The resilience of the VIP

By Santosh Desai – By itself, the ability to claim the right to quicker passage in traffic, is privilege enough, but in this case, the siren as symbol was far more potent.

It signified a sense of screaming impatience with the very people that those in these vehicles were meant to represent. It identified people as the problem and power as the solution. By visibly identifying the special, it made everyone else ordinary.

Can one mere new rule change a time honored practice?

The whole point of reaching a position of power is to get the beacon, wangle some security and to hurtle past toll booths without paying.

As long as the principle that underpins this action is not challenged at a fundamental level, banning one action is bound to end up as a token nod to a half-hearted intent.

There can be no piece-meal approach to this problem. We cannot have a separate protocol for VIP handling for at airports. We cannot keep thinking of the waiver of frisking during airport security as a privilege, we cannot allow officials to put their designations on their car registration plates.

The extent to which this behavior is considered normal can be gauged by how easily and publicly a self-important high official can start groveling the moment someone even higher appears on the scene. The tableau of an untidy gaggle of people alternating between barking orders at underlings and groveling energetically in the direction of the presiding deity is a common sight. more> https://goo.gl/kTfYHk

Facebooktwittergoogle_plusredditpinterestlinkedintumblrmail

Irresponsible politics

EVMs (electronic voting machines) are a positive election reform, they can be further improved through VVPAT (Voter Verified Paper Audit Trail)
Times of India – Parties would do well to revisit India’s election experiences prior to widespread use of EVMs. Violence was common as parties used muscle power to seize booths and engage in ballot box stuffing. Furthermore, in tight contests results were vitiated as ballots that were ambiguously stamped would be declared invalid. These problems were overcome with the advent of EVMs and the level of violence associated with elections has substantially declined.

Among other positive spin-offs are an increase in the speed with which the process can be completed and a control of costs. Overall levels of crime too may have declined, as parties no longer need to nurture armies of goons to influence the political process.

While the advent of EVMs undoubtedly represents a change for the better, there is justification for the demand that electronic votes leave a paper trail that is easier to audit should the vote be challenged later.

In this context, it is welcome that Supreme Court yesterday (Apr 13) asked government to respond early next month in a case where litigants want compliance with the apex court’s 2013 directive to introduce paper trail in EVMs. Voter Verified Paper Audit Trail (VVPAT) is a system where a voter has the comfort of additional feedback. This will hopefully put an end to the unfortunate tendency of losers blaming the ballot box. more> https://goo.gl/EL68OC

Facebooktwittergoogle_plusredditpinterestlinkedintumblrmail

Economic development assistance is debt trap

The Times of India feature, “A ‘Risky’ State of Affairs,” (Oct. 18, 2016) describes the dismal state of development projects in Kerala.

The report says, “A comparison of the World Bank’s rating for its projects in Kerala and other southern Indian states show that risk factor is ‘substantial’ for two categories in Kerala – ‘Political and Governance’ and ‘Institutional Capacity for Implementation and Sustainability.’

“What is worrying is the ‘substantial’ SORT (Systematic Operations Risk Rating Tool) rating for two aspects of the on-going World Bank part-funded Kerala State Transport Project – 2 (KSTP-2), a five-year project which began in July 2013. The International Bank for Reconstruction and Development (World Bank) is funding $216 million of the total expected cost of $445 million.

“World Bank officials might downplay the substantial risk rating as the Kerala Government is their client and the bank couldn’t survive alienating its clients.” a policy maker commented on conditions of anonymity.

“According to the document, these aspects pose governance challenges to the current project: political interference in project implementation, poor quality of works, delayed payments to contractors, delayed decision-making, repeated termination and rebidding of contracts, poor sustainability arrangements for roads and lack of mechanisms for adequate citizen feedback and public disclosure.

“There is a substantial likelihood that weak institutional capacity for implementing and sustaining the operation or operational engagement may adversely impact the project development outcome. The implementing agencies have limited experience with bank and other multilateral development partner operations. The implementing agencies have some in-house capacity, but external consultants play an important role in the design and day-to-day operation implementation. Staff turnover is substantial and they have limited access to relevant training. There are significant gaps in the agencies’ monitoring and evaluation of arrangements, and the lines of accountability are somewhat unclear.”

“How many of bureaucrats have the expertise to see these projects through?” asks D Narayana, director, Gulati Institute of Finance Taxation. “First thing they need is this expertise and then commitment.”

Even in the World Bank’s restrained language, the problems facing development projects in Kerala are clear: institutional capability deficits, lack of expertise among bureaucrats, lack of management skills, lack of dedication, and corruption.

It is not difficult to trace the causes of these problems. The problem starts with education. Kerala Government has full control of the quality of the education in the state – and the goal is to ensure uniform mediocrity. For example, recently there is a new initiative to offer WiFi in schools. However, such cosmetic efforts will not result in the skills needed for a vibrant economy. Studies have found that computers, smartphones and internet can be an inhibitor for learning. Fundamental education reforms are essential for effective functioning of the state economy. For instance, OECD recommends, “Governments should develop smart innovation strategies for education with the right policy mix to give meaning and purpose to innovation, including creating an innovation-friendly culture.”

Kerala Government and its agencies need change of mindset to bring real benefits from development projects. Here is an outline of a typical process for a development project.

  1. Target an agency to get loan from.
  2. Find a consultant who can prepare a proposal that will be accepted by the funding agency.
  3. Once the loan is approved, find another consultant to manage the project.
  4. Hire other consultants to implement the project.
    (In practice, there may be additional creative steps.)

The result of this process is that the supervising agency does not have the skills, know-how or expertise needed to supervise the project successfully — a problem identified in the World Bank report. In addition, the process inhibits the supervising agencies from acquiring essential expertise and know-how for effective project implementation (institutional capacity).

Kerala Government has so far received development loans from World bank, ADB, governments of Japan, France, Germany and others. Some of them are in the early stages. Projects that are due for completion share the fate of the World Bank KSTP-2 project or worse.

The situation with these development loans is all the more deplorable because there is no need for these loans in the first place. Kerala has huge amount of bank deposits and gold holdings to finance these projects and more. The problem is people (depositors) don’t trust the Kerala Government with their money. Instead, Kerala Government goes to these development agencies for loans to squander away, without accountability — as the World Bank has identified.

The economic development agencies — World Bank, ADB (Asian Development Bank [2]), governments of Japan [2], France [2], Germany [2] — are doing a disservice to the people of Kerala by giving loans to Kerala Government and its agencies by helping politicians and bureaucrats escape accountability.

What Kerala needs is assistance with institutional capability and capacity building. The priority for the economic development agencies need to be helping with institutional capacity building, not loans. Otherwise, they are just helping Kerala Government get deeper into the debt trap it is in.

Facebooktwittergoogle_plusredditpinterestlinkedintumblrmail

Cut cities free

India’s urban nightmare can be ended with legislative changes and capacity building
Times of India – US secretary of state John Kerry is unlikely to forget his visit to New Delhi in a hurry. Not once but twice his meticulously planned trip was derailed by routine monsoon showers, leading him to humorously quip [2, 3] to his IIT Delhi (Indian Institute of Technology Delhi) audience, “I don’t know if you came here in boats.”

It is almost 25 years since the 74th constitutional amendment mandated setting up of municipalities as institutions of self-government. But the spirit underpinning the amendment has been ignored by states even as they ask for decentralization and more powers from the Center. Thus India’s economic dynamos Chennai [2, 3], Mumbai [2, 3, 4], Delhi [2, 3, 4], Bengaluru [2] and Hyderabad [2, 3] have all been crippled by poor or non-existent urban infrastructure.

Urban governance reforms must be based on the principle of accountability. It is time to narrow accountability to a single office such as an elected mayor, as successful cities across the world do. The mayor should be the executive head of a city, equipped with sufficient legal powers and financial resources to get things done.

Unless both Centre and states can find the political will to carry out urban governance reforms, talk about smart cities or Swachh Bharat [2] will remain just idle chatter. more> http://goo.gl/xR9bDt

Related>

Facebooktwittergoogle_plusredditpinterestlinkedintumblrmail

Building Smart Cities in India

By Shamika Ravi, Adie Tomer, Ankit Bhatia and Joseph Kane – Launched under Prime Minister Narendra Modi in 2015, the “Smart Cities Mission” is an ambitious multiyear effort to boost economic development, technological innovation, and sustainable growth across 100 cities.

Learning from previous national urbanization initiatives, the Smart Cities Mission promises to simultaneously improve the infrastructure and built environment in India’s expanding cities while offering a new path to urban fiscal health. If successful, Indian cities will position themselves as clean, modern, and competitive places for years to come.

Simply put, installing digital technologies alone will not deliver the results India hopes to achieve.

India’s growing tide of urbanization necessitates significant governance reforms to successfully manage such growth.

Following a variety of reforms during the past few decades—including those included under prior national urbanization programs—many regions across India have assumed greater control over managing and financing their urban development. However, states and Urban Local Bodies (ULBs) can still vary widely in the amount of control they exercise in these matters and are continually exploring new ways to drive investments.

The creation of new local units to manage urban infrastructure—called Special Purpose Vehicles (SPVs)—offers the potential to guide more comprehensive planning efforts, but their long-term role must be more clearly defined.

India must elevate the financial standing of its urban areas, making them more attractive destinations for future investment.

Across all levels of government, particularly among different city agencies, India must ensure that dependable capital is available to meet economic goals in years to come.

Increased private-sector engagement should be a paramount concern, which requires more active, coordinated leadership in project management, technical guidance, and risk mitigation. more> https://goo.gl/R44Kzp

Related>

Facebooktwittergoogle_plusredditpinterestlinkedintumblrmail

How to be a model State again

By Jayan Jose Thomas – Kerala today is not generating enough jobs to meet the expectations of educated Keralites entering the labor market. Changing this is vital and doable.

On the one hand, Kerala has made spectacular achievements in land reforms, education, and health since its formation. Amartya Sen [2, 3] has attributed these results to public action, brought about by State governments and by the political, social and labor movements in the State.

On the other hand, a serious cause of concern emerged by the 1980s: Kerala’s inability to kick-start economic growth despite its social progress. This thankfully changed by the early 2000s: while Kerala’s per capita income was 16 per cent less than the Indian average in the early 1980s, it was 34 per cent more than the Indian average by the end of the first decade of the 2000s.

The biggest stimulus to Kerala’s economic growth comes from the remittances sent by its migrant workers, mostly skilled and working in West Asian countries.

Kerala’s failure to build a diversified manufacturing sector has often been attributed to the activist role played by labor unions. However, my research has shown that the roots of Kerala’s industrial backwardness can be traced to investments to the State starting from the 1930s. Investments were mostly in chemical-producing industrial units.

These industries have hardly built any linkages with the rest of the economy. Further, they have been constrained in growth in the State due to power shortage, unavailability of land, and environmental problems. more> http://goo.gl/Anxg0L

Facebooktwittergoogle_plusredditpinterestlinkedintumblrmail

Triggering industrial development

The Times of India feature, “The Cooperative Way Forward” (July 24, 2016) offers examples of bland planning efforts by Kerala Government.

According to the report, A C Moideen, minister for cooperation and tourism said, “A committee headed by an expert who has worked in the Reserve Bank of India will be established to prepare a detailed report on the project. The bank will be launched after seeking consensus from all the stakeholders.” He added, “Kerala Cooperative Bank will reach more people and boost agriculture, industry, and entrepreneurship in the state.”

About tourism, the minister added, “Waste management is a major challenge in the (tourism) industry.”

“43 rivers and sumptuous rainfall from an active south-west monsoon have blessed Kerala with an abundance of water resources. But over the years, drastic ground water depletion, rampant urbanization climate vagaries have all lead to acute water deficiency in the state.” (“Clean drinking water for all”)

Mathew T Thomas, minister for water resources, said, “Currently only 30 per cent of the state’s population has access to clean drinking water. Our target target is to take it to 100 per cent.” He added, “We aim to strengthen it (Kerala Water Authority) making it more competent, accountable and customer friendly. There are projects to the tune of Rs 2000 crores ($300m) on the anvil, so we need to beef up operations and manpower gaps. Unscientific processes that burden the customer will be revisited and there will be more vigilance in project implementation.”

Statements of the ministers are examples of what the minister of finance and coir T M Thomas Isaac, termed “lackadaisical ways“. The statements of the cooperation minister, A C Moideen, is lacking ambition. The minister’s statement “a committee headed by an expert who worked in the Reserve Bank on India will prepare a report” for the bank reform is bland, to say the least. The scope of the cooperative bank reform is being diminished. The goal is preparing a project report. By limiting the scope of the effort, the results will automatically be reduced.

There is a breakthrough opportunity with the planned cooperative bank reform. “The finances of Kerala are in dire straits,” so says the “White Paper on State Finances“. The mainstay of the state economy, foreign remittance, is in decline. The boom years of remittance [2] from labor migration are behind us, and the flow is beginning to reverse. The remittances were a cause of the financialization of the Kerala economy and was inhibiting economic development. The current gulf crisis is generating an urgent need to develop local jobs. The proposed co-operative bank could become a key institution for instigating economic development in Kerala by building capital formation channels from the huge amount of bank deposits and gold in the state.

One of the current global problems is the excessive importance given to finance in the economy [2]. Overuse of financial stimulus methods over the past several decades have left them ineffective. Economic successes of Japan, Korea, Taiwan, China, Germany and France were the result of focus on “wealth-generating economic activities.”

Luckily, all critical ingredients for jump starting economic development in Kerala are present, if the Kerala government can take the initiative. What is needed is breakthrough thinking. Banking, as the economic activity regulator, has a critical role. But banking needs to go back to its roots, funding the real economy, as was the case, for example, with the Chemical Bank in 1820s. Misplaced faith in finance has resulted in the decline of American economy [2]. It also resulted in the near collapse of Boeing, among other business disasters.

The key requirement is for the planned Kerala Cooperative Bank to develop expertise in the industries it wants to finance. This will overcome the real bottleneck businesses currently face — banks have their own language and terminology. And businesses and industries have to translate their business needs into financial terminology to get financing. Instead, if the banks have expert knowledge of businesses and industries they are targeting, then financing economic development will become much easier.

If the new Kerala government is able to master breakthrough thinking to take advantage of the current opportunity, it can trigger industrial development that has eluded Kerala so far.

Facebooktwittergoogle_plusredditpinterestlinkedintumblrmail

Wealth-generating economic activities – not finance – is the answer

As a result of financialization, Kerala government is operating under the misconception that finance is the key to economic development, exemplified by the non-stop efforts to get loans from various sources [2, 3, 4].

The Times of India report, “Fiscal repair needs more than cuts” (July 8, 2016), says, “Isaac is expecting a 25% increase in tax collection to mitigate this crisis.” “The basic reason for the present present fiscal crisis is the alarming growth in non-plan expenditures comprising salaries, pension, teaching grants given to private/ aided education institutions,” said B A Prakash [2], chairman, fifth finance commission.

The total salary and pension expenditure during 2015-2016 was Rs 36,569 crore ($5.48B). “This accounts for 82% of the total tax and non-tax revenue of the government. With the implementation of pay and pension revision, the additional financial commitment required is estimated as Rs 54,754 crore ($8.21B),” Prakash said.

In a nutshell, Kerala has an overdeveloped government for an underdeveloped economy.

The report adds, “The CII (Confederation of Indian Industry) also expects the budget to support revival of crisis-ridden public sector undertakings and traditional sectors like cashew.”

There seems to be fundamental flaws in the expectations and role of budget and finance with the Kerala government and various agencies. Proper role for finance in an economy is to be an enabler for wealth-generating activities. However, Kerala economy is in deep financialization. Hence, normal expectations will not work. Much of Kerala economy consists of:

  1. Rent seeking” activities
  2. Social welfare schemes
  3. Operation of non-viable public sector units
  4. Under-performing education industry

Lack of operational capabilities, know-how and skill-deficits in critical government agencies are the main contributors for the malfunctioning state economy. Routinely seeking external loans for development projects while there is a huge amount of bank deposits in the state is a manifestation of this problem.

While the governments takes credit for the welfare schemes, the tax system is extremely regressive. Significant part of state tax revenue is from state lottery and alcohol sales [2], while income tax share is non-existent.

The planned “Kerala Bank” [2, 3, 4], consolidating the district co-operative banks, is a potentially good idea to help with capital formation. But the current profligate ways of the Kerala government will have to change. Currently, borrowings are channeled into consumption or unproductive development projects, If the “Kerala Bank” is used for similar borrowing and spending, the result will be a catastrophe.

Kerala economy is beyond repair, and need to be replaced. The real solution is to develop and implement a wealth-generating industrial development program as anchor for a balanced economic development.

Facebooktwittergoogle_plusredditpinterestlinkedintumblrmail

Rebuilding a government

The Times of India feature, “Belt-tightening on the anvil” (July 1, 2016), covers details of the white paper by the Kerala finance minister, T M Thomas Isaac.

The report says, “The inefficiency to mobilize taxes and corruption in tax administration department and at check posts contributed to the decline in revenue. It came down to 13.1 during the UDF rule. Now Isac says he will raise the tax collection at the rate of 25 per cent. It is a huge challenge especially because he will have to overhaul the whole system and bring e-governance and more accountability,” said Mary George, chairman of Public review Expenditure review committee.

Based on the problems identified in the white paper, “overhauling the whole system” is too little. What is required is rebuilding the entire Kerala government processes and systems.

Here are some highlights from the “White Paper on State Finances,” some of which are astounding.

  • “The finances of Kerala are in dire straits.”
  • “The entire borrowing ceiling now permitted by the Central Government is just sufficient to meet the day to day expenditure of the State Government. Consequently, my Government is faced with the stark reality that there are no funds left for capital expenditure like construction of roads, bridges and other major infrastructure projects,” said Justice P. Sathasivam [2], Kerala Governor, in his address to the Legislative Assembly on June 24, 2016.
  • “For the last three years, budgets placed before the State Legislature have not had much of reality with either the resources to finance them or with the actual expenditure incurred at the end of the year. Schemes and projects were announced without the funds to back them up.”
  • “Budgets have lost their sanctity and budget speeches have become exercises in conjuring up unachievable visions of schemes and projects. The divergence between the reality and what is professed, has reduced the annual budgets to a ritual of proclaiming a slew of real or imagined dreams and intentions. Thus unfortunately, the State has been living on a financial lie.”
  • “The vital tax collection machinery, be it in commercial taxes, or excise was pawned away for private gains ignoring public interest.”
  • “Imprudent financial management has had an opportunity cost of nearly Rs.3000 cr. ($450m) per annum – money that could have been ploughed into the much needed capital expenditure in the State.”
  • “Unless, special efforts are demonstrably made evident to investors, this negative image may hamper the borrowing program of the State in the future. If the image of the State Exchequer is not restored in public minds, then it will detrimentally affect resource generation to finance the major policy initiatives and capital projects of the State”
  • “The State will have now to wait longer for catching up with advanced States and that the effort will now cost us more.”
  • “The State Own Non Tax Revenue in Kerala arises largely from lotteries and services rendered in Government Departments and account for on an average about nine percent of the total receipts of revenue.”
  • “Commercial Taxes constitute the major share of the revenues of Kerala, yielding approximately 50% of the State’s total Revenue Receipts. For a fiscally constrained State like Kerala, Commercial Taxes is the mainstay for Government. Any slackening of the mobilization efforts on this front immediately plunges the State into a crisis.”
  • “The Government in 2006-2011 had built up a robust, well-oiled and effective tax collection machinery.”
  • “The crisis itself was due to the lack of cohesiveness in Government during 2011-2016, with one arm in Government doing things without the other arms being aware of it.”
  • “The general lackadaisical directions of governance and indiscipline might well have seeped in to the tax administrative machinery in various departments, paving the way for easy subversion of administrative systems in place in these departments.”
  • Corruption and nepotism in the tax administrative apparatus was quietly allowed to grow strangely.”
  • “Sheer indifference to updating technological systems that should have been the foundation of scientific data analysis needed for effective tax collection.”
  • “Even when the finances of the State continued to remain stressed and on the verge of a breaking point, concessions were lavishly handed out on taxes.”
  • “It is also a tragedy that the appeal process often becomes steeped in corruption with the Deputy Commissioners (Appeals) remanding ripe cases overlooking even judicial pronouncements. Those who resisted the pressures found themselves helpless. There is a case where a Deputy Commissioner (Appeal) was changed three times till a pliant officer was found who would oblige the vested interests.”
  • “The report of the Comptroller and Auditor General on KVATIS in 2015 has documented in detail, how addition of simple validation procedures could have avoided significant leakages. The truth of the matter is that there was no attempt to update the systems since its introduction in 2008. Even the computer server capacity was not expanded, so much so that it became very difficult for taxpayers to access the database for even remitting their tax.”
  • “Significant tax concessions were given even through budgetary announcements even at the peril of a collapse of the treasury which was already starved for funds.”
  • “All caution was thrown to the winds in announcing new schemes without matching budget provisions in the hope that tomorrow would take care of itself!”
  • “Concessions offered to benefit certain groups of tax payers which amounted to sacrifice of revenues already being received.”
  • “Unwritten reluctance in certain cases to ensure that legally mandated revenue generation measures are implemented.”
  • “Failure to implement technology support in the major tax collection departments to give advanced data analytics support for tax collection and monitoring.”
  • “The immediate concerns as a State economy is the risk of our foreign NRI (Non-Resident Indian) remittances dwindling.”
  • “The decline in the rubber and price of other commercial crops has had a deleterious impact on the regional economy.”

Analysis of the white paper points to the following causes for the financial crisis in Kerala.

  • Irresponsible government
  • Corruption at different levels of the government
  • Lack of a balanced, sustainable economy
  • Inefficient tax administration systems and support processes
  • Fantasy budget and financial planning processes
  • Lack of inter-department coordination and collaboration
  • Lack of effective planning, coordination, collaboration and data management infrastructure and processes for the government
  • Lack of a coherent vision for the state economy

During the previous LDF (Left Democratic Front) government (2006-2011), responsible financial management resulted in:
     a) High growth rate (24%) of commercial taxes
     b) High year-end treasury cash balances.

During the last UDF (United Democratic Front) government (2011-2016) financial mismanagement, corruption and unfunded project expenses resulted in:
     a) Lower growth (10.13%) of commercial taxes
     b) Negative year-end treasury cash balance.

Tax revenue is highly volatile and point to an unbalanced economy. Major part of the tax revenue is from commercial taxes, resulting from consumption. Therefore, the first level dependence is on economic activity (consumption). The second level dependence is on the bureaucratic tax collection system (“vital tax collection machinery”), which is prone to political interference and manipulations.

A large portion of the tax revenue is derived from state lottery and alcohol sales. And the income tax share is nonexistent. This makes the tax system extremely regressive. A necessary goal for real economic development is shifting a significant share of state taxes to income tax, which will necessarily mean creating good jobs in the state, and will provide many supplementary economic benefits.

Implementation of a state-wide effective IT infrastructure capable of administrative support, financial and project management is a critical need.

The problems highlighted in the white paper also point to many governance deficiencies. Here are the critical ones.

1. Meaning of democracy

A common belief among political parties and leaders in India is that if they win elections, they can run the government as they please. The is a misconception. India is a “constitutional democracy” [2, 3]. That means political parties, political party members and leaders, government ministers, officials and employees have to behave and act within the provisions of the constitution and the laws derived from it. In addition to the constitution and laws consistent with it, there are sensible norms and customs that need to be followed by all for a functioning democracy.

Democracy matters because “it is the best system we’ve invented for distributing wealth, maintaining peace, and preventing one portion of society from falling beneath the yoke of another.”


2. Purpose of government

Kerala government formulation itself is based on outdated concepts, manifested by its tendency to arrogate to itself various activities in the economy. In fact, Kerala government may be a quintessential example of a malfunctioning government Peter Drucker [2, 3, 4, 5] describes: “There is mounting evidence that government is big rather than strong; that it is flat and flabby rather than powerful; that it costs a great deal but does not achieve much.”

Drucker defines the role of government: “The purpose of government is to make fundamental decisions, and to make them effectively.. The purpose of government, in other words, is to govern. This, as we have learned in other institutions, is incompatible with ‘doing’ … If this lesson were applied to government, the other institutions of society would then rightly become the ‘doers’ … It would rather be a systematic policy of using the nongovernmental institutions of the society – the hospital as well as the university, business as well as labor unions – for the actual ‘doing.'”

OECD (Organisation for Economic Co-operation and Development) has expanded on Drucker’s ideas and developed concepts for “public management” using “leveraged government,” More details available in the OECD publication: “Government at a Glance“.

Kerala government should focus on governance and divest itself from all other activities, automatically reducing its financial burden.

3. Tax administration

Kerala government tax administration, also known as “vital tax collection machinery,” is a misguided organization. Currently, based on the inclination of the political party in power, the “machine” whirls into action, collecting taxes. If the inclination of the party in power is lower taxes, the “machine” goes slow, and tax collection decreases. This type of thinking is an outdated vestige of the colonial days.

“The promotion of voluntary compliance should be a primary concern of revenue authorities,” OECD recommends in “Principles of Good Tax Administration.” And OECD adds, “Voluntary compliance is promoted not only by an awareness of rights and expectations of a fair and efficient treatment but also by clear, simple and ‘user-friendly’ administrative systems and procedures. Voluntary compliance is enhanced when it is easier for taxpayers to do so. Voluntary compliance is maximized when revenue authorities are aware of major developments and trends in the business and legislative environment, and are responsive to their implications on tax administration and compliance.”

The measure used for the effectiveness of taxation, rate of growth of commercial taxes collected is unscientific. A better method for estimating potential taxes is to benchmark with Tax revenue to GDP ratios. EU Tax revenue statistics may be a helpful guide for estimating tax potential in Kerala.

The solution to the current financial crisis in Kerala is a comprehensive economic development program — not increasing the rate of commercial tax collection.

Facebooktwittergoogle_plusredditpinterestlinkedintumblrmail

A development shell game

The Times of India feature, “KSUDP short of Rs 750cr ($112.5m) to meet targets” (June 30, 2016), shines light on the sorry state of development projects in Kerala.

The projects were launched in 2007 with deadline set in 2012, were extended twice and the final closing data was fixed on June 30, 2016. According to the report, “an amount of $45 million will remain unutilized by the loan closing date which is June 30, 2016. The packages comprised to improve roads, water supply and sanitation, solid waste management, sewerage network improvement and storm water drainage.”

It seems most of the effort was focused on getting the loan, but there was little attention paid to completing the projects. Understanding the reasons why there is so much interest in getting the loans, but not enough motivation in completing them would be an useful exercise. Because the failures point to systemic problems.

Reasons for project failures include “public resistance, non-availability of land and poor performance of contractors.” And, “four sewerage contracts in Kochi worth Rs 168 crore ($25.2m) could not be commenced due to public protest.”

With stopping of ADB (Asian Development Bank) funds, the only option before KSUDP (Kerala Sustainable Urban Development Project) to seek funds from the state government, which is unlikely to succeed due to the dire condition of the government finances.

The report also says, “The JICA (Japan International Corporation Agency) stopped the Rs 250cr ($37.5m) payment after the state failed to complete project within the stipulated time frame.” (“Irked by delays JICA had done an ADB before”)

In addition, “The project management unit of the KSUDP, which is struggling for funds, had paid close to Rs 70 crore ($11.25m) in consultancy fees alone for managing various projects” (“Consultants guzzled close to Rs 70 crore”). The report also adds, “As per the terms of agreement with ADB, projects can be implemented only with a panel of consultancies. Hence, even if it results in economic drain, we have to go by the terms.” an official pointed out.

The feature also reports about an interesting distracting activity. The report says, “At first, the plastic waste dumped in the various corners of the compound will be moved to one place. Then private firms will be roped in to beautify the remaining plot. The space for upcoming waste treatment plant and waste-to-energy plant will also be marked. A few firms have already come forward offering their corporate social responsibility (CSR) fund for the beautification.” (“Brahmapuram plant to get a green makeover“)

The proposed “beautification” proposal highlights skills deficit in the Kochi Corporation. The beautification plan is an attention diverting effort to salvage a half-baked plan for waste management. Instead of diversions, what is required is implementing a comprehensive waste management solution and implement it vigorously.

Putting all the pieces together, this is the picture that emerges:

KSUDP and other Kerala government agencies hire consultant(s) to prepare proposal documents to obtain loans, with minimal or no project execution preparations. Once the loan is secured, victory is declared. Since there were built-in deficiencies in capabilities for project execution, the project never takes off or flounders. The funding agency gets frustrated, and eventually stops further payments. The expenses incurred for partially implemented projects gets added to the state debt, worsening the budget deficits.

The reason for ADB requirement to include consultants in the ADB-funded projects need to be understood. Outsourcing project planning and management functions to consultancies inhibits developing mission critical skills within the project-sponsoring agencies. So why is the ADB interesting in requiring use of consultancies? Is it to promote scams like the one outlined? Or, to inhibit real economic development?

With the current financial crisis facing the state, maybe the Kerala government will be forced to adopt better project planning and financing methods.

Facebooktwittergoogle_plusredditpinterestlinkedintumblrmail