A burden on Society: Inefficient Public Enterprises

“Government produces lamest products, infrastructures, and services! Government should do nothing but the work it has been assigned, governance.” Victor quipped.

He added further, “Private sector gives superior quality of services, which government never will be able to match in its lifetime.”

 “Well, remember what happens to the employees when a government undertaking is privatised. British train, when privatised on insistence of Margaret Thatcher, shed 100,000 jobs since it was privatised.” I tried to pacify my friend by putting up the counter argument in favour Government.

Campaign against privatisation of Royal Mail

“Those employees were burden on the tax payers. I was paying for their inefficient services, which were bought out by us because we had no other options at our disposal.” Generally, intellectually sterile Victor was on a roll today.

This short conversation made me think about the utility of government, in producing goods and providing services. All around the world governments have sweat profusely to manage public enterprises. Many public enterprises have been privatised by government for various reasons.The natural monopoly firms, such as Royal Mail, British Rail etc. of the Great Briton, are prime examples of the privatization. The prevalent sentiment   across the globe about privatization was, initially, downbeat. Citizens thought that government is privatising the assets only because government couldn’t nail those enterprises. On the contrary there were many examples of “rock star public enterprises” being privatised due to financial distress faced by government. Take cue from India’s privatisation drive, along with loss making and socially redundant enterprises like; Modern Food Industries (Such an ironic name) India also privatised Maruti Udyog (Now considered a top player in Indian automobile industry).    

Lack of innovations and incentives to reduce the costs are few critical reasons behind public enterprise’s dismal performance compared to private enterprises. Private sector looks for greater efficiency to reduce cost, without sacrificing, specified, minimum quality standards. Modern food industries was a government undertaking (Indian Government), engaged in producing fruit concentrates and bakery items. Founded in 1965, Modern food industries limited (Initially known as Modern Bakeries) marvelled in preparing recipes for business disasters (pun intended).  MFIL had no incentives to run the operations efficiently as profit maximization was put last on the list of Indian government. MFIL opened mango pulp producing plant in Bhagalpur-India. The location was chosen to decrease unemployment in Bhagalpur region. Interestingly, Bhagalpur was nowhere near to mango orchards. Entire plant became economically, a disaster due to increased transportation cost. This was one of many defunct plants opened by MFIL.

Modern food Industries strategic mistakes made many plants unprofitable

All the production facilities of MFIL were underutilised, excessive labour force with extremely low productivity, and lack of decision making paralysed MFIL adversely. Dissecting the failure of MFIL, one can derive that government enterprises’ lack of incentives to reduce costs and achieve efficiency was one of the prime reason behind MFIL’s under performance. Government wished to generate employment for youth through this venture but all it created was a glut of inefficient workforce, which put up burden on the tax payers. Government would be better off if it would have announced the tax rebates, equivalent to the investment made in MFIL, to private enterprises.

Government employees, running public enterprises, do not have innovative edge over their private sector counterparts. Government doesn’t have incentive system linked with performance of employees. In absence of such performance evaluation system government employees opt to free ride. Thus enterprises like MFIL has large chunk of “good for nothing” workforce and efficient and hardworking employees become minority.

Success breeds through two phenomenons, namely, motivation and threat. Management uses, popularly known as, carrot and/or stick method to align workforce’s objectives with enterprise’s growth plan. Workers not working ardently in tandem with enterprise’s goal, always face a situation where management may use the stick of wage cut, demotion, or pink slips to punish such ineffective or unruly workers. Public enterprises don’t have such a stick, which can be used with their will, in their hand. This creates a monopolistic situation for workers, who can choose between working and shirking. In absence of performance linked reward system, workers find more utility in shirking than in working. Workers decided how much output they would produce for their principals and clients as their principal doesn’t hold any stick to punish their agents/workers. MFIL faced such an excruciating situation before privatization. MFIL was marred with the issues described above and unfortunately MFIL was doing business in highly competitive industry, where margins were quite low and firms stay profitable due to their innovativeness and efficiency, both of which are absent at MFIL.

MFIL's Logo having lion as a mascot

Public enterprise’s emphasize on social welfare, alienate such pubic ventures from building reputation in the market. Unless, an enterprise builds reputation in the market, its product remains a commodity rather than being a brand in such a competitive industry. MFIL, completely lacked, such competitive edge to build its reputation in the market.

Ultimately, MFIL was privatised under Indian government’s privatization programme. The transaction announced on March 1, 2006 made MFIL a subsidiary of Hindustan Unilever. After taking over, Unilever management infused slew of measures to cut the costs by chopping of unproductive plants and processes. Unilever introduced PLR (performance linked reward) system to motivate efficient workers/agents.

Time will tell, whether Unilever made smart bet  on MFIL but one can surely conclude that by offloading MFIL government has certainly reduced social cost and enable tax payers to get rid of money sucking enterprise.

Economics Lessons from EBOLA outbreak

  Public goods are directly correlated with economic well being, prosperity, and peace. Countries, mostly developed, having superior public goods in place are better off compared with others and provide welfare to their citizen.

  Economic definition qualifies any good, which is non-excludable and non-rivalrous, as a public good. Non-excludability can be explained by inability to prevent non payers from enjoying the benefits of the goods. Non-rivalrous can be said in place when one person’s enjoyment doesn’t come from other person’s expense. When a country provides public good such as defence or economic stability every citizen of that country, including those who haven’t contributed in formation of public good, enjoy the benefit and no one is deprived of the public goods put in place. Sometimes fear and not the benevolence drive the provision of the public good. Take an example of CDC- Centers for disease control and prevention, whose existence came in picture due to fear of the pandemic diseases. CDC strives hard to prevent diseases’ negative spill over effects. Endemic occurs due to many scientific reasons and once it starts spreading, it almost becomes non-excludable and non-rivalrous.

  A trend called globalization, which started at the early onset of this century, has increased interdependency among international nations.  This interdependency has both negative as well as positive effects. An increased air travel network has contributed significantly in global trade. Public goods such as Internet, Financial stability, commercial integration or knowledge promotion has created a new category, which is known as International public goods.

  Global interdependence has generated few negative effects as well. Increased international mobility has increased the risk of contagion in case of deadly diseases. We have witnessed many International Public Bad, which is symmetry to public goods, such as spread of H1N1, Influenza, in the past.

A recent outbreak of EBOLA in Sub-Saharan Africa is a latest public bad, giving nightmares to global arena.  Found in 1976 in Sudan, Ebola virus Disease (EVD) is member of the Zaire ebolavirus species. This virus is behind largest number of EBOLA outbreaks and is the most deadly Ebola causing virus. Research has established bats as most likely natural reservoir of EBOLA Virus (EBOV). Transmission of EBOV between natural reservoir and humans is rare thus making the traceability bit difficult. Generally, transmissions are traced back to a single case where an individual handled the carcass of gorilla, chimpanzee or duiker, which might have fed on partially eaten fruit or pulp dropped by bats.

  Bush meat, meat derived from terrestrial wild animals such as apes, is very popular in Sub-Saharan Countries. Consumers and suppliers of the bush meat market might not have thought in their wildest dream that their transaction would create such a dreadful negative externality. Externalities arises whenever action of one economic agent, in this case meat seller, make bystanders worse off, in this case EVD affected people. WHO and CDC, public goods body, are taking desperate measures to contain and defeat EVD in Africa. Guinea, Liberia, and Sierra Leone where almost 1600 people succumbed to EVD till date are trying solutions of medieval ages. Mass quarantine, border lockdown, which were last seen in some Hollywood apocalypse movies have caught human frenzy.

Sierra Leone’s proposed country wide lockdown for 4 days has created huge uproar and posed questions on administrations ability to tame EVD. Opponents of local governments’ frantic measures are arguing that governments’ lack of resources to provide essential public goods such as disease awareness, public sanitation system, functional hospitals have forced government to opt for such inhuman decisions.

  As Arrow realized (1971: 137), “when the market can’t manage to establish an optimum situation, society will, at least to some extent, become aware of the shortages, and other social institutions, outside the market, will emerge to try to fix them.” Developed countries have started pouring in resources to develop vaccine to fight EVD. Teams of expert doctors and nurses from international public bodies such as WHO, CDC, and MSF are fighting together on ground zero to defeat this public bad.

  A section of society is accusing international bodies to be responsible for current outbreak. WHO, CDC are being blamed for being hand in glove with major pharmaceutical firms. International bodies’ commitment towards provision of preventive measures such as improved sanitation system, clean water distribution system, disease control mechanism has been not much encouraging. Why world has woken up suddenly with a dire need to contain EVD? Why afflicted nations did not put their healthcare system in order and brought entire world to the edge of a pandemic?   The answers lie in public goods aggregation technology (Hirshleifer 1983; Cornes and Sandler 1984; 1996; Kanbur, Sandler and Morrison 1999; Kanbur 2001; Sandler 1997; 1998). Aggregation technology states that contributors’ incentive determines the overall supply of a public good.

  Current scenario of EVD outbreak very well depicts the supply of public goods by weakest link. Where public goods are supplied by weakest link, the smallest effort or contribution fixes the effective provision level. Contributions beyond this smallest level use resources without increasing provision. As a consequence, contributors will match the smallest contribution level. With weakest link public goods, there are no incentives to free ride since the effective provision level is zero. This is the case with the risk of contagious diseases such as EVD. Probability of an endemic outbreak, to take place,  is subjective to the healthcare situation of host country. The country, such as any Sub-Saharan country, having weakest healthcare infrastructure, can easily become a focal point of infection from which the disease can spread to the rest of the world. The supply chain of this public good critically depends on its weakest point. Tremendous amount of relief provided by international public bodies and developed countries are turning less effective due to host nation’s negligible contribution towards healthcare infrastructure. This is evident by lack of, labs and clinics containing  bio safety level-4, which meets CDC’s mandatory requirement to handle cases of EVD.

  In epidemiology, the basic reproduction number (denoted as R₀, r nought) of an infection can be thought of as the number of cases one case generates over the course of its infectious period, in an otherwise uninfected population. Generally, higher R₀ defines higher possibility of contagion. As EBOV transmits through bodily fluids, only, it has a R₀ varying between 1 and 4. As heuristic, 1-(1/ R₀) percentage of people needs to be vaccinated to prevent sustained spread of epidemic. In the case of EVD, 75% of the population of afflicted country needs to be vaccinated immediately. Development of Vaccine for EVD depicts the concept of better shot public goods. In current scenario aggregate level of provision of public good (Vaccine development) is determined solely by the largest single contributor. Trial drugs such as ZMapp and TKM-EBOLA are being developed by powerful pharmaceutical firms located in USA and Canada, which have high technology and monetary fund at their disposal.

  The development of successful vaccine will be preceded by human trials and mass manufacturing. It will take months for vaccine to be available on ground zero. Looking at EVD’s contagious effect everyone around the globe seems to be hell-bent to tame this international public bad at any cost. Developed countries are coming forward with all the aid they can provide to assist affected countries in this difficult time. If we leave aside problems pertaining to principle and agent, we have learned a vital lesson from this calamity; it is always desirable and economical to strengthen the weakest link of the system instead of providing a big shot of remedy later on.