sector creating Private sector funded facilities in the premises of public institutions etc with a view to improving productivity and efficiency. It’s most crystallized and widely advocated and used form is the Public and Private Partnership. A Public – Private Partnership is a contract between government and a private company under which the latter finances/ builds / operates or undertakes all three, some element of public service and gets paid over a number of years, either through charges paid by users, payments from public authority, a combination of both and non- monetary subsidies such as concessions relating to land, developed infrastructure etc, trained personnel, space for setting up services and access to established public institutions to be run privately. The contract envisages selection of service provider through competitive bidding and negotiation, mechanism of payment by public agency to private service provider, risk and revenue sharing between the two, monitoring and evaluation by the public sector agency. This partnership has taken varied forms such as. The discussion in the following paragraphs draw upon several sources such as Baylios and Kessler (2006); Goodman and Loveman (1991), David Hall (2014), Randal Swood (2014), Meine P Van Dyk (undated); Report of Sub group on PPP in Social Sector, Planning Commission (2004) etc which are gratefully acknowledged though not individualy cited in the text due to limited nature of private circulation of this paper. 4 1. Public funding with private service delivery and private management. 2. Public as well as private funding with private delivery and private management. 3. Private funding with private service delivery and private management. 4. Public as well as private funding with public / private / joint management Though PPPs have come in use since 1990s, concessions to a private agency by the Government have been extended earlier too for development of water and energy resources and transport the cost of which was paid by the consumers or the Government. This arrangement provides attractive business opportunity to private / corporate agencies as it assures a long term flow of Income guaranteed by the government itself. In India, various forms of private sector involvement in Public Services indicated above are loosely termed as public private partnership. This partnership also includes partnering with voluntary / NGO sector which are labeled as private sector without profit. In social development, this structural collaboration has been used in education, health, poverty alleviation, urban development and housing, drinking water, sanitation and waste management, electricity though its more extensive usage is in infrastructure projects. Private-Public partnerships are widely claimed by the governments as a win win situation for both parties, private and public, which in effect they are not. This institutional arrangement has come in for strong criticism across the countries, developed as well as developing, including India. The key issues raised in their evaluation for assessing their performance in terms of stated objectives include 1. Cost of capital 2. Cost of construction 3. Efficiency of execution 4. Transaction cost 5. Uncertainties created by incomplete contracts 6. Impact on Public Policy, Public services and different social groups In their enthusiasm for PPPs, the governments usually refrain from comparing with Public sector production and distribution of goods and services in terms of value for money and resort to them irrespective of the cost they involve. This ‘value for money’ objective is crucial because public services have multiple public interest objectives. On the distribution side, these objectives include availability, cost and quality of services, coverage of difficult areas and access of the poor, and particularly disadvantaged / vulnerable groups, users’ capacity to pay etc. On the production side, the objective of achieving economic efficiency is paramount which can be accessed from multiple parameters such as cost of capital, extent of profit, cost of production / construction, degree of competition (cartelization), transaction cost, timely delivery, environmental impact, operational flexibility and element of risk. International evidence has shown that in terms of all these

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