Healing Self-Inflicted Wounds

Let's use the smarts for making rational policies

Shyam Ponappa / December 1, 2011

A spate of dysfunctional actions and retrograde developments has led to an unimaginable mess for India. Can the damage to growth prospects be undone? Does it need to be? If so, how? Three areas are discussed below.


Some months ago, the spectre was of consoling ourselves with a reduction of two per cent in growth, from 9.5 to 7.5 per cent. That’s history. What looms ahead is a larger, more serious threat. This ominous tidal-wave-in-the-making comprises many separate currents converging to undermine India’s take-off yet again. The prospect is long-term growth hamstrung by policy stand-offs, foreign direct investment in retail being a case in point, and social tensions fuelled by high unemployment.


Those who think India has arrived should be aware that it will take another decade of eight to nine per cent growth to be able to fund reasonable basic infrastructure and necessities for everyone. Why should it matter if you live in a rich cocoon? At the very least, you’ll be able to go out without stepping into filth or smelling it, or seeing masses of people struggling to survive.


Instead of a high-growth trajectory, we may get six to seven per cent, with luck. These prospects are clouded by wasteful expenditure, such as the perpetuation of an ill-functioning public distribution system and its concomitant, ration-shop-mentality, instead of efficient direct retail subsidies through electronic transfers. The negativity is amplified by fractious social and political tensions, and shoddy infrastructure crippling productivity: power outages, low-speed communications and poor logistics. One can argue (ah, argument) that the tensions are justifiable as an antithesis to increasing levels of corruption from political, bureaucratic and corporate kleptocracy feeding off the land and people, or hardening sectarian interests competing for predatory control. But if there’s one thing we can learn from others’ experience, it is to work together for better outcomes, or suffer; in game theory parlance, collaborate to optimise, or settle for worse.


Undoing Sectarian Alignments


Undoing the fractious underpinnings of sectarian alignments of language, caste and religion is beyond the scope of this article. The unpleasant reality is that unless such structural social impediments are addressed, malfunctions will continue. So we have this reality where, at one level, India is wonderful in the way people stream and swirl together, and at another, it is horrible because our potential is not manifested in living standards, with people fed, clothed and housed properly, and clean streets.


To return to misapplied intelligence in the political economy, consider three areas: interest rates, airlines, and telecommunications.

Interest Rates

It seems only the Reserve Bank of India (RBI) was unaware that the consequences of interest rate hikes since February 2010 would (a) not control inflation (short of an economic collapse), and (b) lead to a severe curtailing of growth. To be fair, some economists aided and abetted with remarks that interest rates must be raised because of high inflation.

By contrast, the accompanying charts for China and Germany (euro zone) show their negative real interest rates.

What we have to do is reduce interest rates, with selective credit controls to ensure that credit for speculation is constrained and costs are high, e.g., in certain real estate, commodities, stocks and derivatives. Implementation, likewise, has to be “intelligent”, with online tracking by exception, and not cumbersome or voluminous weekly or fortnightly reports that are manually compiled and/or analysed, filtered and then presented to committees for decisions.

Airlines

The structural anomalies in India’s taxes on aviation turbine fuel (ATF) and airport charges defy logic. For a decade, there has been talk of cuts in central and state taxes on ATF, but the problems continue. Consider the missed opportunity: India has a large domestic market and is well positioned for airlines to use this for establishing global leadership, as well as ubiquitous domestic services. Instead, the sector is bled for short-term government revenues, giving foreign airlines the advantage. ATF charges in India for international flights cost 16 per cent more than they do abroad, and local airlines pay over 50 per cent more because of taxes and additional charges. Consider the ludicrous stipulation that foreign airlines cannot invest in India, and the irrationality defies imagination. Add the illogic of a government-funded, loss-making airline undercutting private airlines, and we have the mess we are in.

Globally, airlines suffer from gratuitous free-market philosophies, the exceptions being airlines from strategically focused countries, e.g., in West Asia, Southeast Asia (Singapore, Malaysia, Thailand) and, of course, China. Wake up! Surely no one doubts that aviation is an integral aspect of logistics and transportation? The government needs to recognise this and build capacity, with policies like uniform, low state taxes. Also, as in telecommunications, aviation requires an oligopolistic structure with limited competition, which if ignored brings chaos and grief, because nothing else is sustainable.

Telecom & Broadband

The draft National Telecom Policy 2011 promises good things. Yet, like India’s potential, the promise will be realised only with convergent action. This iconic sector, which changed the way the country functions and is perceived, is on the verge of being ruined by dysfunctional intervention. For instance, the regulator and the government seem bent on applying retrospective charges for “excess spectrum”, taking the bottom out of the market. Worse, 3G services are hamstrung by government attempts to restrict services, while operators threaten litigation. Meanwhile, the bastions of “free markets”, the US and the UK, are initiating shared spectrum policies. What good are our brilliant objective statements about excellent, affordable services if the government acts to achieve the opposite? And is it beneficial for India to hound solid companies like Telenor and Qualcomm (unless they commit transgressions), instead of taking a problem-solving approach?

If the confused doublespeak – of punitive charges, restrictive practices, PSUs building state-of-the-art networks, auctions and spectrum sharing, all in the same breath – continues, we may lose a decade or more because of instability and irrational policies. It is time for decisions on pay-for-use, open-access spectrum and networks. Incumbent network companies can be compensated along a downward-sloping power curve to give up their competitive advantage. We must start being reasonable and do things that make sense.

shyamponappa at gmail dot com

Telecom Path-Breaker?

Does the draft National Telecom Policy-2011 reflect true brilliance or smoke-and-mirrors? It will be a game-changer if a shared network is implemented effectively.
Shyam Ponappa / November 3, 2011

There’s much to criticise the government about for not initiating systematic reforms. Yet, the draft National Telecom Policy 2011 (NTP-2011), announced three weeks ago, is a stunner.¹ It begins with a solid, integrated-systems preamble to IT, Communications and Electronics, followed by an excellent vision statement: “[to provide] secure, reliable, affordable and high quality... telecommunication services anytime, anywhere.” A sound beginning, although open-ended in terms of how the details could evolve.
There are potential problems with such high-level pronouncements, of course. A number of commentators castigate the motherhoods in the draft. With a lofty perspective and few details, much depends on how the open-ended possibilities develop, including the difficulties of execution in dealing with ground realities and obstacles.

An Assessment

NTP-2011 addresses six major areas: spectrum, licensing, broadband, convergence, roaming, and manufacturing. Focusing on the first two, there are sweeping proposals:
a) licences will not be linked to spectrum; and
b) spectrum sharing will be permitted.

Some view the separation of licences and spectrum as retrograde, because spectrum is essential for service delivery. Others suggest that transgressions that led to the scams are now being inducted as new policies, e.g., operators accessing networks they do not own, which is characterised as being against the public interest. Some heap opprobrium, alleging that like the previous policy, NTP-99, which they call retrograde (although it led to the phenomenal growth in mobile telephony), its main purpose is to allow companies to avoid paying licence/auction fees to the government.

• The last expostulation is the most ludicrous, because revenue collections after NTP-99 far exceeded estimated fees foregone: Rs 20,000 crore estimated “loss” by March 2007, but Rs 40,000 crore actually collected, and Rs 80,000 crore collected by March 2010.² Add tax collections on exponential growth with increased profits, and the result is even higher total government revenues.
• Opposing operator access to networks arises from confused objectives; blocking access is like cutting off one’s nose to spite one’s face. The purpose of the sector is to provide services and access to users for legitimate activities. The public interest lies in facilitating access on appropriate terms.
• To evaluate licensing and spectrum, begin with the premise of shared spectrum. Spectrum is essential for effective service provision, particularly in the rural and semi-urban areas with about 70 per cent of the population. An aspect not commonly known is that larger bands of spectrum enable more efficient throughput. For example, 1 MHz of a 12 MHz band carries 50 per cent more traffic than 1 MHz of a 6 MHz band. An estimate of the benefit to Indian operators of more bandwidth at international norms is a reduction of 20 per cent in operating costs.

Spectrum Occupancy
In practice, assigned spectrum is idle much of the time, except during the busy hours in India’s heavy-traffic metros, for extraneous reasons: too many operators, with too little spectrum, in too- narrow bands. This aspect becomes clear from spectrum utilisation or occupancy studies. For instance, the chart shows spectrum occupancy in Bangalore, Edinburgh and Stony Brook (New York) sometime in 2011.
Spectrum Occupancy in Bangalore, Edinburgh, and Stony Brook, NY.

dBm: decibel; MHz: Megahertz; GSM: Global System for Mobile Communications; CDMA: Code Division Multiple Access

Source: http://research.microsoft.com/pubs/142837/SpecNet-NSDI11.pdf, Anand Iyer et al;

The low readings (250 to 850 MHz in Bangalore, 600 to 950 MHz in Edinburgh, and 500 to 850 MHz in Stony Brook, NY) indicate available “white spaces” that can be better utilised.

• High-traffic cities like Delhi and Mumbai have much higher utilisation than cities elsewhere in the world. It comes at increased costs to operators, because of advanced equipment and the closer spacing of towers, as well as having negative environmental effects. If a system with on-demand access to centralised, more efficient spectrum bandwidth were available, the capacity would be much higher, while operators would gain tremendous savings.
  
• Another aspect has to do with the structuring and pricing of shared spectrum. One scenario for sharing is to enable operators to share assigned bands on mutually acceptable terms, leaving the onus of structuring and deployment on the respective operators, as for mobile telephony towers. As with the towers, there are likely to be coalitions of operators/independent entities who are able to work out arrangements among themselves, while not attaining the ultimate efficiency of unified coordination. For instance, participants who share towers in India share passive but not active infrastructure, and a critical element of active infrastructure is spectrum.
  
• An alternative scenario would be mandated spectrum sharing. Spectrum on demand could be made available to any operator/counterparties for the duration of every communication “transaction”. This would need a database-driven Dynamic Spectrum Assignment facility, as deployed by Spectrum Bridge in the US. The more efficient throughput would mean higher traffic capacity for a given investment through better utilisation.
  
• The distributed processing alternative through cognitive radio in every user device is (a) much less efficient, and (b) far more expensive. The market consolidation-through-acquisition approach, with more auctions, is the least efficient and most expensive.

Common-Access Networks

There would be further efficiencies if the entire network (and not just the spectrum) were accessed on-demand for payment per use. Another benefit from a public perspective would be much lower collective investment in resources, because of better utilisation. A third benefit would be the reduced environmental impact because of a lower carbon footprint and radiation from two or three common-access national networks (assuming competition is essential for effectiveness and efficiency).

In other words, database-driven, shared spectrum and networks have to be organised and managed as a coordinated unit if the potential benefits are to be realised. America is doing this with TV white spaces/the digital dividend, through the appointment of 10 database administrators (including Spectrum Bridge, Google and Microsoft). This should elicit our interest.

Once the government and stakeholders accept these concepts, the next major task is structuring the networks as consortiums to align the interests of operators and network providers, with state-of-the-art lead partners. In this process, incorporating and reorienting BSNL and MTNL as guardians of national interests with oversight by an adequately empowered regulator will be the remaining major tasks.

shyam (no space) ponappa at gmail dot com

1 http://www.dot.gov.in/NTP-2011/NTP2011.htm
2 TRAI, 2005: http://www.trai.gov.in/trai/upload/StudyPapers/2/ir30june.pdf
CAG: http://www.performance.gov.in/sites/default/files/departments/telecom/CAG Report 2009-10.pdf

Facing up to Moral Hazard

Systems upholding the law and standards help navigate the grey areas of moral hazard and adverse selection

Shyam Ponappa / October 6, 2011

Amid the general sense of an ailing socio-economic environment in the country, consider these situations:

• Coal supplies for power generation are eight per cent short of generation capacity. Worse, nearly 42,000 Mw of additional generation capacity over the next five years is jeopardised because anticipated supplies are short by two-thirds of the requirement (100 million tonnes against demand for 313 million tonnes).
  
• The rural employment guarantee scheme, well intentioned and with some reported successes (as in Melghat in Vidarbha), shows few tangible results while distorting farm labour practices and pricing. The reasons are many: inadequate design and supervision (mud roads that are washed away every year), no integration with agricultural programmes, palliatives that deny real infrastructure and support, like extension schemes that build on successes leveraging ICT, no skill development for alternative (self) employment, and so on.
  
• The telecommunications sector is buffeted by scandal, the downward spiral of public sector operators BSNL and MTNL, and pressures of intense competition with constrained resources and regulations.

Leaving aside venality, a common thread is of laws and rules not upheld, slack standards, contracts not honoured, an absence of hard decisions and the requisite effort, and a degradation of mindsets. These are the grey areas of “moral hazard” on the one hand – where protection from the consequences of irresponsible actions induces irresponsibility – and of adverse or negative selection on the other, avoiding the best feasible choices for easier, inferior alternatives. They are widespread, and need assiduous effort to identify and set right with systems, even as criminality is dealt with by the legal system. Good people do not game situations for self-gain, but everyone faces the hazard in making choices. The importance of devising and upholding credible systems, standard operating procedures and laws that are seen to work through incentives and penalties is that these perceptions uphold the social contract and protect one from moral hazard.

Whatever the policies, they must have integrity and coherence; the hazard arises from not ensuring these conditions. The specific hazard is the change in behaviour for the worse. Absent this skein of expectations and constraints, there is no coherence to every individual’s uncoordinated wish list or gripes. This is the problem with well-intentioned social vigilantism, because it destroys the very fabric of order.

DOWN THE SLIPPERY SLOPE

The hazards in grey areas are manifested in several ways.

(i) Abdication of responsibility by the government: The most prominent moral hazard may be the central government’s abdication of responsibility epitomised by the 2G scandal. A redeeming feature is that some alleged perpetrators are being prosecuted eventually — although how matters end will establish whether it is truly a redemption or a perpetuation of banditry with the state’s complicity (by abstaining from intervention). Similar scandals in mining and civil aviation are unravelling or are on the brink. It is these egregious developments added to the hassles in routine dealings with the government that have led to such public alienation.

There are also many errors of government omission or inaction, such as initiatives not taken in infrastructure, like stalled efforts at power supply reforms, including the state governments’ reluctance to address sustainable electricity tariffs, or not reducing the extent of administered pricing and taxes in petroleum products (or state governments imposing non-uniform sales tax), the deterioration in the railways, and so on.

(ii) Taking to the streets: Citizens who feel alienated can take to the streets when they are desperate or outraged. This seems to be the sentiment not only in the Arab spring, but also in varying degrees in established democracies in Europe, Israel and India. There are incipient signs even in America, with the amorphous “Occupy Wall Street” movement spreading from New York to other cities, protesting against various inequities.

When both government and citizens are irresponsible, chaos follows. In India, absence of governance is an extenuating circumstance for activism. But equally, there are indefensible lapses by citizens: the unwillingness to be disciplined, to outgrow the anti-colonial paradigm of railing against the government-as-imperial-ruler, of fasting and civil disobedience as acceptable forms of protest, of not subscribing to order, whether in traffic, respecting queues, or managing garbage and sanitation. Yet, reports of queuing by Delhi Metro users suggest that we can perform if we must — as do all the IT professionals delivering services to international markets. But for the most part, we rail against other people’s transgressions, while being unwilling to observe discipline ourselves.

(iii) Corporate chicanery: Apart from criminality such as in the mining and 2G scams, there is the grey area of bending the rules. Examples include the financial and operational performance of many real estate developers, or the poor automotive service quality that is an adjunct to the undeniably more refined automobiles themselves.

(iv) Media overreach: The advent of 24x7 news channels is a boon for choice and sourcing. Tragically, many have morphed into whipping up a frenzy rather than delivering solid news and balanced views, given the battle for viewership with a lowest-common-denominator bias for sensationalism.

(v) Stalled government decisions: Government decisions in a number of areas were already stalled owing to problems in the approach to land acquisition, environmental effects, and in sectors such as nuclear energy. A combination of circumstances comprising all these and hyper-aggressive audits, a popular outcry stoked by frenzied media treatment relating to scams in land acquisition, 2G spectrum, and mines, has in effect created a gridlock, in which no forward-looking decisions seem possible, because of the risk of retribution for perceived missteps or errors of judgment, with hindsight.

The grey areas occupy the space between what we want – superior standards – and what we have, which is a slackness of systems because of widespread shoddiness in the practice of leadership and citizenship, with neither inspiring confidence in the other. The way out is conceptually simple, though difficult to execute: take responsibility, devise coherent systems and practices in all areas, with incentives and penalties applied impartially, and live by them.

shyamponappa at gmail dot com

Comments

Posted by: Harish Kumar October 06 , 2011, 17:50 IST I fully agree that the way out is conceptually simple, though difficult to execute: take responsibility, devise coherent systems and practices in all areas, with incentives and penalties applied impartially, and live by them.But here in India is there a political will to do so, also is every Indian ready take on the responsibility and share Government's policies in real spirit. Both seem to be invisible in nature.

Reviving Growth

Reduce interest rates and undertake specific reforms to revive growth

Shyam Ponappa / September 1, 2011

India’s heady economic prospects of a year ago have deteriorated unthinkably. True, the rest of the world is wobbly, too, from America’s unreconstructed and unsustainable headlong decline, to much of Europe’s companion piece. But the possibility of some buffering for India seems to have evaporated. Expectations of better prospects were not so much from decoupling as from our limited dependence on exports, and headroom from activity levels with enormous scope for improvement and expansion — in basic infrastructure, housing, second-order infrastructure like education, sanitation and health care, as well as manufacturing, tourism and retail.

Rising input costs and interest rates started the decline in margins, and self-destructive actions made matters worse, epitomised by the implosion of the scams (2G, the Commonwealth Games, the Karnataka mining scandal, the land scams…). The Reserve Bank of India’s (RBI’s) actions of increasing interest rates when faced with inflation caused by factors beyond its ambit, such as food prices rising because of supply constraints, or energy prices on account of expensive imports, have amplified the negative sentiments.

The Bogey: Growth versus Inflation

The economy is slowing, and earlier estimates of well over nine per cent growth for 2011-2012 have gone overboard. In May, the Federation of Indian Chambers of Commerce and Industry’s estimate was nine per cent; in August, an RBI survey consensus was under eight per cent; Morgan Stanley’s was barely over seven per cent. Yet, policy makers maintain that despite the deleterious effects on growth, raising interest rates to control inflation through monetary policy is paramount.* In absolute terms, the need for controlling inflation is incontestable, but societal needs provide an exigent imperative for making the trade-off in favour of growth. The consideration now needs to be of steps that could alleviate the slowdown, and the likely effects of such actions not only on inflation, but also in collateral damage to economic activity.

Consider India’s shortcomings, namely, insufficient food production and associated storage and distribution, inadequate agricultural extension support services, expensive oil and coal imports, and lack of educational and vocational training facilities for a burgeoning, youth-dominated population. Add another level of inadequacy arising from our continuing lack of infrastructure, from basic sanitation, water and health care, extending through energy, transportation and communications (broadband). These structural bottlenecks exacerbate the negative aspects of our predicament.

The government’s recalcitrance in acting against blatant corruption until the scams erupted had already unsettled markets. Even salutary developments like Anna Hazare’s anti-corruption movement have added to the destabilisation, through attacks on parliamentary processes and the prospect of a breakdown in law and order.

Against this backdrop, we have a slowing economy, now threatened by a global slowdown. In the quarter ending March 2011, a third of the Sensex companies had missed their earnings estimates, while in the last quarter ending June 2011, nearly half of them were below estimates. With offshore revenues estimated to contribute nearly a third of FY12 profits, the threat of a global slowdown is ominous.

Inappropriate Rate Hikes

From this perspective, raising interest rates to combat inflation appears decidedly ill-advised. As expected, interest rate increases have not reduced inflation. The reduction can happen only when economic activity slows so much that demand for essentials falls, a horrific prospect. As for attracting foreign investment, rate hikes do little to induce confidence in foreign investors in skittish times, because they look to India and emerging markets for growth, not for stability. To be a safe haven, India has to be perceived not as a developing economy, but as an equivalent of the Organisation for Economic Co-operation and Development — a long way and many years ahead.

The economy, therefore, needs shoring up. Can the RBI and the government take steps to reverse the decline? Consider the following corrective actions:

(i) Reduce rates to revive growth

In these circumstances, the priority has to be growth. Otherwise, apart from minimal foreign investment, domestic investment also is likely to be curtailed further, and social instability triggered by economic pressures could grab centre stage to devastating effect. International commodity prices are outside India’s control, but the RBI can reduce interest rates. Cutting rates can raise margins and revive consumer demand.

The central bank needs to reverse its repressive stance on rates, no matter what the textbooks say, so that enterprise profits recover to a high-growth trajectory.

An immediate cut in borrowing rates, together with a concerted move to reset positive expectations and sentiments, is an urgent requirement.

(ii) Selective credit controls for asset bubbles

Further, the RBI has avoided instituting selective credit controls to avoid asset bubbles, perhaps because of legacy reasons concerning commodity pricing and the potential for interference in markets. With smart e-governance at hand, this nettle must be grasped in place of the blunt instrument of overall rate increases, to use real-time, targeted additional margins, cash reserves and rate increases to defuse incipient asset bubbles.

(iii) Reforms to build momentum

In tandem, we need reforms to rebuild economic momentum. All sectors need reform, e.g., energy, communications, transport, sanitation/water/health and education. For instance, the energy/power sector sorely needs drastic reforms, but it is so complex, with so many layers that need disentangling, that while initiatives are necessary, they are unlikely to revive growth in a reasonable period. The need, therefore, is to focus on what is practicable with the likelihood of achieving results.

In practical terms, we have to prioritise, and focusing now on communications, specifically broadband, could yield results. Mobile communications grew phenomenally over the last decade. The meteoric rise stalled for a variety of reasons: excessive competition, ultra-low tariffs, saturation in urban markets, limited access to spectrum, no incentives for broadband, restrictive actions against BSNL and MTNL, scandals and policy uncertainties. Yet, if the government initiates appropriate reforms in spectrum policies with incentives for broadband delivery, prospects could revive. If the government can (a) formulate major reforms with a New Telecom Policy 2011 that achieves growth, while(b) resolving problems relating to past irregularities through sound legal processes and judgment, communications could go through another meteoric rise, becoming the growth engine for the economy.

Shyam (no space) Ponappa at gmail dot com

* “The policy dilemma”, C. Rangarajan, Business Standard, August 22, 2011: http://www.business-standard.com/india/news/c-rangarajanpolicy-dilemma/446531/

Management as Capital

Learning and applying good management practices can help improve productivity

Shyam Ponappa / August 4, 2011

At a time of concern about sustained momentum in India’s economic growth, some recent findings including a case study in India offer fresh pointers on the implications for management and organisation in emerging economies.

Competition ≠ Efficiency

A widely held assumption is that competition results in efficiency. The reasoning is that market forces and competition compel enterprises to evolve into efficient producers. So, does management affect productivity?

An article in The American Economic Review posits that developing economies appear to suffer a shortage of what the authors term ‘managerial capital’1, that is, management and organisation. The authors also note that this aspect has been ignored in studies of development and growth. This is not surprising, given the completely different domain expertise compared with economics, such as, the skills required to understand financial statements and linkages to operations, or organisational structure and effectiveness, and the difficulties in defining and measuring managerial inputs. However, this does not diminish the importance of managerial inputs for growth and development, just as factors not well understood by weather forecasters nevertheless do influence the weather.

The authors cite evidence that managerial know-how can improve the productivity of other inputs including human resources and equipment, and help to better deal with resource constraints, by planning, acquiring and configuring assets to optimise outcomes.

Management and organisation are accepted as critical inputs for effective performance in developed economies. This is true for enterprises at the firm level, for sectoral policy and regulations, and for the economy as a whole. Anecdotal evidence suggests this is less so in developing economies, both in terms of prevalence and acceptance. Also, the wide variability in productivity in developing countries’ plants has been attributed to differing management practices, but so far with little validation based on data.

Differences in management practices can vary by nearly 30 per cent between the “best” and “worst” countries. The accompanying chart shows overall management scores for a number of countries. The studies consider differences in managerial practices between emerging and developed economies, as well as interventions to improve practices in the former, comprising training and advisory inputs. The results imply that good practices can be learnt and applied in developing economies.

(Number of firms surveyed shown on or next to each bar)

Source: http://www.nber.org/papers/w17231²

An experiment in textile companies in India over a two-year period supports these findings.3 The report covers 20 plants in 17 companies. Of these, 14 plants in the treatment set were given active interventions, while six were treated as control units. The active set went through a diagnostic phase over a month, followed by an implementation phase of intensive support over four months, and a measurement phase thereafter for several months. The control units were only exposed to the diagnostic phase. The management inputs covered a range, such as lean manufacturing practices including sales and inventory management, quality control and human resource management.

The interventions by transnational consultants were estimated at $250,000 (Rs 1.125 crore) in each firm if provided at commercial rates. The report estimated the productivity in the treated plants to improve by 18 per cent, with net gain in profits in the first year itself estimated at 40 per cent above costs, at $350,000 (Rs 1.575 crore).

Implications

(i) A need to improve enterprise management and organisation: the reports show evidence of the inadequacy of management and organisation prior to interventions, and of the benefits of upgrading management practices with measures that are considered standard operating procedures in advanced economies. There is explicit evidence from textile companies in India that the induction of such practices results in significant productivity gains.

(ii) Delivery methods: the report found that common practices, such as preventive maintenance, were known but not adopted, because managements thought they would not be profitable. Such items account for 45 per cent of practices in the interventions. For uncommon practices, the problem was lack of awareness.

The question is whether the approach – of a transnational consulting firm providing advisory services for several months – is the preferred way of upgrading practices at enterprises, or if there may be other practicable ways that are equally effective and efficient. For instance, whether distance education is a plausible method for learning or participating in substantive diagnostics and best-practice dissemination for enterprises. The issues are whether management institutes or local consultants can develop effective programmes for delivery as modules; whether such methods can be effectively developed and delivered through the Internet; whether the National Skill Development Corporation, the National Productivity Council and the like can co-ordinate such initiatives; and whether systems integrators can grow to deliver such services.

(iii) Sectoral management and organisation: beyond the enterprise level, developing economies sorely need management and organisation at the sectoral level. Here, it is not so much about best practices as it is about designing the right framework of goal-oriented policies and procedures appropriate for the given socio-economic context. Sectoral frameworks are essential to create productive sectors and to prevent the flight of capital — major Indian groups invest abroad rather than in India, even when there is much room for growth here. While the crisis precipitated by the 2G scam has forced the government to undertake drastic reforms in communications and spectrum management, the power sector is an equally critical area, which desperately needs radical reform.

(iv) Local play: Stanford, Massachusetts Institute of Technology, Harvard, World Bank and the European Bank for Reconstruction and Development have conducted path-breaking studies on management inputs and upgradation. Considerable work needs to be done by Indian institutions — there seem to be no such studies at present. As for local funding, the significant Indian donations are either to self-run institutions or to iconic foreign institutions, a notable recent exception being the Nilekanis.

shyamponappa at gmail dot com

1 “What Capital is Missing in Developing Countries?”, Miriam Bruhn, Dean Karlan and Antoinette SchoarThe American Economic Review, May 2010:

http://karlan.yale.edu/p/BruhnKarlanSchoar_AER_P&P.pdf

2 “The Land that Lean Manufacturing Forgot? Management Practices in Transition Countries”, Nicholas Bloom, Helena Schweiger and John van Reenen, July 2011:

http://www.nber.org/papers/w17231.pdf

3 “Does Management Matter? Evidence from India”, Nicholas Bloom, Benn Eifert, Aprajit Mahajan, David McKenzie and John Roberts, Jan 2011:

http://www.nber.org/papers/w16658.pdf

The Challenges of Direct Democracy

India must weigh the pros and cons of various approaches to direct democracy and develop one of its own.

Shyam Ponappa / July 7, 2011

Direct democracy is alluring. The dangers to our society and economy from reckless governance as well as confrontational activists, however, are the undermining of institutions, and the unintended consequences.

Our governments have a carry-over of feudal and colonial attitudes and do not communicate unless they must. Change is accepted only under duress, and is not initiated through leadership. Mismanagement is tolerated, resulting in various scams such as the 2G spectrum scam and associated problems.
The current anti-corruption drive by Anna Hazare et al and their well-intentioned cohorts uses tactics that echo a righteous, anti-authoritarian and non-collaborative pattern of “us” versus “them”, combined with an insistence on their way alone. Yet, collaboration is essential for solutions that lead to an equilibrium, recognising the legitimacy of all stakeholders – the government and civil society – as well as the criticality of credible institutions and processes.

We in India are not alone in being drawn to direct democracy. Switzerland’s success in citizen participation combined with its federal structure is the epitome of a workable system. But this model cannot simply be transplanted without regard to cultural contexts. Consider the sobering example of California.

California's Predicament
California has been in a state of financial crisis for several years. In 30 years, the Golden State’s credit rating fell from among the best of the 50 states to the worst. Despite everything from Silicon Valley to agriculture, defence, aerospace, biotechnology and Hollywood, why can this state not manage itself? Why does The Economist quote labels like “dysfunctional”, “ungovernable”, even “failed” for this El Dorado (April 20)? To understand what happened in California, we must start with its direct democracy model imported from Switzerland.

The Swiss Model

Since the 14th century, Switzerland has had a tradition of citizens participating in assemblies. Coordination among different sets of delegates, e.g. for building roads and bridges across different valleys, had to be approved by respective assemblies. On this canvas, Switzerland grafted America’s Constitution in 1848. It worked and still works because of its design, and Switzerland’s collaborative approach. Constitutional amendments require a referendum as well as a majority of votes by the cantons (states) in the legislature.

Thus, over half the cantons can overrule the popular majority in a referendum, because of the rule taken from America of two votes per state, even if they represent a minority of voters. After being approved in a referendum, the amendments go back to the legislature for redrafting. This enforces George Washington’s principle of “cool” debate outlined at the time of drafting the US Constitution, and embodied in Senate deliberations for dispassionate lawmaking. Initiatives for new laws by direct democracy go through the same process, but the legislature has the option to draft a counter-proposal. This process of engagement and negotiation is designed to avoid extreme outcomes and promote dispassionate solutions. As with America’s Constitution, this prevents two kinds of abuse: James Madison’s1 concerns regarding minority factions and their “swing vote” capturing outcomes (as in India, where minority factions become king makers), or a tyranny by the majority.

The California Variant

About 100 years ago, the Progressives in California brought in direct democracy from Switzerland. As in India today, the purpose then was to attack corruption, specifically, “The Octopus” of the Southern Pacific Railroad with its tentacles everywhere. California’s direct democracy was designed to achieve the opposite of the Swiss model. Switzerland emphasises compromise and consensus; California encourages confrontation, and the winners impose their will. Starting new initiatives (“propositions”) is easy; calling referendums on existing laws is difficult. In effect, California’s propositions are irreversible, because a retraction or reversal needs a two-thirds majority, which is virtually impossible because of minority factions and special interests.

For over half a century, there were no major problems. Then, in 1978, the anti-tax proponents initiated a property tax cap, Proposition 13. It limited state revenues (placing a ceiling on all property taxes at one per cent of the 1975 value, which could grow at no more than two per cent annually unless sold, thereby establishing a new value). There are contradictory views on the benefits of Proposition 13, with the defenders blaming opportunistic individuals, not the system, for problems. It is the old divide between tax-and-spend liberals versus cut taxes-and-services conservatives. The outcome, however, is that California went from being a liberal showcase with excellent infrastructure and services to a bankrupt state, cutting back on both.

What India Can Learn
India’s polity (at central, state, and local levels), at least now, must start creating systems that harness participation through all means available, so that the voice of popular assemblies is heard within the framework of our representative democracy, and acted upon.

The government needs to move away from the paradigm of “The Administration” against “The People”. Instead, the government must lead a process of collaborative stakeholder engagement for equitable resolution, like the one based on a lifeboat concept of shared interests and survival. As individuals, we need to move away from blaming routines (the government/everyone else is at fault, and I am a victim) to accepting the responsibility and discipline of institution building and processes.

What India Requires

• Discarding feudal/colonial notions of the durbar in political parties, among politicians and in government.
• Channeling righteous public anger into the constitutional process with competence and discipline. Currently, there seems to be no effective way of demonstrating dissatisfaction except by taking to the streets.

We need institutionalised incentives and penalties to steer towards these effective means, and to abandon arbitrary and angry ways.  Technology allows this on an unprecedented scale, with perhaps 100 million Internet users in India already. To harness and channel this capacity, systems need to be developed on the lines of the Obama campaign², vastly extended with the expertise and support staff to inform citizens and channel their participation constructively within an institutional framework. These systems will need to cover everything, from issue-based analysis and presentation to spelling out responsible choices with the foreseeable consequences, and collating individual inputs and preferences. If executed with vision, imagination and commitment, this could reduce the instances of people taking to the streets.

1 Member, US constitutional assembly; later, US President.
2 http://www.bluestatedigital.com/work/case-studies/barack-obama/

Shyam (no space) Ponappa at gmail dot com

NTP 2011 Objective: Broadband

The Indian government has to choose between accessible, affordable services and short-term revenue

Shyam Ponappa / June 2, 2011

[Additional material: logic tree outlining the rationale for common spectrum + network added later]

Apart from the scams, confused ideas are roiling India’s telecom sector. One instance is the finance ministry urging spectrum auctions to collect Rs 30,000 crore to help bridge the fiscal deficit. Another is the Ashok Chawla committee recommending spectrum auctions for transparency, making transparency the criterion for managing spectrum. The committee apparently does not mention the disastrous US auction, and attributes the UK fiasco to extraneous reasons; presumably, they knew the facts.¹ Such issues need logical and systematic remedies. Otherwise, the success of the telecom sector will degenerate into yet another failure.

Apart from transparency, public asset sales, including spectrum, need three other criteria:

∙ Objectives: the transaction should be structured in the public interest;

∙ A life-cycle analysis of costs and benefits, and not just windfall revenues (since short-term cash drives the finance ministry’s concerns, it is important for the ministry and the government to step back and consider alternatives, such as the sale of BSNL’s vast real estate. If the goal is ubiquitous and affordable broadband, this would be much less damaging to the public interest than spectrum auctions); and

∙ End-to-end solutions are required from an integrated systems perspective.

The New Telecom Policy ’11

For the New Telecom Policy 2011 (NTP ’11), the first requirement is to define convergent goals. We could take a leaf from countries with excellent broadband that built high-quality next generation networks. While the US and UK have strong initiatives, Japan, Sweden, South Korea and Finland have highly rated broadband. Australia and Singapore are now building next-generation networks. Both are common-access, open-to-all service providers.

Spectrum Management

In India we must begin with unravelling the mess of spectrum management. There are two separate skeins. Legacy issues of irregularities and scams form one stream, to be dealt with by the process of law. On the other hand, policies for next-generation networks need a process of stakeholder workouts to deliver services. Broadly, there are two ways of approaching spectrum management. One is to allocate specified bands for exclusive use, as was customary until now. An alternative is to create a common spectrum pool for use by all service providers. In other words, any provider can dynamically access spectrum for carrying voice, image and/or data. This method of dynamic spectrum access is now feasible, and the US is starting off with TV white space. The Federal Communications Commission has appointed nine companies including Spectrum Bridge and Google as database administrators; a tenth, Microsoft, is under consideration. India could start out on this if the government chooses the objective of accessible and affordable services.

Network vs Revenue

The choice is between building/configuring a high-quality, least-cost network and high short-term government collections. Over a longer period, a restrained approach emphasising networks and services is likely to be superior to aggressive government fees, as we found with NTP ’99 — revenue sharing resulted in explosive growth together with higher collections than the amount foregone from licence fees (see data from the Telecom Regulatory Authority of India and the Comptroller and Auditor General²).

How can the government evaluate this trade-off? The diagram below outlines alternative approaches to spectrum allocation and the likely outcomes. The outcomes should be evaluated as public interest costs and benefits.

The first step is to choose between exclusive spectrum use and common access. Exclusive use entails allocation through auctions; methods like first come, first served (FCFS); or “beauty contests”, for example, the evaluation of stipulated criteria such as technology, financial capacity and so on. Auctions are transparent. Common access, too, is completely transparent, provided the usage and payment systems have integrity.

If there are few operators (three or four), each can be allocated 20 MHz or more for exclusive use. In such circumstances, the relative merits are not obvious. However, in an emerging economy like India – without a ubiquitous network and with too little spectrum distributed among many operators – the logical choice for efficient spectrum management is common access.

Auctions often lead to service deprivation because of high costs (the “winner’s curse”). However, there are exceptions, where bidding is kept reasonable, as in Finland, or France because of its timing, after the fiasco of the European auctions. The other alternatives, FCFS or beauty contests, can result in low or high costs depending on government policies. High fees ratchet up costs with windfall gains to government in the short term, but users are deprived of these funds for networks and services. For example, in India, while the government collected nearly Rs 1,03,000 crore for 3G and broadband wireless access auctions, new facilities and services have been slow. Instead, this spectrum is largely used to support 2G users.

Low fees would have improved the odds of high-quality and low-cost facilities, affordable pricing, and better coverage. The government, however, would have lost its short-term windfall gains.

Once the government sets the objective of affordable, high-quality services, the next steps will be:

(I) Spectrum allocation and management

The decision criteria are:

∙ Technology: The rationale for optimal channel width is that with lower capital cost there is greater throughput with a 20 MHz band than with several smaller bands.

∙ Economics: The capital cost of shared facilities through common access is far lower than if each operator invested in separate access networks.

∙ Practical results: High-quality broadband in countries like Japan, Sweden and South Korea was built without spectrum auctions.

∙ Carbon footprint and resources: Both are minimised with shared facilities, such as towers and equipment.

These reasons make common spectrum the logical choice, as against auctions for exclusive allocations.

(II) Common network

The same logic of economics and carbon footprint/shared resources extends to the whole network. The rationale of common access for oil pipelines, railways, airways, roadways and electricity networks applies equally to communications networks. [See diagram below on common network.]

Common Network

A common network is, therefore, a logical and environmentally sound choice. The question is how best to own and operate it.

shyamponappa@gmail.com

1 E.g. see: “Winner’s Curse”, Chris Anderson, Wired, May 2002:
http://www.wired.com/wired/archive/10.05/change.html

2 Trai’s estimate of foregone revenues by March ’07: under Rs 20,000 crore: “Indicators for Telecom Growth”, Trai, ’05:

http://www.trai.gov.in/trai/upload/StudyPapers/2/ir30june.pdf

Revenue share collections by March ’07: Rs 40,000 crore; by March ’10: Rs 80,000 crore: “Performance Audit Report on the Department of Telecommunications, Ministry of Communications and Information Technology”,
http://cag.gov.in/html/reports/civil/2010-11_19PA/Telecommunication%20Report.pdf

Spectrum Reforms: Good & Bad News

[with additional diagrams + last two bullet points]

A good initiative is under way, but needs changes to work out complex issues

Shyam Ponappa / May 5, 2011

There’s some good news, and yes, some bad news… The good news is that momentous developments are under way in spectrum and telecom policy:

• The Ministry of Communications & Information Technology held consultations with service providers, then posted the transcript on the Department of Telecommunications (DOT) website.
  
• The Wireless Planning & Coordination Wing (WPC) disclosed data on all commercial spectrum allocations – frequencies allotted by geography and service provider or operator – on its website.

Terrific first steps in a constructive approach. There’s more: the ministry’s report of 100 days states: “We will hold consultations with key stakeholders to evolve a clear and transparent regime covering licensing, spectrum allocation, tariffs or pricing, linkage with roll out performance, flexibility within licenses, spectrum sharing, spectrum trading, MVNOs, unlicensed bands, M&A, etc, in a technology agnostic environment after due consideration of Trai recommendations in this regard. Interest of the ‘aam aadmi’ would be the prime consideration.” That’s comprehensive alright, which is good, though the ‘aam aadmi’ bit is either confused or manipulative. Elected governments should act in the public interest, no more, no less. While the private sector is exhorted not to play games, the government at all levels – politicians, administrators and agencies – must also focus on results, and avoid populism.

Display & Presentation

The presentation of information could be more effective for the patterns and structure to be easily accessible. The WPC display is of voluminous raw data. There is no overview, with the ability to drill down to details, nor to aggregate details by operator or frequency. The full set runs into 32 pages of tables (Figure 1).

Compare this with a display in colour from the US’ National Telecommunications and Information Administration (Figure 2). Similar information from the WPC runs into many pages.

Figure 2: Fragment of Allocation Chart (USA)

Source: http://www.ntia.doc.gov/osmhome/allochrt.pdf

However, the US display contains not as much detail, and has no interactive capabilities (these are possible extensions). For an interactive graphical interface, consider the “market map” by Moneycontrol.com for stocks (Figure 3, left).

One can drill down in any sector by clicking on the rectangle. For example, “Telecommunication”, which opens a map with the listed companies, each colour-coded to reflect more detail (green for gains, red for losses).

Clicking on a company shows its daily price and volume chart (Figure 3, right). In a variant (at Smartmoney.com), it opens a menu with access to details like news, financials and so on. Similar spectrum displays could show, for example, information by operator for network rollout and subscribers by frequency.

Figure 3: Market Map of Stocks (Sectors) Companies

Source: http://www.moneycontrol.com/mcplus/marketmap/nse/marketmap.php

An alternate display format is the “Topics most commented on” on The Economist's website.

When the cursor hovers on a topic, related comments are displayed. Clicking on a topic realigns the clusters based on content around that topic, as for India in Figure 4.

Figure 4:

Source: http://www.economist.com/conversation-cloud?days=30

This would work well for aggregating comments on related issues in the consultation transcripts.

Imagine what such a graphical interface to a relational database could do for effectiveness and transparency in spectrum policy. It could be extended to telecom and broadband next, and, eventually, to all of government.

The Bad News: Process Limitations

Judging from news reports, process inadequacies might render the ministry’s grand intentions unachievable. The following examples show why.

- Spectrum sharing is an obvious solution for high demand with limited supply. The DoT has reportedly considered it for years, but discussions so far have been superficial and on “excess spectrum”. Also, the statements of intent on sharing or trading are confusing. “Spectrum trading” implies exclusive rights to spectrum, unless otherwise specified. “Spectrum sharing” means aggregating spectrum for redeployment, with Dynamic Spectrum Allocation. This is analogous to “common carrier access” and “big pipes” for railways, roads, oil pipelines, or airways. Therefore, from a policy perspective, spectrum sharing and spectrum trading are mutually exclusive.

Spectrum and airways or flight paths coexist in the atmosphere. Imagine if airways were auctioned to each airline for its exclusive use, instead of being available to all airlines for similar aircraft through Air Traffic Control. That’s what we have with spectrum auctions in communications. The logic for spectrum auctions is based on old technology with no allowances for improvements in managing interference in the last 60-70 years. Also, allocating spectrum in this way means that aggregate capacity is constrained for two reasons. One is that each operator uses only part of allotted capacity. A study in Singapore in 2008 found that only two bands had a utilisation rate of 50 per cent; the overall utilisation rate for 80-5,850 MHz was about five per cent (Figure 5).

Figure 5: Average Occupancy of Frequency Bands in Singapore

Source: http://www.pwtc.eee.ntu.edu.sg/News/Documents/Spectrum%20survey%20in%20Singapore_%20Occupancy%20measurements%20and%20analyses.pdf

Second, a large band provides much greater capacity than the sum of smaller bands.

Our spectrum predicament arises primarily from inappropriate allocation policies. Therefore, forward-looking policies need the incorporation of a technical understanding of spectrum occupancy, of the effects of spectrum aggregation versus fragmentation, and of technologies like multiple antenna effects (multiple-input and multiple-output, or MIMO), which enable more effective spectrum use and improve functional attributes of higher frequencies. A backward-looking audit of historical data will not serve these purposes.

- Another damaging effect is the move to extract spectrum from Defence to auction to the private sector. The rationale apparently is the high revenues the government can collect. This cannot be in the public interest, especially since the alternate optical fibre network to have been built by BSNL is still not ready.

- Decisions on issues like the desirable number of operators per circle need an objective rationale. No data have been offered contrary to the UK Ofcom’s findings of maximum welfare at three to four operators.

An inherent limitation of the consultation-and-pronouncement approach (as opposed to a collaborative-stakeholder-workout) is that external expertise in technology and process consultation, sorely needed in India, has to be brought in only by the government. This must be done before formulating new policies, because the issues are too complex to resolve without objective expertise.

shyamponappa at g mail dot com