Public in the private

The story of the relationship between state and private enterprise needs a rewrite.

Updated: January 16, 2014 8:37 pm
Our contemporary moment seems fraught with both possibility and anxiety. A new social contract will be institutionalised in the next couple of years. Reuters Our contemporary moment seems fraught with both possibility and anxiety. A new social contract will be institutionalised in the next couple of years. Reuters

The story of the relationship between state and private enterprise needs a rewrite

Our contemporary moment seems fraught with both possibility and anxiety. A new social contract will be institutionalised in the next couple of years. But we don’t know the shape of this contract. Learning by doing, compromising to get a workable consensus are, to some extent, inevitable. But we are in the midst of defining new relationships between public and private that will require us to return to a new framework.

In 1991, a simple framework became a guiding template for a renegotiation between the public and the private sector. The private sector was to be freed, its productive and competitive energies were to be unleashed. The gains from the resulting growth would not just trickle down, they would also provide resources for the state to help citizens who could not, in their current circumstances, participate in the gains of growth. The basic idea, only imperfectly realised, was not on the wrong track. But it turned out to be a limiting template in several ways.

First, our understanding of the relationship between the state and private enterprise turned out to be too simplistic. This was partly because the fascination with the private sector did not come from a story about its virtues; it came as a negative reaction to state failure. Since the public sector was full of vice, as it were, the opposite, namely the private sector, must be full of virtue. This sensibility underwrote the great reforms of the period: ending the licence permit raj, greater integration with the global economy. But it neglected key issues in the relationship between public and private. First, there was the question of an appropriate regulatory structure. As the recent Delhi High Court judgment allowing for government audit of private telecom companies has reminded us, the issue of an interface between the state and private companies is more complex than a pure ownership story would suggest. In the United States, these kinds of audits of private utility companies, for instance, are routine and far more invasive than in India. Much of the debate over public and private in India is based on a simplistic conception of ownership: private, therefore exempt; public, therefore accountable. Yet the issue of accountability is now based not on ownership, but function. If you are a private monopoly in utilities, the fact that you are private is neither here nor there: your costing will have to be audited.

Public-private partnerships have been a success in areas like infrastructure; they have been oversold in other areas, like education. But if 50 per cent of government expenditure is routed through these partnerships, it will be hard to make the argument that this expenditure should be exempt from public accountability. The public-private debate will now have to move to a whole new level of sophistication. To use a phrase central to the reforms process, instead of a pitched battle between public and private, both will have to be “unbundled”. Rather than thinking of the private as always a default substitute for public failure, we will have to carefully think about what institutional form is likely to succeed under what conditions. As the Delhi High Court noted, the real issue is going to be whether both sides learn sensible norms appropriate to this regulation, or whether this ends in a combat of mutual suspicion. The danger is that much of the rhetoric, from both companies and political parties, increases risks of the latter.
The second aspect of the liberalisation story was that we ignored the costing of negative externalities that impinge on the public-private relationship. The environment is a classic case, where we are producing a near irretrievable disaster. Unfortunately, this message is still not getting through. So you have both spectacles in progress. On one hand, there is the government, trying to speed up clearances. On the other hand, the regulatory framework is multiplying, with the Supreme Court mandating the creation of state-level environmental regulators just last week. Again, will we get a new social contract or the logjams of mutual suspicion?

You can run a similar story across every sector. Our laws on social regulation bear the marks of mutual suspicion rather than reasonable agreement. Our debate on taxation is taking a similar turn. There are two issues. The first is the institutional architecture, centred on simplicity and ease of enforcement. As the fiscal deficit got worse, the tax authorities got even more licence to be arbitrary, leading to the same argument: is taxation about reasonably justified mutual obligations or is it doomed to be an extreme contest between arbitrariness on one hand and evasion on the other?

But most fundamentally, the issue of fairness has come up again. Whining about tax burdens is inevitable. Unfortunately, the debate has got complicated because we do not have a clear public-private framework. So, on one hand, there are several irrational subsidies. On the other hand, the things most capitalist states provide — health, education, water, in many cases, transport and even security — are available through private provision.

What is the public-private interface in these sectors? In education, we ended up with a regime that neither rejuvenated public institutions, nor unleashed the full advantages of the private. Accountability in healthcare will be the next frontier issue in politics. But a deeper issue is this. While we need to strengthen the state in so many ways, there is no short cut around it. At the same time, the cost of an extraordinary privatisation of services may be undermining the willingness to support the state. It is one thing for the state to have a taxation debate in a context where it could assure the middle classes that there is a reasonably priced, good quality university they could access. It is another to do it in a context where anxiety over how much you will have to pay for health or education wrecks the system.

A similar argument could be made for another place where we have got the public-private mix wrong. Labour regulation, in some areas, impeded formalisation and job creation. Yet it would be easier to argue for different labour laws if there was some other, effective social protection.
We grasped correctly that corruption had stripped away trust across the board. It corroded the legitimacy of every institution, making solutions harder. Both growth and justice were casualties. But are we ready for a more sophisticated negotiation on the balance between public and private? To paraphrase Vivekanada, we have arisen, we are awake. But we still need to decide whether this revolution will get the public-private relationship right.

The writer is president, Centre for Policy Research, Delhi, and a
contributing editor for ‘The Indian Express’