The Hindu Business Line : Coming out with the real outcome

What exactly is `outcome' and how to measure it? Raising this question vis-à-vis the Outcome Budget, P. V. Indiresan suggests that, assuming cost-benefit can be measured, there are three ways the `outcome' can be deemed better than before. An d, he argues, if the Finance Minister is keen on improving outcomes, the third option — of changing the outcome using innovation and technology — is the one he should concentrate on.

LAST YEAR, the Finance Minister introduced an interesting innovation in the form of the Outcome Budget. However, what exactly is Outcome and how to measure it is a controversial issue.

A dozen years ago, a committee was appointed to look into projects funded by an international agency in one of our technology ministries. The closure reports were all glowing. Each report pointed out that buildings had been completed; equipment had been procured, installed and tested; staff had been trained as planned, both in India and abroad; and that foreign experts had completed their visits. The Review Committee asked a simple question: What was the benefit and who were the beneficiaries? That query created turmoil. One of the laboratories that had been set up ostensibly to help local industry could not produce more than one customer. On an investment of nearly Rs 15 crore, it had collected a fee of about Rs 60,000. The Report was locked up. The Department felt relieved when the CAG, which looked at the projects in the traditional manner, could find no fault.

In another instance, a solar photovoltaic electricity system was installed in a village. The village got three or four streetlights with 12W compact fluorescent lamps; each household got one such lamp with power for 2-3 hours a day. The village households were asked to pay one rupee per day for the benefit. The project was presented as a great achievement, which it was in several ways: The village had got streetlights for the first time in its history; people had lights in their homes.

However, for the electricity they got, they were being charged at over Rs 30 per unit — 10-15 times more than what townspeople pay. The report on this project too was consigned to a dark cupboard. In this case too, the CAG could find no fault.

These two examples illustrate the pitfalls in identifying and measuring outcome. Our bureaucracy measures performance on the basis of compliance to rules and regulations. It has neither the mandate nor the expertise to identify benefits and beneficiaries let alone measure the benefit they get. Our audit is also not concerned about missed opportunities and opportunity costs.

Businesses use the concept of `profit centre' to locate inefficiencies. The government has no profit centre to speak of. At best, it could use an `expense centre' as a substitute.

For example, let us take a government college. That is an identifiable expense centre. Who are the beneficiaries in this case? Would they be students or would they be the employers who hire the graduates? What is the benefit? Is it passing the final examination, or is it the number that got employment?

How about those who join post-graduate courses or go abroad? If the college has postgraduate programmes, how should the expenditure be divided between under-graduate and post-graduate classes? If the college has research programmes, the issue becomes even more complex, and if it has substantial industrial consultancy or sponsored projects, the cost-benefit analysis becomes more a matter of jugglery than the precise arithmetical exercise that auditors love.

Benefit and beneficiary are virtually impossible to define in such governance functions as Defence, Home or even within the Finance Ministry. Even in a service department like irrigation, benefit and beneficiary can be identified only in field offices, not in administration units. Therefore, it is best to confine the exercise of the Outcome Budget to the field offices of service departments.

Assuming that cost-benefit can be measured, there are three ways the outcome can be deemed better than before: (a) Outcome is the same but the inputs are lower; (b) inputs are the same but the Outcome is larger; (c) Outcome is different.

The first option of economising on inputs may be virtually ruled out. Most of the expenditure in government is on establishment — wages, perquisites, staff welfare, and the like. At times, (in many educational institutions, for instance) these amount to as much as 98 per cent of the total. Hence, the only significant way inputs can be reduced is by reducing staff.

However, in our government, people may only be appointed; they cannot be dis-appointed. That makes the first option all but impossible; economies are not possible except in trivial ways.

The second option of enhancing output too has its own problems: Increasing outcome with the same inputs as before requires either better management or better technology.

Any official who attempts to increase outcome without increase in inputs will have to bend rules, cut corners. That entails running foul of the auditor, even risking criminal prosecution by the CVC. In theory, the official can get the rules modified but that may not materialise even by the time the official retires.

Improvements in technology are possible at any time. However, even that is dicey. For example, all over the country, citizens grit their teeth whenever they negotiate potholes in the streets. Better technology will solve that problem for good. There is nothing great or novel about that technology; most countries have it.

One need not even go abroad. Our policy-makers can go to IIT Delhi and see for themselves roads without potholes and pedestrian pavements that are actually walkable on. However, PWD engineers are bound by standards, codes, regulations and the like. Like in the case of rules, it is safer (even if it is unsatisfactory) to follow outdated codes rather than apply better technology.

The third case of changing the outcome for something better is the most dangerous of all. In this case, innovation is the prime input. Unfortunately, few innovations succeed except after prolonged experimentation. Often they fail completely. Hence, this case throws up virtually unsolvable problems in cost-benefit analysis. Yet, it is the one that contributes most to progress. If the Finance Minister is really keen on improving outcomes, this third case is the one he should concentrate on. However, normal procedures will not do. Changing the outcome for the better requires R&D. Usually, R&D is compartmentalised: it is performed in ivory towers far from the rough and tumble of the real world. That isolation has its advantages; it has disadvantages too. The R&D often becomes unimplementable.

The remedy is to permit field executives to innovate. Developed countries spend 2-3 per cent of GNP on R&D. Their governments allocate as much as ten per cent of their budgets (excluding social welfare transfers) for R&D. Then, let us consider allowing each field executive the discretion to spend, (more accurately, invest) up to, say, a modest one or two per cent of the unit's budget on R&D.

Let it also be stipulated that no penalty will accrue if the experiments fail unless it is proved that a deliberate attempt was made to waste public resources. Further, let there be tangible rewards for any success achieved.

Discretion means complete discretion; no auditor or no superior should question why or how the money was spent. Such total discretion is necessary because innovation comes with unpredictable obstacles. If the official has to wait for approvals each time some difficulty crops up, no tangible progress will ever be made.

Cautious administrators will point out that the proposal is an open invitation for misappropriation. In fact, there will be cases of misuse; that cannot be helped. Some officials are bound to be corrupt. However, such is the peculiarity of human nature that people become more cautious and more honest when they have autonomy, when they enjoy total discretion and cannot pass on blame to others.

Losses are inevitable but, with discretion limited to 1-2 per cent of the unit's budget, they will be small. In general, benefits from useable innovations should outweigh losses caused by corrupt or incompetent or unlucky officials. Let us not underestimate the ingenuity or honesty of our people.

In any case, this suggestion too is an innovation; it will work sometimes; it will fail sometimes. That is the risk the Finance Ministry has to take. No risk, no gain!

The Finance Ministry can reduce risk by getting each innovation proposal cross-checked prior to implementation. In R&D, those who crosscheck operate as peers, not as superiors. Then, each executive circulates proposals for innovation to knowledgeable persons inside and outside the department.

As the official has full discretion about spending the unit's R&D budget, any critical comment is merely criticism; it is not a veto. It is up to the official to accept or not accept either criticisms or suggestions. That freedom is important because critics often do not have enough time to study innovative proposals in full detail and can make errors themselves.

Even the official's superior should not interfere. The superior officer should have only three options: (a) Agree and share the credit for success if any. (b) Return the proposal for reconsideration but accept responsibility for any delay that such review may entail. (c) Reject but accept the entire blame if the same or similar idea succeeds elsewhere.

In particular, other than the immediate superior, nobody else should have the power to delay the scheme. In short, the proposer is free to accept or reject any suggestions made by anyone including the superior. That is the true meaning of operating a discretionary budget.

Strange? All innovative ideas are strange until they get implemented.

(The author is a former Director, IIT Madras. Response may be sent to: indiresan@gmail.com)

(This is 167th in the Vision 2020 series. The last one appeared on January 9.)