Saturday, December 09, 2006

Exporting suicides

It is a sad fact that Kerala has the highest suicide rate in India. A friend of mine once speculated that the Malayalee is a unique creature prone to caving into peer pressure which forces people to resort to extreme measures in desperate times. Any doubts surrounding that idea should have been repudiated by Lee Ban Seen, a Malaysian contractor, who committed suicide this past November and attributed his death to delays in the Kerala State Transport Project (KSTP) in a note he left behind.

Ever since Lee Seen's suicide, the state machinery has shifted into a blame game. It began with the CM, Achuthanandan, blaming the previous UDF government for leaving "scope for corruption through a clause on payment of Rs. one lakh compensation per day for delay if the required land for the work is not handed over."[i] Following him, Finance Minister Isaac Thomas claimed that the state government was not responsible for the project delay, so there was no veracity to the allegations that Lee Ban Seen had "committed suicide due to a delay in the payments". He also singled out the PWD Minister M K Muneer from the previous UDF regime alleging that "Muneer cannot absolve himself of the charges as serious financial irregularities have taken place during his tenure like awarding tender at a much higher rate and realisation of liquidated damages",[ii] to which Muneer retorted that the project and procurement procedures was signed by the prior LDF government headed by E.K. Nayanar and accused Isaac of raking up the issue to create a distraction. Isaac then shifted his ire on the contractors "attribute[ing] the problem to "cash crunch" and "poor" management of the Malaysia-based Pati Bel Company that was given the contract for the work."[iii] In a reaction fit for Shakespearean irony, two of the three major contractors terminated their contracts three weeks after Lee Seen's suicide.[iv] Isaac now estimates that the project originally estimated to cost the exchequer $81 million or Rs. 388 crores, would now cost the exchequer more than 500% as much at $417 million or Rs. 2,000 crores. On the surface, it's hard to tell whom to blame and where the fault lies. Our collective experience with both contractors and politicians has taught us to trust neither. Yet, that is not the case here. A variety of direct and indirect sources point the finger quite clearly at long-standing flaws in the system and more directly at both the LDF and UDF governments.

The KSTP project was conceived in 2002 in the midst of a fiscal and infrastructure crisis in Kerala. Motor vehicle traffic on Kerala's roads had been rising annually by 13% since 1990. However, 70% of the State Highway roads remained single-lane (3.8 meters wide) roads and the rest were merely dual-lane roads (7.0m) with limited shoulder space. By itself, the limited space at worst contributes to traffic jams and inconvenience residents and businesses. To make things worse though, less than 70% of Kerala road network's annual maintenance needs, which are estimated at $50 million, are met by the PWD's slim budget. This gap contributed to a substantial backlog of at least $100 million in overdue maintenance expenditure. As a result, Kerala is also infamous for one of the highest accident rates of any state in India at 2,500 deaths annually. Loss of life and property cause an estimated loss of $100-200 million per year, or the equivalent of 1-2% of Kerala's annual GDP.[v] Ordinarily, such infrastructure needs would have remained unfunded. But, after years of unmanaged government expenditure and economic stagnation, Kerala's fiscal crisis forced it to look outward to make up for the gap in funding, lest it grew larger as the PWD's budget grew smaller.

When the World Bank was brought in, it was keenly aware of Kerala's fiscal crisis. For the past decade or so, Kerala's government expenditure had outstripped its revenue both in absolute size and growth. While total revenue grew annually during 1993 -2002 at 11%, total expenditure grew by 13%, taking Kerala's fiscal deficit from 1.4% of GDP in 1993 to 4.5% of GDP in 2002. Faced with an over-stretched revenue base, the government took on additional debt to finance this deficit. But, at a debt/GDSP ratio of 32%, Kerala's debt burden was considerably higher than all of the southern states (AP, TN and K) as well as the Indian average of 24%. On a per capita basis, Kerala carried Rs. 7,414 of debt, placing it in significantly more danger than the next worst southern state, AP, at Rs. 4,724 and the Indian average at Rs. 4,996.[vi] Needless to say, the WB was particularly concerned about the Kerala government's ability to pay its dues, which it termed "Fiscal Strain", and went so far as giving the government a prescient rating of "Substantial Risk".[vii] The only other risk that WB rated as worse was GOK's ability to pay them on time. The WB's answer to all these risks was to place its funds in a separate account "outside the treasury system", which were to be "available to the project in advance, on a quarterly basis from the State budget, on the basis of cash forecasts."[viii] In hindsight, the WB is probably kicking itself in the shin for not doing more.

After a thorough analysis of these and other factors, WB agreed to lend GOK a loan of $255 million with the tacit, and for some reason, inexplicit understanding that GOK would contribute around $81 million on its own. Interestingly, while the loan agreement expresses scope for GOK to put up its own money to the extent that it is "required" to complete KSTP, it never binds GOK to a specific amount. Although GOK presented a plan to put up additional funding to support the WB initiative, it never committed to this amount legally. So, in theory, the total project funding came out to $336 million while in reality, the actual funding could have been as low as $255 million. Moreover although the project was secured by the WB, in practice, the project was managed by the PWD. Understanding this gap between financing and management is the first part of understanding the KSTP fiasco.

The second part of disentangling this mess lies in understanding why the costs of the project ran up. Signs that the projects was running into delays were evident as early as November of 2005, when Muneer publicly admitted costs increases in the project of around Rs. 500 crore, bringing the state's share of the project to approximately Rs. 888 crore, or $185 million.[ix] However, he also stated that the project's costs overruns would not exceed Rs. 2,000 crores as rumoured. Five months later, however, Isaac announced that the project would end up costing the state "roughly" Rs. 3,000 crores to complete.[x] This proved to be an overestimate as he revised that down to Rs. 2,000 crores more recently. While Isaac claimed that the cost overruns were not due to the lack of payments, his views appeared not to be shared even within his own government when the PWD Minister T.U. Kuruvilla admitted a few days later that there had been delays in land acquisition. That the Kerala government's record on acquiring land is notorious is nothing new. However, no one foresaw that its ineptitude in this matter would drive the project to a halt. Upon examining his allegations, one is forced to conclude that Isaac was simply dodging the blame.

Isaac's first claim was that "irregularities" in the procurement procedure had resulted in expensive bids and contributed to the cost overruns. Even if we grant Isaac that logic, the fact is that the bids were no more or less expensive than typical road projects. As the table below shows, on a per kilometer basis the winning bids for KSTP were by no mean exorbitant or unusual, unlike what Isaac claims:



Isaac's second claim, that cost overruns were the result of PATI, the Malaysian contractor that hired Lee Seen, experiencing financial difficulties due to internal mismanagement is just as ludicrous. While PATI's public financial records show that its corporate parent, UEM Builders, incurred a loss of $76 million in 2005 in its Construction & Engineering division, the PATI-BEL is involved in at least one other project in India currently, which is reportedly proceeding without any delays. And if that is not enough to repudiate Isaac's allegation, it should also be noted that Road Builder, a financially-healthy contractor, also pulled out of the project citing lack of payments. So Isaac's claim that the cost overruns are due to financial mismanagement on the contractors' parts is not only incoherent, but also incorrect.

In the end, one still has to ask what compelled Lee See Been to the extreme measures he took? Some have speculated that it was the debt that Lee Been took out from domestic banks to pay his workers' monthly salaries when proceeds from the government were not forthcoming. But, I find this hard to believe because no reasonable manager takes out personal loans. In all likelihood, the loans were made out in the company's name. At worst, Lee Been could have lost his job for misplacing his trust in the government's financial solvency and desire to pay his firm. However, considering Lee Been’s flawless reputation at his workplace, that was also an unlikely possibility. So, if you rule out the financial reason, what remains?

I believe what drove Lee Been to the end of his wits was the political element, which is the third and final key to understanding the KSTP fiasco. A lot of evidence points to the fact that Lee Been was driven to the end of his wits by the political apathy and constant bureaucracy he had to face. But, it was Gouridasan Nair's piece in The Hindu that gave me the final clue. In his article, Nair concludes that the Finance Department, which was compelled to pay expenses owed by the PWD, "will be able to do so only if it is able to keep the PWD on its side, particularly given compulsions of coalition governance."[xi] Coalition governance - it's a word with different shades of meaning. In recent years, India has witnessed a massive change in its electoral dynamics from single-party governments to coalition-based fronts. So, most people are used to hearing about coalition politics, fractured policies and delayed implementation. It's the price one pays for participating in as diverse a democracy as consensus in a coalition government is fleeting and temperamental. However, there is a considerable difference in governance theory between day-to-day management and policy setting. The former is the business of running the state machinery and that includes infrastructure maintenance. The latter is the business of charting out its future and foreign policy. Maintaining roads requires no vision. It is a mundane job, best handled by technocrats and not politicians. So although we are used to hearing law bills and policy initiatives being delayed on account of politics, we remain optimistic that the daily affairs of governance remain untouched. And that's where reality bids goodbye and Kerala begins.

You see, regardless of GOK's financial duress, the KSTP was doomed from the start because it was handled by the PWD, an ill-equipped and poorly managed institution. Even the WB noted "problems with the [PWD’s] organization structure, administration, delegation of administration and financial powers, overstaffing, development and staff training." Although it's political blasphemy to compare a state department to a corporation, the reality is that infrastructure maintenance is a job that requires expertise in financial and management skills. And just as you let the inventory and capital expenditure guys in a company manage maintenance expenditures, so should the job of maintaining Kerala's roads be left to the experts. Which brings us to the question of what is the PWD if they are not experts at managing roads?

As part of its appraisal report, the WB conducted an evaluation of the PWD and came up with an alarming assessment. As it states, "a preliminary institutional audit of PWD highlighted gaps and deficiencies in several areas, including road development and maintenance planning, road safety, quality control, financial management planning (including delays in payments to contractors) and transport coordination." Need we a better indication of where the KSTP experiment would have ended? A department whose leadership structure changes with each outgoing political party cannot be trusted to act independently or accountably.

But as the WB saw it, there were several promising mitigations to the inherent risks. First, GOK had drawn up a Road policy to "rehabilitate roads…in a phased and timely manner". Second, GOK had created a State Road Fund that would "seek to generate user charges through road tolls and dedicated fuel levies." The third promising development was the establishment of a Road and Bridges Development Corporation of Kerala, "to raise funds through loans, shares and borrowings" in order to maintained selected parts of the road and railway network. Lastly, the PWD was drawing up an Institutional Strengthening Action Plan (ISAP) to develop its technical, managerial and financial capabilities with the help of an Australian engineering consultancy, SMEC. Were these measures enough to breed success?

Well, hindsight is always 20-20, but I believe too many concerns were swept under the rug by the WB in the beginning itself.




What the KSTP saga demonstrates is that Kerala currently does not have the management skills, capacities and efficiencies to handle large infrastructure projects. Therefore, financial institutions including the WB, who are best placed to effect change, must insist on reform prior to loan disbursement. As the events of the last year and more have shown, the Kerala PWD department is in dire and quick need of organizational reform to make it autonomous and independent of the political regime. Infrastructure maintenance after all is a public need, not a policy option.

In this regard, the WB could take a leaf out of the Asian Development Bank’s (ADB) book. In 2001, the ADB loaned $250 million to the Maharashtra government exclusively to pursue reform in its public sector undertakings including the state PWD. Among the initiatives to reform the PWD were several key elements aimed at enhancing the agency’s independence and efficacy: 1) separation of regulatory and operational functions 2) empowerment of implementing agencies and 3) social security net including VRS scheme for redundant PWD workers.[xii]

In the movie Sandesham, Satyan Anthikad has Thilakan tell his wayward children, "First fix your house, then fix society." It's advice that could have served the World Bank and the State Government well. Sooner or later though, there won't be any Lee Seens left around to pay for their mistakes. By then, no one will trust either organization in Kerala.


Notes:
In the interest of simplifying conversion rates, I used the USD-INR exchange rate of Rs. 48 per $1 used to assess the project cost in 2002, throughout this article.


Sources:
[i] “Kerala Govt not to withdraw corruption cases:CM”. newKerala.com News. November 22, 2006.
[ii] “Road project controversy; Kerala FM blames former PWD Minister.” The Hindu, November 28, 2006.
[iii] “Minister joins issue with opposition on KSTP issue”. PTI. November 23, 2006.
[iv] “Road Builder terminates RM112m Kerala project”. The Edge Financial Daily, November 24, 2006.
[v] World Bank appraisal report.
[vi] Kerala Economic Review 2003.
[vii] The appraisal report rates risk on a scale of High, Substantial, Modest and Negligible in order of declining risk.
[viii] World Bank appraisal report.
[ix] “Kerala: second phase of State transport project from January”. The Hindu. November 11, 2005.
[x] “Kerala's financial position grim, says Minister”. The Hindu Business Line. May 23, 2006.
[xi] “Finance Department's intervention a crucial turning point for KSTP”. The Hindu. November 25, 2006.
[xii] Technical Assistance to India for Preparing the Madhya Pradesh Road Sector Development Project. Asian Development Bank, October 2001.

36 Comments:

Anonymous Anonymous said...

Abhilash, excellent take on governance and its nuances as a whole. i read the post (rather i wud call it paper) two times, but will have to read again to get to the bottom of it.

Abt the post, its well researched and quite thoughtful. I think key infra-structure projects should go under a ministerial committee comprising finance,revenue,PWD and power ministries rather than under a single minister.

12/10/2006 3:58 PM  
Anonymous Nita said...

Good analysis. Do you have any stats on the suicides?

12/11/2006 8:26 AM  
Blogger abhishek said...

@bvn

Thanks man. KSTP already has a committee compromising these people. The problem was that there was no accountability. I believe that as part of their organizational reform, PWD should create a public quarterly review that includes information on land acquisition, because after the government, the public is the best check.

@nita
Information on suicide rates can be found at:
http://www.ksmha.org/suicide.htm
and at:
http://maithrikochi.org/india_suicide_statistics.htm

All of these stats are based on data from the National Crime Records Bureau, which like most government departments, has a non-existent website.

12/11/2006 11:26 AM  
Blogger Sreejith Kumar said...

A very interesting post! Very informative and detailed...

The condition of the roads.... hooooooo......!

12/15/2006 12:16 PM  
Blogger Draco said...

WOW, nice post one can see a lot of work behind the scene.
ny wy good work dude
i share Ur concerns

12/19/2006 12:05 PM  
Blogger Sasi Kumar said...

alarming facts

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4/22/2007 10:03 PM  
Blogger Dinakarr said...

Hi Abhi,
Nice post.
The tone of your article seems to suggest that WB was taken in by GoK's promise to contribute $81m. But the bank's job is to get a reasonable RoI and as long as Govt. of India is the guarantor, it would have no qualms about lending to the most indebted states in our country.
And usually, the 'recipients contribution' is not cash but in kind (land acquisition, salaries & fees, etc)

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