The capacity to deliver

Our state agencies need to be redesigned by shifting the current discourse on agency design to a first-principle, empirical analysis of staffing and design.

In recent years, a wake of corruption scandals and the ensuing agitation within Parliament and civil society, combined with the pro-active strictures of the Supreme Court has left the government in what many are calling a “policy paralysis”. The inefficiency of government services in India in general is however not a new phenomenon. It was hoped that a reform-oriented government would ameliorate these inefficiencies. A ‘paralytic’ government sadly has been unable to cope with this task. It has taken some piecemeal measures that fall ridiculously short of the reforms required. For example, the Cabinet Committee on Investment was established to give fast-track clearances to large investment projects. This is nothing but a shortsighted shortcut to skirt cumbersome and non-transparent processes. Rather than focus on making processes clearer and easy to comply with, the CCI merely seeks to provide an escape valve to those frustrated with countless procedural bottlenecks.

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By far the largest issue currently facing government agencies is their ability to deliver the services they are supposed to in a transparent, time-bound manner that upholds the rule of law and cannot be subverted by cronyism and nepotism. Achieving this objective requires a focus on designing agencies efficiently, giving them clear functions, and creating a fine balance between independence and accountability. Once this has been done, a well designed agency has to be staffed with adequate and competent personnel to discharge its functions efficiently. Currently we face both problems in India: our agencies are badly designed. They are on the one hand not transparent and consistent in their functioning, but on the other, are also vulnerable to interest-group capture. Additionally, in agency after agency, there is a shortage of personnel. Our police-population ratio is among the lowest in the world. So is our judge-population ratio and our doctor-population ratio. We have consistently under staffed the agencies required to deliver essential public goods.

To overcome this problem, many of our agencies need to be redesigned. A badly designed agency even if adequately staffed, will be unable to perform its functions efficiently. The Forward Markets Commission (FMC) is a good example. Investigative authorities have apparently unearthed a scam that could be in excess of Rs. 5,000 crore. The FMC is the supervisory regulator for the commodities market. It is alleged that these acts of wrongdoing went on for a long time. Yet, the FMC was apparently oblivious to these wrongdoings. Why was the FMC unable to detect them? Two possible answers lie in agency design and manpower strength.

The FMC was established by the Forward Contracts (Regulation) Act of 1952 (FCRA). Unlike many new regulatory agencies, this Act does not establish FMC as a modern regulator. It does not have extensive investigative and enforcement powers similar to modern regulators like SEBI and the Competition Commission. The FCRA does however give 3-4 clear functions that the FMC must perform. It has to (a) grant or withdraw recognition from recognized exchanges, (b) supervise forward markets, (c) collect information on trading in commodity futures, and (d) make recommendations to the Central Government on the working of the commodity futures markets.

A look at the Results Framework Document (RFD) of the FMC shows however that the regulator spends thirty-five percent of its time on capacity building measures for exchanges and associations involved in commodity markets. This is not even a statutory function the FMC has been asked to perform. Therefore, it spends only about 50 percent of its time actually performing its statutory functions. A look at the organogram of the FMC shows 10 divisions, with “market development” alone having two divisions. Again, market development is not a statutory function the FMC has been asked to perform.

Even more importantly, one of the activities of the FMC as stated in its RFD is the “Regulation of markets”. The metric the FMC uses to measure its performance however is the growth in “Transaction Value” in the commodities market. This can potentially allow anyone to use improper means and increase overall transaction value in the market, and therefore allow the FMC to claim it is regulating markets efficiently even as the markets are growing due to illegal activities! The metric on regulation should ideally be linked to inspection and enforcement activities and balanced with the growth of the market.

While bad agency design is one probable, but important reason for the FMC’s failure to detect an alleged fraud, its capacity to do so is equally important. A look at the staff strength of the FMC gives another clear indication of its sheer inadequacy. While the commodity futures market is close to the size of the securities market, the size of the FMC is close to one-fourth of SEBI. SEBI, as per its latest annual report (2012-13), has 666 employees, the FMC has a sanctioned strength of 132 as per its 2011-12 annual report. Of this, 55 positions are vacant, and only 77 positions are in place. It is therefore easy to see the yawning gap between SEBI’s staff strength and FMC’s staff strength. While SEBI has not been blameless in preventing large-scale frauds in the securities market, it is far more aggressive in investigating wrongdoing by regulated entities than the FMC. One simple reason for this seems to be an allocation of resources commensurate with its responsibilities as a market regulator.

The FMC and its failure to detect the alleged fraud in the commodities market is just one example of how bad agency design and low manpower resources can combine together to create a perfect storm where investors and consumers can potentially lose everything. This brings into focus the manpower assessment techniques of the Union Government. The Department of Expenditure of the Ministry of Finance has a Staff Inspection Unit that is tasked to assess manpower requirements and make government departments more efficient in their use of manpower. As per its RTI disclosure, “The Staff Inspection Unit was set up in 1964 with the object of effecting economy in manpower consistent with administrative efficiency and evolving performance standards and work norms in government offices…” As per the same disclosure, the role of the SIU has been changed to assist line ministries in improving their organisational effectiveness. However, the disclosure merely goes on to state how its work from 2003-2006 merely identified surplus positions and helped ministries economise. It seems therefore that its idea of efficiency is inextricably linked to economy of personnel, not agency re-design.

Our discourse on agency design and state capacity needs to move beyond these existing parameters to a first-principle, empirical analysis of how agencies should be designed and staffed. We cannot afford too many Rs 5,000 crore scams.

Photo: Natesh Ramasamy