The consequences of criminalising cheque bouncing

by Shubho Roy and Ajay Shah

Many countries (e.g. New Zealand, Poland, Germany, Norway) have discontinued paper cheques. In other countries (e.g. the U.K., the U.S.), the use of cheques is declining. But in India, the use of paper cheques in India has stabilised in terms of value and number over the last five years. This is despite the extent to which digital and instantaneous payments are now feasible. Why might this be the case?

Prior to 1988, cheques were primarily used as a tool of payment. In that age, there were delays in clearing. Paper cheques had to be transported to the bank branch where the cheque issuer had an account. In that branch, the issuer's signature would be verified against a sample. If the signatures matched, the balance would be cleared (assuming the issuer had adequate funds). This process took seven working days, even when the issuer and recipient had banks in the same city. If the parties were in different cities, the process would take 15 working days, on average.

Today, a cheque issuer can send a secure document showing that the issuer's bank account has adequate funds to honour the cheque. However, in 1988, there was no such system, and the cheque recipient faced the risk that the issuer was writing a cheque that her account could not honour.

Some technical mistakes can always happen, where a person fails to anticipate the date on which funds are required and there are unpredictable delays in the money moving in and out of the account. Alongside this, many unscrupulous people knowingly wrote bad cheques. This made sellers mistrust cheques and prefer cash. While cash as a payment mechanism has the virtues of instantaneity and privacy, it comes with difficulties on physical security.

The 1988 change of the law

In this setting, the Parliament criminalised the bouncing of cheques in 1988. Now, the cheque writer could be sent to jail if the cheque did not clear. The law also stated that every cheque is presumed to be written to clear a debt. This change helped the recipient of cheques because the recipients did not have to prove any underlying transaction. The recipient only had to demonstrate that the cheque was not honoured.

In 2016, the Supreme Court ratified the practice of using cheques as collateral in the case of Sampelly Satyanarayana Rao v Indian Renewable Energy Development Agency Limited. Sampelly Satyanarana Rao (Mr. Rao) had written post-dated cheques as security for a loan from the Indian Renewable Energy Development Agency (IREDA). Mr. Rao did not take the loan personally but wrote the cheques as a director in the company that borrowed the money. The borrower company failed to pay the instalments when they became due. In response, IREDA (the creditor) initiated criminal proceedings against Mr. Rao under the 1988 law. Mr. Rao defended the claim by stating that the cheques were written before the creditor (IRDEA) disbursed the loan amount. IREDA pointed out that the cheques were deposited after the borrower (the company) had failed to pay the instalments, and therefore, the penal provisions of the 1988 Act applied. The Supreme Court agreed with the creditor and allowed for the criminal prosecution of Mr. Rao. This judgement provides legal certainty to the use of post-dated cheques as security. This date, i.e. 2016, is an important milestone in the journey, over and beyond the amendment of the N. I. Act in 1988.

The role of cheques in India today

The threat of imprisonment restored some faith in cheques. Anecdotally, it seems to have worked well in the initial years after the amendment. Cheques became more acceptable in commercial transactions and helped reduce frictions in economic activity. Many a cheque recipient was willing to take the risk of delivering goods without waiting one or two weeks for a cheque to clear.

These considerations do not exist in the present landscape. Instantaneous payment systems are ubiquitous in India, ranging from small value payments to the largest amounts possible. Any problem of trust between buyers and sellers can be readily solved by resorting to NEFT or RTGS. By this reasoning, the number of cheques written in India should have declined sharply. It has not.

People responded to incentives

Alongide this, the rest of the Indian legal system which enforces contracts works poorly. Ordinarily, a loan dispute would be resolved as a contract dispute through civil law, and, in some cases, bankruptcy law may be involved in situations where the debtor is insolvent. In 2020, in enforcing contracts, India ranked 163 out of 190 countries, while its overall rank was 63 (a difference of 100 ranks). India's rank in resolving insolvency was 52. Hence, creditors are unconfident about ordinary credit enforcement mechanisms.

One strand of credit enforcement systems is seizing assets that are pledged as collateral. This tends to work poorly in India. While the SARFAESI Act of 2002 is reasonably effective in getting collateral into the hands of the lender, many assets are hard to sell. Many land titles have encumbrances, and the land market works poorly, which hinders the recovery rate.

These weaknesses of the ordinary (civil) credit enforcement systems made criminal proceedings under S.138 attractive to creditors. Under S.138, a debtor faces up to two years of imprisonment if the debtor is convicted. In reality, the creditor does not even have to wait for the end of the litigation to get the debtor imprisoned. The debtor can be arrested at the beginning of the litigation so that the debtor can be produced before the court. In some cases, the debtor can also be imprisoned for the duration of trial under S.138. In contrast, a civil case proceeds without the debtor, if the debtor chooses not to appear. Most people will pay up to avoid being imprisoned, which gives heart to creditors.

When faced with legal difficulties around land title, it is better for the creditor to threaten imprisonment, and have the borrower solve the problem of selling the land, instead of seizing collateral and then facing legal difficulties in liquidating them.

As a consequence, after the new law was established in 1988, creditors started using cheques as a security. Creditors frequently demand that the debtor provide post-dated cheques for loan amounts. These cheques are payable deep into the future -- sometimes extending to multiple years. In such cases, both parties are aware that the cheque drawer does not have the money in the bank account at the point in time when the cheque was signed. Creditors sometimes demand a separate cheque for each instalment of loan repayment. Consequently, a debtor for a five-year loan may write 60 post-dated cheques. On a similar note, landlords sometimes asked for post-dated cheques for the payment of rent at multiple time points in the future.

Modern economies do not have a debtors prison: the choice of filing for bankruptcy is always there, in which case the creditor gets a low recovery rate. On one hand, in India, there is no legal framework for personal bankruptcy. When threatened with jail time, the borrower may reach into her web of relationships, and borrow from the community. This increases the resources available to the lender.

Weighing the pros and cons

The introduction of S.138 has thus exerted many complex impacts upon the working of the economy.

An increased level of violence in society

More people go jail, and more threats of incarceration are bandied about. This is a less civilised society.

Increased interest in lending

When lenders are given greater certainty about recoveries, they are likely to be more willing to lend to persons that might otherwise be excluded from the credit market.

Diminished interest in borrowing

When borrowers are shown the possibility of jail time, they will be more cautious and avoid borrowing. That has its own welfare consequences.

Conditions for state failure

The prospect of jail time is a `high stakes' situation where the policing system gets to make decisions which have a high impact upon the life of a citizen. This increases the incentives for corruption.

Hindering the emergence of a modern economy

All advanced economies have moved away from debtor's prison, and evolved civil mechanisms around borrowing, collateral and bankruptcy. These pathways reduce the extent of violence in society and increases user confidence in borrowing.

The threat versus the cash

Jail time is indeed a potent threat and creates strong incentives for the borrower to obtain cash, either by borrowing from someone else or by liquidating opaque assets. But once a person goes to jail, all future payments to the lender are stopped. With more civil processes of collatoral and bankruptcy, there is the strategy of keeping the delinquent active in economic life, and obtaining a stream of cashflows to the lender.

Incentives for policy makers

Lenders that got comfortable with the use of S.138 were less inclined to persuade policy makers of the need for the institutional apparatus of the credit market.

Conclusion

The introduction of S.138 into the N.I. Act in 1988 was a response to a problem of the time. Some other countries, like Taiwan, had also criminalised cheque bouncing. However, most countries have walked back since then because credit systems have improved and the use of cheques have declined. In those countries, cheques are not used as collateral for loans.

There is a strong argument for repealing this section. The consequences of such a repeal will, however, also be far reaching, particularly in the context where the institutional apparatus for contract enforcement remain weak. It is interesting to look at the list, presented above, of the consequences of criminalising cheque bouncing. We can then ask: Which of these would flip around and arise, in reverse, when cheque bouncing is de-criminalised.

Shubho Roy and Ajay Shah are researchers at XKDR Forum.

Incentive compatibility and state-level regulation in Indian drug quality

by Harleen Kaur, Shubho Roy, Ajay Shah and Siddhartha Srivastava.

The Indian pharmaceutical market is the third largest in the world by volume of drugs sold and is dominated by local players that produce branded generics at low prices. Existing government estimates suggest that 3.16% of drugs at retail pharmacies and 10.02% of the drugs at government pharmacies are not of standard quality. Independent surveys hint at higher estimates of inadequate quality. While India is a powerhouse of drugs export, foreign drug regulators routinely classify Indian origin drugs as not of standard quality. This problem has been around for a while. Reports of the Comptroller and Auditor General of India (CAG) and Parliamentary Committees have repeatedly highlighted the problems and poor regulatory capacity.

There is a need for better policy pathways to address these problems. In this article, we argue that an incentive problem inhibits the existing regulatory structure. The present law is set up in such a way, that it may be in the interest of the regulator to not carefully monitor the manufacture of pharmaceuticals. Unlike other areas where a statutory regulator is responsible for the safety of an industry, the legislative system of for the pharmaceutical sector does not create a body dedicated to ensuring that medicines are safe and up to standards. Alongside this, there are long-standing problems with regulators in India, where laws create arbitrary power, and the feedback loops of accountability mechanisms do not create a striving for improved state capacity. Certain solutions flow directly from this reasoning.

The current system

Unlike the working of the market economy in most goods and services, market discipline through consumers in the field of pharmaceuticals is limited; there is market failure caused by asymmetric problem. The user (usually the patient) does not have the skills or experience to know if a pill actually contains the claimed active ingredient. When (say) a pen does not work, this is evident to a consumer. However, it is very difficult for an individual patient or even a doctor to know if a drug is substandard. When medication fails to cure the patient, this could be because of three different possibilities -- a wrong diagnosis, or the patient just did not respond to the correct drug, or a problem with drug quality. This induces an identification problem, so there is no feedback loop when a substandard drug is purchased. Similarly, when a patient does get better, a lot of the time, this would have happened through the working of the human body and is helped by a placebo effect. Here also, there are no feedback loops based on quality signals.

The consequences of inadequate quality can be grave: substandard medication can even cause the death of a patient. And even if a patient dies, it is extremely difficult to establish (after the fact) that the medication was defective.

As with most other countries, India has a law that creates a government apparatus for approval and manufacture of medicines in the country: the Drugs and Cosmetics Act, 1940 (DC Act). This divides the functions of regulation between the union government and state governments. The union government is responsible for the approval of new drugs, regulation of drug imports, and laying down standards for drugs, cosmetics, diagnostics and devices. State governments are responsible for licensing and monitoring manufacturers for drug quality and initiating legal action against offenders.

The parliamentary law does not separate the regulatory duties between the union and state governments. The primary legislation allows the union government to appoint licensing authorities (S. 33 of the Act). Under this authority, the union government has delegated licensing functions to state governments (Rule 59 under the Act).

What was the text of the law which generated this separation? Section 33 of the legislation empowers the union government to appoint the 'licensing authority' for the manufacturing and sale of drugs and the union government has used this power to anoint the state government using subordinate legislation (See rule 59 of the DC Rules). As a result of this delegation, State governments (through their State Drug Regulatory Agencies) are responsible for licensing pharmaceutical manufacturing facilities and inspecting them.

Misplaced incentives under the law

The present arrangement of delegating inspection of manufacturing facilities to the state government, however, has problematic implications. In a unified national market, where goods flow across state borders seamlessly, pharmaceutical manufacturing factories do not limit their sales to one state. Many firms are harnessing the economies of scale that come from producing for the entire country or even the global market from a few very large manufacturing plants. Small states like Himachal Pradesh and Goa contribute disproportionately to India's total pharmaceutical production.

This unification of markets creates a problem of incentives for the state governments where these plants are located. These states benefit from the tax revenue, jobs and licensing fees that these large plants bring to the state. If the state government is vigilant and runs a tight inspection regime, it risks discouraging pharmaceutical companies from setting up plants in their state. Companies may engage in jurisdiction-shopping, taking the tax base and manufacturing jobs to states with a lax regulatory regime. On the other hand the welfare costs associated with a poor regime -- the adverse impacts on the health of users -- is not borne by the state exclusively, but by the entire country. If the state has a small population (e.g. Goa or Himachal Pradesh) and the medicine is not commonly used, the failure of the regulatory regime may be invisible to the voters of the state. Therefore, it is not in the interest of a state government to run an efficient inspection regime.

Another dimension in the incentive problems of state governments lies in the cost and complexity of regulation. State governments are being asked to spend on manpower, testing facilities and institutional capacity for regulation, while the benefits of regulation are enjoyed by customers all over India.

This incentive problem leads to a race to the bottom with states competing on laxity of regulation. As an example, while a single database for providing information about substandard drugs to the public exists, only five state regulators provide such information through this database.

Finally, even if a drug manufactured in one state is found to be substandard by a regulatory agency in another state, it is difficult to organise enforcement actions that cut across state borders.

Additionally, the separation of roles between state and union is not clear and leads to confusion about who is actually responsible for inspecting manufacturing facilities. For instance, under the DC Act, drug inspectors are responsible for inspecting manufacturing sites and detecting substandard medicines (Sections 22, 23). However drug inspectors can be appointed by both the central and state governments (Section 21), and function under the control/directions of an officer appointed by the relevant government (Rule 50).

Crucially, the DC Act and Rules do not clarify the instances in which the drug inspectors are to be appointed by the central government and when they are to be appointed by the state government. Neither do they outline a scheme of accountability wherein the quality enforcement actions of the drug inspectors can be scrutinised or audited by either a state or central body.

This results in a quality enforcement framework where there is no clear statutory body responsible for the failure in drug quality at the central or state level and therefore no incentive for individual drug inspectors to investigate and prosecute quality violations adequately. Both levels of the governments may consider the other responsible for the failure to inspect a facility.

Solutions proposed in the prevailing literature

There are broadly two schools of thought on how to reform the problem of drug quality in India. The first set of arguments favour the creation of a new central regulatory authority (Pharmaceutical Enquiry Committee (1954), Drug Policy (1994), Mashelkar Committee Report (2003)). The second set of arguments suggest that the existing State Drug Regulatory Authorities (SDRAs) be strengthened for better implementation of drug quality regulation (Hathi Committee Report (1975), Department-related Parliamentary Standing Committee on Health and Family Welfare 59th Report on the Functioning of CDSCO (2012)).

Does the solution to the problems of drug quality in India lie in building a single agency at the union government and giving it high powers to investigate and punish? In thinking about the federal architecture of the Republic, there is merit in the separation envisaged in the 1940 Act. It is difficult for the union government to build an operational capability in any field, which is effective all across the country. The Constitution of India is imbued with federalism: India is not a unitary country ruled from New Delhi, but a union of states. The Constitution envisages a limited role for the union government: the establishment of standards for quality of goods to be transported from one State to another (See Entry 51 of List I of Schedule 7 of the Constitution).

Multiple legislative attempts have been made so far to create a centralised drug authority along the lines of these recommendations but without much success. In all these instances, the bills have been opposed by state manufacturers associations and state drug regulators. But going beyond these political economy constraints, there are concerns about this pathway to policy design. Simplistic centralisation, drawing on the existing text of the DC Act, will be problematic both on the grounds that decentralisation is a valuable approach and on the grounds that the present Act has flaws on incentive compatibility. The proposals for reform have not analyzed the incentive problems and ambiguity created by the 1940 legislation. The regulatory framework for pharmaceuticals in India suffers from multiple failures which need to be addressed, over and beyond the question of decentralisation. For example, you can check the inspection dates and reports of all drug manufacturing plants in the U.S (here), but we do not know when Indian manufacturing plants are inspected. There is no obligation on either the state or union governments to regularly inspect manufacturing plants, and the DC Act is the site where such obligations need to be imposed upon state agencies.

One possibility lies in reversing the focus of state-level agencies from factories to consumers of their state. E.g. if a factory makes drugs in Goa which are sold in Maharashtra, their quality characteristics would be the responsibility of the Maharashtra drugs regulator. Such a drugs regulator would achieve greater alignment with the interests of consumers in Maharashtra, and have a reduced conflict of interest with jobs and prosperity. However, there are difficulties in establishing the powers of the Maharashtra drugs regulator over a factory in Goa. There are also dangers of creating barriers to inter-state commerce.

How to reshape incentives

Better working of regulators. An extensive body of knowledge has developed in India, in the last decade, on the working of regulators and regulation. This literature has argued that the path to high state capacity in regulation lies in: Clarity of purpose, the role/composition/working of the board, formal processes for legislative/executive/judicial functions which are written into the law, reporting and accountability mechanisms, the budget process, and low powers of investigation and punishment (FSLRC 2015, Roy et. al. 2019, Kelkar and Shah 2019). This knowledge needs to be brought into a deeper transformation of the DC Act.

Transparency reforms that reshape incentives. A low cost intervention could be based on reputation costs and can usefully be placed at the level of the union government. There are multiple channels through which drug testing is taking place in India today. Whenever a drug is found to be substandard, the union government should obtain this information and upload that information to a publicly available repository along with the name of the manufacturer and the state in which it was manufactured. This will impose a cost on states which are lax on inspecting manufacturing facilities. The public will come to associate drugs from that state to be of poor quality and avoid them. Pharmaceutical firms will then face a market based penalty if they locate manufacturing facilities in states with lax regulatory regimes. On the other hand, states which set up good regulatory regimes will benefit from the positive publicity. Pharmaceutical manufacturers would gain respectability and may even command a price premium by locating their manufacturing facilities in states with a reputation for high inspection standards. Consequently, such states would gain from licensing fees, revenue, and jobs by establishing a good regulatory regime. Therefore, with a modest work program at the union government, naming and shaming bad actors and their state level regulators, we can reverse the incentive problem and create a virtuous cycle instead of the present race to the bottom.

Greater transparency would also kick off market discipline. Households would become more aware of quality characteristics associated with the brand names of various drugs and that would kick off greater pricing power in the hands of higher quality drugs. This process would, however, be curtailed by the extant system of price controls for drugs.

Conclusion

The current regulatory framework does not adequately define the objective, functions or powers of the de-facto regulators, the CDSCO and the SDRAs in the primary law or rules thereunder. This leads to creation of unaccountable regulators that have misaligned incentives. In this article, we have shown elements of a drug regulatory regime that are consistent with the federal vision of the Republic, and can effectively reshape the incentives of state level regulators. The union should be responsible for national public goods : drug quality standards, cGMP standards, randomised testing on a national scale, and release of this testing data. The laws that create state level regulators need to draw on modern Indian thinking about how regulators should be constructed. Put together, these reforms will modify the incentives of state level regulators. 

References and further reading

Arrow, 1963: Kenneth J. Arrow, Uncertainty and the welfare economics of medical care The American Economic Review, December 1963.

National Drug Survey Report, 2016: Ministry of Health and Family Welfare, Survey of extent of problems of spurious and not of standard quality drugs in the Country, 2014-16, Ministry of Health and Family Welfare.

Government of India, 2012: Department-related parliamentary standing committee on health and family welfare, 59th report on the functioning of the Central Drugs Standard Control Organisation (CDSCO) Rajya Sabha Secretariat, May 2012.

CAG, 2007 Report No. 20 of 2007 for the perriod ended March 2006 - Performance audit of Procurement of medicines and medical equipment Comptroller and Auditor General, 2007.

Khan et al. 2016: AN Khan, RK Khar and Malairaman Udayabanu, Quality and affordability of amoxicillin generic products: A patient concern Indian Journal of Pharmacy and Pharmaceutical Sciences, 2016.

Stanton et al, 2014: Cynthia Stanton et al, Accessibility and potency of uterotonic drugs purchased by simulated clients in four districts in India BMC Pregnancy and Childbirth, 2014.

Thakur and Reddy, 2016: Dinesh S. Thakur and Prashant Reddy T, A report on fixing India's broken drug regulatory framework Spicy-IP, June 2016.

Singh et al, 2020: Prachi Singh, Shamika Ravi and David Dam, Medicines in India: Accessibility, Affordability and Quality Brookings India, March 2020.

Krishnan, 2020: KP Krishnan, The three tiers of government in public health The Leap Blog, August 2020.

MoHFW, 2017: Ministry of Health and Family Welfare, Department of Health and Family Welfare, Notification G.S.R. 1337(E), CDSCO, Oct 2017.

Drugs Enquiry Committee, 1930-31: Government of India, Report of the Drugs Enquiry Committee, 1930-31.

Pharmaceutical Enquiry Committee, 1954: Ministry of Commerce and Industry, Report of the pharmaceutical enquiry committee,1954.

Hathi Committee, 1975: Ministry of Petroleum and Chemicals, Report of the Committee on Drugs and Pharmaceutical Industry, 1975.

Drug Policy, 1986: Government of India, Measures for Rationalisation, Quality Control and Growth of Drugs and; Pharmaceutical Industry In India, 1986.

Drug Policy, 1994: Government of India, Modification in Drug Policy, 1986, 1994.

FSLRC, Indian Financial Code, version 1.1, Ministry of Finance, 2015.

Vijay Kelkar and Ajay Shah, In Service of the Republic: The art and science of economic policy, Penguin Allen Lane, 2019.

Mashelkar Committee, 2003: Ministry of Health and Family Welfare, Report of the expert committee on a comprehensive examination of drug regulatory issues, including the problem of spurious drugs, 2003.

Shubho Roy, Ajay Shah, B. N. Srikrishna and Somasekhar Sundaresan, Building State capacity for regulation in India in "Regulation in India: Design, Capacity, Performance" edited by Devesh Kapur and Madhav Khosla. Oxford: Hart Publishing, April 2019.

Task force under the Chairmanship of Dr. Pronab Sen, 2005: Government of India, Task Force to Explore Options other than Price Control for Achieving the Objective of Making Available Life-saving Drugs at Reasonable Prices, 2005.

Jeffery and Santhosh M.R., 2009: Roger Jeffery and Santhosh M.R., Architecture of Drug Regulation in India - What are the Barriers to Regulatory Reform?, 2009.

 

The authors acknowledge the support of Thakur Foundation in this work, and valuable conversations with Dinesh Thakur and Prashant Reddy. All errors are ours.

What ails public procurement: an analysis of tender modifications in the pre-award process

by Shubho Roy and Anjali Sharma.

One source of low state capacity in India lies in the ability of the state to contract with private persons. The contracting process starts at procurement and runs till the final payment or dispute resolution. This process suffers from delays and disputes, to the point where managers in government feel uncertain about whether a given contract will work correctly, and private firms feel that doing business with the government is problematic. While difficulties in the last step (payment delays (link, link) and/or contract disputes (link, link) tend to loom large in the discussion, these are the final manifestations of weaknesses of the overall process of government contracting.

Research on government contracting is required in order to diagnose the sources of difficulty and design solutions. As an example, Lewis-Faupel et. al. (2016), analyse a database of 35,600 contracts awarded by the government under the Pradhan Mantri Gramin Sadak Yojana (PMGSY) to understand whether electronic procurement is associated with better procurement outcomes. They find some improvement in quality but not much impact on costs and delays. While state capacity in government contracting is an important problem, in the Indian context, there is a limited empirical literature on the subject. Due to difficulties with data, most studies rely either on small data sets (Goyal (2019)) or on the case study approach (Nag (2015)).

In this article we use a new dataset about the public procurement process in India to measure one aspect of the public procurement tender process: modifications made by the procuring entity to tender documents. We analyse the frequency and nature of these modifications and the possible impact these modifications might have on entities that participate in government tenders. We find that a large proportion of tenders that are published see modification and that government procurers make frequent modifications, especially in high value tenders. We offer some speculation on the causes and consequences of tender modifications.

Difficulties of measurement of the public procurement process

The Indian state buys through various entities and at various levels. Each government department or entity is responsible for following the General Financial Rules (GFR) and purchasing the goods and services it needs to meet its operating requirements. Most government departments or entities do not have a centralised purchasing office. Purchasing is, often, distributed geographically and by value. Small value purchases (relative to the entity's budget) are usually carried out by lower rung offices, while larger value purchases are carried by regional or even the national headquarters. Similarly, purchases of goods or services may be carried out at the location where it is required. For example, a contract to maintain an agency's local office may be advertised only in the city where the local office is situated. The fact that purchasing takes place at many locations makes it harder to assemble datasets about it.

The first step in the process is tendering for bids. Advertisements for government procurement called Notice Inviting Tenders (called NITs in this article) are typically published in local newspapers where the government entity is interested in procuring goods or services. If the proposed procurement is above a certain threshold, it is advertised in newspapers with a national circulation. Any attempt to get data from NITs would call for scanning hundreds of newspapers, every day.

A new opportunity for measurement

In 2011, a website called the Central Public Procurement Portal (CPPP) was established. From 2012 onwards, all central government organisations, including Central Public Sector Enterprises (CPSEs) and autonomous and statutory bodies under the Central government, are required to publish their tenders on the CPPP. Since then, in addition to publishing of tenders and awards information online a large part of the tendering process has also been automated using the portal. The mandate has evolved from e-publish to e-procure.

This website allows us to observe tenders from the date they are published till they are awarded. That is, from the time that the general public/interested bidders are informed that the government is interested in purchasing some goods or service or works, to the time that the government selects a supplier and awards the contract.

The problem of tender modification

In this article, we focus on one measure of state capability in the procurement process: modifications that are made to the NIT during the procurement process. When the government issues the NIT, interested vendors respond by submitting a bid document to the government. The NIT contains details about: (1) the item being procured (including details such as procurement category, technical specifications, bill of quantity, estimated value of procurement, delivery specifications and period of work), (2) qualifications for eligible bidders (financial and technical eligibility conditions), and (3) critical dates for the tender process (publishing date, submission date, opening date). Any modification that is made to the NIT after it is first published is a source of substantial cost on all entities interested in bidding for the government procurement. For instance, if the government modifies the qualification requirements for the bidder after publishing the NIT, those who originally qualified for the NIT may not qualify after the change. The effort taken to develop a bid is then wasted. Once tender modifications are endemic, at every stage in the process, bidders build in expectations about future fluctuations through tender modifications, and this reshapes their decisions to try to sell to the government and the price at which engagement with the government could be profitable.

The government often requires potential bidders to submit 'earnest money deposits' or EMD with their bids, which is a financial guarantee. Potential bidders need to take steps to tie up the funds required for this EMD. This typically involves an explicit cost, such as getting a line of credit from a bank, or an opportunity cost, such as keeping this money aside and not using it for any other purpose. If the period of the tender process is then extended by the government procurer, the period for which this cost has to be borne by the potential bidder also gets extended. In large value tenders, this cost can be substantial. This cost has to borne by all potential bidders. For instance, if six firms bid for a civil works tender where the EMD requirement is Rs.1 million, the aggregate cost to the economy is the cost of keeping Rs.6 million of capital aside till one supplier is selected. The selected supplier can internalise this cost in its bid. But for the five that are not selected, this cost does not have the offsetting benefit. It will influence the supplier's overall business, not just its current or future government engagement.

Similarly, modifications in the original technical specification of the goods and services in the NIT, may require interested bidders to substantially change their bid documents or even drop out of the process after incurring the costs of putting together the bid documents. If the date of the delivery of goods or services is modified, the ability of the supplier to manage its supply chain is hampered. Even when a firm feels confident that it will win a contract, unpredictable delays in tendering hamper efficiency in the production and supply process.

We find three mechanisms through which the NIT can be modified: (1) cancellation, (2) re-tendering, and (3) corrigenda. An outright cancellation is where the government procurer retracts its decision to purchase some goods or service. A re-tender is where a published NIT is withdrawn and replaced with a new NIT. This fresh NIT usually has substantially different provisions and requirements for the bidders. Corrigenda are issued when the government procurer wishes to make changes to the NIT that it deems as not so substantial as to warrant a re-tender, and instead amends certain terms of the NIT. Each of these three mechanisms of modifying NITs introduce uncertainty and costs for all potential bidders in the public procurement process.

These three mechanisms also make the tender process uncertain and costly for the government procurer. Procurers have to spend time and resources to prepare NIT documents, and frequent document changes add to this cost. For instance, if a tender is published and then cancelled, the effort and the resources go to waste. Similarly, frequent corrigenda also require time and resources to manage and monitor the change management process. If modifications to the NIT create disputes and complaints about probity from potential bidders, additional costs of investigation and enforcement alongside possible litigation arise. If frequent modifications to the NIT create an outcome of too few or no bidders, there can even be an extreme outcome of a failed procurement.

Given the uncertainty and costs that modifications to NIT can impose on both the government procurers and the bidders, we think of these three mechanisms for making changes as sources of errors in the tender lifecycle. Our dataset makes possible the measurement of the `modification rate' which is a metric of the friction in the procurement process.

A few entities account for most of the procurement

In November, 2020 there were more than 26,000 government procuring organisations registered on the CPPP. An average of 0.225 million tenders were published on the portal in FY 19 and FY 20 each. These tenders had an estimated value of Rs.8 trillion in each of these two years. We find that 11 procuring organisations within the Union government accounted for around 50% of the NITs by count and more than 80% of the NITs by value in both FY 18-19 and FY 19-10. Table 1 gives the details of the NITs published by these entities.

Table 1: The largest organisations by NIT count and value across FY 19 and FY 20

Organisation	Share in count (%)	Share in value (%)	Average tender size (Rs. million)
Airports Authority of India	2.0	1.8	32
Border Roads Organisation	2.1	0.7	12
Defence Research and Development Organisation	3.3	0.2	3
Delhi Metro Rail Corporation	0.2	1.2	188
E-in-C Branch of Military Engineer Services	24.8	2.8	4
Engineers India Ltd	0.5	31.4	2,163
Food Corporation of India	2.1	14.6	241
IHQ of MoD (Army)-(OSCC)	14.9	1.3	3
Ministry of Road Transport and Highways	1.1	8.5	263
National Highway and Infrastructure Development Corporation	0.1	2.0	893
National Highway Authority of India	0.9	19.6	795
Total	51.9	84.2	57

The modification rate is high

For each of these entities, we study all three mechanisms for making modifications to NITs: cancellation, re-tendering and corrigenda. For cancellation and re-tendering, we examine the data from the CPPP analytics dashboard over the two year period, i.e. FY 2018-19 and FY 2019-20.

For corrigenda, we find that there is no aggregate data available and it has to be hand collected at the level of each NIT. We focus on collecting corrigenda data for NITs published by the organisations in Table 1. The tenders for which we collect data are those that are currently not active. A tender that is not active is one which has either been awarded or cancelled. We focus on NITs published in the period of January to March, 2020. We pick this period for our analysis as it is before to the start of the Covid lockdown and allows us to study the corrigenda pattern in normal times. In this period, we record which NITs have no corrigenda and which NITs have at least one or more corrigenda. This analyse a set of 11,714 tenders across the 11 procuring organisations in Table 1 for the presence or absence of corrigenda.

Table 2 gives a summary of the modification rate for the three mechanisms. It shows that across the 11 procuring organisations, potential bidders face substantial uncertainty due to tender modifications. Since the corrigenda data is from a period different from the tender cancellation and re-tendering data, these three modification rates cannot be added up to arrive at the aggregate modification rate. However, it is clear that a large proportion of NITs see changes, and that issuing corrigenda is the most frequent mechanism through which NITs are changed. Corrigenda are issued for nearly 20% of the NITs that get published in our analysis period.

We may expect that organisations that do more tendering would develop greater organisational capability to do this well. We might expect that difficulties of contracting in the past would have triggered off feedback loops into organisation design that address these difficulties. However, across these 11 entities, we see the reverse relationship. This raises concerns about the extent to which difficulties faced by these organisation have generated feedback loops into modified organisation design and reduced tendering inefficiencies.

Table 2: Sources of modifications in NITs (in %)

Organisation	Re-tender	Cancellation	Corrigendum
	(FY 19 & FY 20)	(FY 19 & FY 20)	(Jan-Mar 2020)
Airports Authority of India	4.4	13.0	26.6
Border Roads Organisation	2.8	8.0	7.5
Defence Research and Development Organisation	4.4	7.0	18.3
Delhi Metro Rail Corporation	0.1	25.3	56.3
E-in-C Branch of Military Engineer Services	16.6	5.7	17.2
Engineers India Ltd	5.7	4.3	43.0
Food Corporation of India	1.4	7.3	35.6
IHQ of MoD (Army)-(OSCC)	6.0	10.4	10.5
Ministry of Road Transport and Highways	7.8	15.3	43.1
National Highway and Infrastructure Development Corporation	1.7	28.2	78.7
National Highway Authority of India	0.5	16.0	19.5
Total	10.5	8.1	19.5

Corrigenda are frequent

We turn to the nature and the frequency of the corrigenda being issued. For this, we identify a sample of active tenders with corrigenda for the entities listed in Table 1. Our analysis in Table 2 relied on tenders that were not active. However, on the CPPP website, corrigenda details are only available for tenders that are currently active. An active tender is one for which the tender lifecycle is yet to be completed. In this analysis, we identify 104 tenders. These tenders had 536 corrigenda issued against them when the sample was collected. Since, these are active tenders, more corrigenda may have been added to them subsequently.

While a cancellation terminates the procurement process and the re-tender starts it afresh, a corrigendum keeps the process running. The government procurer may make incremental changes to terms of the NIT with a corrigendum. For example, the government may add details to the technical specifications on the item being procured. Or it may change the date by which bids have to be submitted. Or it might demand additional documents from bidders as proof of eligibility. While the changes introduced by a single corrigendum may be small, over time, with many corrigenda, these changes may become substantial. So while corrigenda do not terminate the process, they introduce significant uncertainty in the procurement process.

Our analysis of 536 corrigenda across 104 tenders shows that changes by corrigenda are common. Table 3 presents some of the features of these corrigenda. We observe:

• On an aggregate basis, around five or more corrigenda are issued for every tender. This number varies across organisations, with entities like NHAI issuing as many as 30 corrigenda per tender.

• Around 60% of these corrigenda are issued to change the bidding dates. The remaining 40% are to make changes such as alterations to the technical specifications, the bill of quantity or for issuing more details or clarifications than were given in the original NIT document.

• There is a systematic under-estimation by procuring organisations of the time it will take to get bids. Across the 11 procuring organisations, the original estimate of the time it will take to receive bids was 16 days. However, through frequent issuance of corrigenda this period was extended to 81 days. And since these are active tenders, the bid period may increase even further.

• Some entities, like NHAI and NHIDC not just have more tenders with corrigenda but also more corrigenda per tender.

Table 3: Frequency and nature of corrigenda

	Avg. tender size (Rs. million)	Avg. corri-genda /tender (No.)	O/w Date change (%)	Original bid period (Avg. in Days)	Revised bid period (Avg. in Days)
Airports Authority of India	504.2	2.5	60	17	33
Border Roads Organisation	264.5	4	63	22	64
Defence Research and Development Organisation	9.7	1.6	63	18	26
Delhi Metro Rail Corporation	2,811.9	1.3	77	7	14
E-in-C Branch of Military Engineer Services	1.9	1.2	8	7	7
Engineers India Ltd	NA	3.3	33	16	31
Food Corporation of India	1.6	2	-	16	19
IHQ of MoD (Army)-(OSCC)	2.0	3.8	89	16	49
Ministry of Road Transport and Highways	1.9	1	100	7	7
National Highway and Infrastructure Development Corporation	1,561.9	4.4	20	10	24
National Highway Authority of India	7,620.3	29.7	67	44	584
Total	1,848.2	5.2	60	16	81

An illustration of changes through corrigenda for a complex project

Table 3 presents a subset of a larger set of parameters on which the original tender is modified through the corrigenda. We illustrate the extent to which original tenders can experience change using one example of a tender for a complex procurement: the NHAI Contract to upgrade a stretch of road at Panipat from two lanes to four lanes. The estimated value of the tender is Rs. 2.1 billion and the estimated period of work post award is 2 years. Potential bidders are required to submit an EMD of Rs. 21 million, 1% of the tender value.

Table 4 is a brief summary of the timeline of the NIT. As of the date of data extraction, the NIT has been amended 31 times, and has been active for 693 days as against the original bid period of 44 days.

Table 4: An example of frequent changes to a tender

Date	NIT change event	Time elapsed (in days)
10th Dec. 2018	Original NIT published on CPPP website. Original bid submission timeline: 23rd January, 2019. Bids to be opened on on 24th January, 2019.	-
11th Dec. 2018	NHAI publishes first corrigendum. This adds a new set of information about the procurement. Additional documents added to the NIT by NHAI.	1
21st Jan. 2019	NHAI issues second corrigendum two days before the final date of submitting bids. This corrigendum extends the submission timeline from 23rd January to 12th February, 2019.	42
11th Feb. 2019	One day prior to the submission deadline, bid submission date extended by 7 more days to 19th February, 2019.	63
13th Feb. 2019	NHAI publishes three corrigenda on a single date. They are titled "Revised Tender Documents", "Financial Proposal", and "Letter". After nearly two months of publication of original NIT, NHAI makes substantial changes to the planned procurement. Interested bidders would have to go back to the drawing board and redo their bids. On 13th February, the deadline to submit the bids was 19th February, so the bidders would have just six days to absorb all the changes, make fresh documents and submit them.	65
14th Feb. 2019	The NHAI publishes another corrigendum. This one contained replies to queries raised by the bidders. The clarifications may have required the bidders to redo their bids or make substantial changes.	66
18th Feb. 2019	One day before the bid submission deadline, NHAI changes the deadline for the third time. Now, the final date for submitting bids would be the 25th of February, 2019.	70
22nd Feb. 2019 to 19th Oct. 2020	The NHAI goes on to publish 25 more corrigenda, each extending the deadline for submitting bids by about two weeks. The bid submission timeline is now 17th November, 2020.	679
2nd Nov. 2020	We extract corrigendum data for this tender. The tender is still active so more corrigenda can be added.	693

Conclusion

In this article, we have used a novel dataset and discovered some new facts about the public procurement process.

While there is significant decentralisation in the procurement process across government entities, there is a possibility of improving public procurement by initiating reforms at a few entities that make up the bulk of procurement activity.

A large proportion of the tenders published are modified by the government procurer, either through a corrigendum or through re-tendering and tender cancellation. These tender modifications are taking place at a scale that increases uncertainty in the procurement process. There is a need for organisational reform within government organisations, so that better analysis is done before the first document is unveiled, so that the need for changes thereafter is minimum.

How the state contracts with private persons is one important element of the overall problem of state capacity. There is a need to build knowledge, and a literature, on this subject. This article constitutes one small element of that overall research program.

References

Sean Lewis-Faupel, Yusuf Neggers, Benjamin A. Olken and Rohini Pande (2016), Can Electronic Procurement Improve Infrastructure Provision? Evidence from Public Works in India and Indonesia, American Economic Journal: Economic Policy, Vol. 8, No. 3.

Bodhibrata Nag (2015), Combating Corruption in Indian Public Procurement - Some Exploratory Case Studies, The Journal of Institute of Public Enterprise, Vol. 38, No. 1&2.

Yugank Goyal (2019), How Governments Promote Monopolies: Public Procurement in India, American Journal of Economics and Sociology, Vol. 78, No. 5.

Anjali Sharma is a researcher with the Finance Research Group. Shubho Roy is a doctoral candidate at the University of Chicago. The authors would like to thank Susan Thomas for discussions and useful inputs and Charmi Mehta and Sejal Gajjar for assistance with collecting the data.

If school fee regulation had to be done, how can it be done better?

by Bhuvana Anand and Shubho Roy.

In the Indian policy discourse, there is a strand of thought which sees schools as aggressors and parents as victims in a fight over school fees. The National Education Policy 2020 for example is concerned with “...the commercialization and economic exploitation of parents by many for-profit private schools...”. The COVID-19 pandemic has increased disputes between parents and schools over fees. Some parents are demanding a moratorium on fees. Some state governments are insisting that schools continue paying teachers. The managers of schools are struggling to balance these demands.

It is useful to take two steps back and ask: Is there a role for state power in controlling prices? In a market economy, market prices coordinate supply and demand, resulting in optimum resource allocation. Any state manipulation of the market price, such as a price cap, distorts this process and hampers mutually beneficial exchanges (Coyne and Coyne 2015). Price caps in general lead to poor outcomes. We see reduced investments and innovation (Ross 1983), collusion amongst suppliers (Grayson 1974, Knittel and Stango 2003), and regulatory capture. In the school education section in India, there is some evidence that implementing fee caps results in perverse outcomes (Agarwal et al. 2019).

Government control of prices has gone out of fashion in some areas (cement, steel) but this continues to be mainstream thinking in fields like education policy in India. Nine states and union territories have legislation that establishes fee regulation for private schools. Other states, such as Delhi, use executive power to regulate school fees. States with fee regulations impose absolute caps on fees or limit annual hikes.

In a previous article (Anand and Roy 2020), we discussed regulatory capture by teachers in fee setting. In this article, we discuss the hold-out problems that fee regulation creates. The current approach to fee regulation gives parents the power to hold up fee hikes. The exception to this is Maharashtra Educational Institutions (Regulation of Fee) Act, 2011. The Maharashtra law reduces the chances of a single parent holding up a fee hike. If there was a desire to have price controls in elementary education, the Maharashtra law gives us a better method for implementation as compared with what has been done elsewhere.

Fee regulation and the power of parents

Multiple states in India allow parents to challenge the decision of school management to hike school fees. This is, in and of itself, an awkward arrangement: Customers will always be biased in favour of lower prices. For example, if customers could hold up price hikes by security guards, they would always do so. Similarly, if exporters are given power on government control of the exchange rate, they will always favour depreciation.

Under the conventional arrangements, if parents find that schools have hiked fees 'unreasonably', they can complain to district/divisional fee regulatory committees. These committees are composed of parents, school representatives and government officials. Most laws characterise such action as raising a “grievance” or a “complaint” and require quasi-judicial proceedings to determine fees.

In Chandigarh, students, parents or guardians can register “complaints” with the regulatory body against schools for charging 'excessive' fees. Any hike beyond 8% of previous year’s fees, or attempting to profit (Section 7) is considered excessive.

In Bihar, schools may increase fees up to 7% over the previous year’s fee. Any increase beyond the 7% cap, requires the approval of a fee-regulatory committee. Any parent can file “objections” to the committee in case a school charges over the fee cap (Section 5).

Uttar Pradesh allows schools to hike fees in proportion to teacher salaries. However fees cannot be increased by more than CPI + 5% of previous year’s fees. Parents may complain to the district fee regulatory committee in cases where the school does not address their “objections” (Section 8).

In each of these states, an individual parent can start legal proceedings against the school management on the question of fee hikes. In the legal proceedings, the district fee regulatory committee has the power to question the fee increase. The school management has to justify why the fee increase is legitimate. If the district fee regulatory committee is not satisfied, it may impose fines on the school. In Bihar and Uttar Pradesh, if a school fails to pay fines on time or repeats offences, the committee may recommend revoking recognition which will lead to the school shutting down. Managers of schools are potentially subject to this legal process, the corresponding legal risk, and the cost of time and resources required to acquire political capital ahead of time to navigate these situations at the district fee regulatory committee as and when they might arise in the future.

In most states with fee regulation, one parent is capable of holding the entire school at ransom for raising fees. A single parent can engage in what is called a hold-out (Epstein 1993). Schools may need to hike fees to meet operational expenses (teacher salaries), comply with regulations (setting up CCTV cameras) and for infrastructure development (ed-tech). A bulk of parents may be willing to raise fees to meet these costs and improve the quality of education for their children. But the law allows a single parent to make it costly for the school to raise prices.

Maharashtra

Maharashtra regulates fee dispute with an added nuance: it imposes a minimum threshold that parents have to meet before raising a complaint against schools.

Schools in Maharashtra can hike fees only after approval from a school-level committee. This committee is composed of parents, teachers, and school management. Where parents disagree with the decision of the school-level committee, they may appeal to the divisional fee regulatory committee (Section 6). However, the Act does not give the power to an individual parent to raise a legal dispute. The Act creates a category called an ‘aggrieved parents group’ thus:

"aggrieved parents group" means the group of parents of the children, not be less than 25 per cent of the total parents of the children of affected standard or school, as the case may be, who are aggrieved by any decision under the Act (Section 2).

In Maharashtra, parents can challenge the decision of the school-level committee only if 25% (or more) of the parents affected by the hike come together to register a dispute. By raising the bar to 25% of affected parents, the Maharashtra law makes it difficult for one parent to stop the school from ensuring financial viability or improving services.

In the modern age of mobile phones, it may not be hard to solve coordination problems and muster a quarter of the parents as a coalition. The basic problem remains: should customers be given access to a non-market mechanism to influence prices? But this appears better than giving each parent the power to initiate a legal process.

The way forward

The literature shows that school education can be sticky; moving schools frequently can have social, emotional and learning consequences (see here, and here). Parents need to plan household finances for a 5-15 year horizon. Schools, on the other hand, want autonomy to run, expand and modify their offering, and to be able to respond to environmental demands, unforeseen circumstances, and competition from other schools. Parents want to remove consumption volatility in their purchase of vegetables, this does not mean we use state power to prevent price changes in vegetables. If parents wanted to eliminate price uncertainty enough, the market economy might find solutions on its own: e.g. perhaps schools could offer price lock-ins for a group of years at a time.

The present configuration of state power in fee regulation is biased against the school management. The law ignores the possibility that parents have no interest in the long term financial viability of a school. Once their children graduate from a school, they have no interest in whether the school survives. On the other hand, the management, which may run the school for decades (more than a century in some cases), has to consider the long term. By allowing one parent to hold up fee hikes, such laws hamper the long-term financial viability of schools, and create a bias in favour of school promoters who are politically well connected.

The rational response to a disagreement over fees would be parents shifting out when the school raises fees above what they are willing to pay. The Indian state, however, has created artificial constraints on the supply of schools through multiple laws (Singh and Sudhakar 2020). Parents have limited options to choose from for their child’s education.

The foundational mistake in Indian education policy is imposing artificial restrictions on the entry of new schools. The Indian state attempts to respond to the consequences of this bad idea by introducing other bad ideas like fee regulation and involving parents and teachers in school fee setting. This does not solve fee hike disputes and instead introduces new problems. We need to address the core problem head-on and not entangle ourselves into more complicated laws and administrative mechanisms to address them.

References

Controls are not the answer, Jackson C. Grayson, International Economic Review Vol. 21, Issue No. 2, 1974.

How are private school fees regulated?, Ritika Agarwal, Atreyi Bhaumik, Adit Shankar and Anindya Tomar, in Anatomy of K-12 Governance in India, Centre for Civil Society, October 2019.

Holdouts, Externalities, and the Single Owner: One More Salute to Ronald Coase, Richard A. Epstein, The Journal of Law & Economics, John M. Olin Centennial Conference in Law and Economics at the University of Chicago, April 1993.

Moving Matters: The Causal Effect of Moving Schools on Student Performance, Amy Ellen Schwartz, Leanna Stiefel and Sarah A. Cordes, Association for Education Finance and Policy, 2017.

Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards, Christopher R. Knittel and Victor Stango, The American Economic Review Vol. 93, Issue No. 5, December 2003.

Pricing education: An example from Uttar Pradesh, Bhuvana Anand and Shubho Roy, The Leap Blog, July 2020.

Restrictions on for-profit education in India, Akash Pratap Singh and Tarini Sudhakar, Latest Analysis, Centre for Civil Society, May 2020.

Switching Schools: Reconsidering the Relationship Between School Mobility and High School Dropout, Joseph Gasper, Stefanie DeLuca and Angela Estacion, American Educational Research Journal, 2012.

The economics of price controls, Christopher J Coyne and Rachel L. Coyne, Chap. 2 in Flaws and Ceilings: Price Controls and the Damage They Cause, Institute of Economic Affairs, 2015.

The Private Schooling Phenomenon in India: A Review, Geeta Gandhi Kingdon, The Journal of Development Studies, 2020.

The Price of Education, Ernest Ross, Foundation for Economic Education, 1983.

Bhuvana Anand is a researcher at Centre for Civil Society and Shubho Roy is a researcher at the University of Chicago. The authors thank Tarini Sudhakar at Centre for Civil Society for research support.

Does India need a public procurement law?

by Shubho Roy and Diya Uday.

One of the proposed solutions to India’s public procurement problems is new legislation to govern how the government buys goods and services from the private sector. Will a law help India? We connect two data sources to test this idea. Instead of a new law, monitoring public procurement, identifying failures, and then building state capacity may be a better solution. Legislation may not be the silver bullet for our problems.

In India, legislation is often viewed as a panacea when faced with policy problems. Whether it is bankruptcy, privacy, warehousing, or medical testing in private laboratories; the government is quick to propose a new law to solve problems. The same approach has been attempted to address the issues of public procurement. In 2012, the government introduced the Public Procurement Bill with the stated reason as:

“Major countries of the world have well codified legal provisions governing public procurement.” (Statement of Objects and Reasons).

An international organisation also prescribed this solution for India. In 2013, the United Nations Office on Drugs and Crime recommended that India should enact the Public Procurement Bill. According to the UN agency, the bill would improve public procurement and reduce corruption. The bill lapsed, and the government changed. However, the idea that a law is needed persists. The present government had plans for introducing similar legislation. In the 2015-16 budget speech, the finance minister stated:

“Malfeasance in public procurement can perhaps be contained by having a procurement law and an institutional structure consistent with the UNCITRAL model. I believe Parliament needs to take a view soon on whether we need a procurement law, and if so, what shape it should take.” (Paragraph 72)

The present government is yet to introduce a bill.

It seems intuitive that a better law should improve public procurement. More transparent systems that make procurement information widely accessible and encourage more firms to participate, deter kickbacks and other forms of fraud and corruption (Ware et al.). Countries with legal provisions which discourage governments from closing bids to select vendors or establish an independent dispute resolution mechanism seem to have less bribery of public officials (Knack et al.). However, better laws may not necessarily result in better outcomes (Sukhtankar and Vaishnav and Bosio et al.). In this article, we look at the correlation between the state of the procurement law in a country and the outcomes from public procurement.

Parliamentary laws and corruption outcomes

The first step towards measuring the outcome is to agree on metrics of the quality of public procurement. The quality of a procurement law/system may be determined by multiple variables such as the conservation of public resources, purchase of better products, timely payment to vendors and integrity. However, we do not have data to measure these. We suggest an interesting proxy that we do observe: corruption perception. The predominant form of corruption, in most countries, is corruption in public procurement. Therefore, one of the primary objectives of making a public procurement law is to reduce corruption. We hypothesise:

If adopting a law improves public procurement, we should see lower corruption in those countries.

To examine this evidence, we look at two databases: Benchmarking Public Procurement and, Corruption Perception Index.

1. World Bank’s 2017 Benchmarking Public Procurement Database(BPP). This is a comparative evaluation of the legal systems governing public procurement in 180 countries (World Bank BPP, 2017). Experts analyse the laws governing public procurement on eight criteria. The criteria start from the preparation before a tender is published and extend to dispute resolution and complaint management systems. Economies with more extensive legal frameworks score higher on the BPP than countries with less comprehensive legal frameworks for public procurement. In this sense, the BPP measures the extent to which a country has accepted and implemented the idea that a better law for public procurement is desirable.
   
2. Transparency International’s Corruption Perception Index (CPI). Transparency International scores jurisdictions based on the perception of corruption in a country’s public sector. It is based on opinion polls and surveys across countries. Low scores mean higher corruption and higher scores imply high government integrity.

We look at the correlation between the World Bank’s BPP score and the Corruption Perception Index. We collected BPP data for 2017 and the CPI data for 2019 (latest years). We narrowed down the countries present in both databases, which yields information about 163 of 180 countries (91.12% of the datasets).

Findings

As Figure 1 shows, We find no correlation between the BPP scores and the CPI scores of countries. It is particularly interesting to look at the countries where the two run in different directions. Italy and Kazakhstan have very similar BPP Scores (79.33 and 79.50) but very different CPI Scores (34 and 53). China has a much higher BPP score than Hong Kong (74.66 against 48.66), but in CPI scores, China does significantly worse than Hong Kong (41 and 76). India (61.50), Australia (60.83), and Singapore (60.50) have very similar BPP Scores, but very different CPI scores (41, 77, and 85, respectively). Russia is 14 points ahead of the United Kingdom in the BPP but significantly behind on the CPI by 49 points.

Figure 1:Quality of Law and Corruption

Similarly, as Table 1 shows, the Bahamas, Hong Kong and Barbados rank quite high on the CPI (little corruption) but do quite poorly on BPP ranks. On the other hand, Kazakhstan, Congo and Yemen have high corruption (low CPI score) but score higher on the BPP.

Table 1: Comparing Rankings

Country	CPI score	BPP score	CPI Rank	BPP Rank
Barbados	62	40.20	30	157
Hong Kong	76	48.66	16	141
Bahamas	64	44.66	29	151
Kazakhstan	34	79.50	104	2
Congo	18	64.33	155	43
Yemen	15	64.66	162	41

This evidence is consistent with the arguments by Sukhtankar and Vaishnav and Bosio et al. that better laws do not correlate with better outcomes in public procurement.

What might be going on?

Why is there no correlation between corruption and quality of public procurement laws? Two reasons may explain our observations: isomorphic mimicry or imperfect measurement.

Isomorphic mimicry: ‘Isomorphic mimicry’ is the ability of organisations to sustain legitimacy through the imitation of the forms of modern institutions, but without functionality (Andrews et al.). Countries may adopt laws and institutions which are considered global best practices. However, the laws are not enforced, and the institutions are ineffective. One of the reasons for the observed results could be that countries are adopting law intending to score high on an international indicator without the requisite state capacity or active institutions to implement such a law. While this creates the facade of a sound legal system, the on-ground reality is quite different. International aid agencies sometimes require that a country have a sound legal system for public procurement, where superficial measures such as passing a law are considered sufficient. A government trying to attract international donors might pass `modern’ legislation to showcase or appeal to donors, foreign academics, journalists or NGOs. However, the government may have no intention or capacity to implement the law.

Imperfections in the BPP: The BPP as a measure appears to have a sensitivity problem. The OECD has overarching public procurement guidelines with which all members have to comply. We should, therefore, see OECD countries cluster towards the higher end of the CPI and BPP scores. While this holds for CPI scores, it does not, for BPP. BPP scores of OECD show much more variance than their CPI scores. The fact that OECD countries have adopted a common framework on public procurement appears to be not captured by the BPP measurement system.

The BPP may fail in measuring the quality of procurement laws in a country because of invisible infrastructure. Invisible infrastructure is the superset of general laws, institutions and accountability arrangements in the country which are crucial for determining the success of specific policy intervention (Kelkar and Shah). A common law country like the UK may have binding precedents setting transparency and accountability standards but may not have legislation. Constitutional provisions governing equality before the law or requiring due process apply to government procurement. Freedom of information laws may bring about transparency generally and may apply to procurements. Governments may have general laws which require government agencies to appoint an ombudsman or inspector general. Such offices may take active steps to reduce corruption and settle procurement disputes. However, such rules are not captured in a measurement system like the BPP as it is limited to government procurement legislation (Bosio et al.) The elements of invisible infrastructure may suffice, in itself, to generate high-quality procurement absent a law, and invisible infrastructure may matter in shaping the consequences of any procurement law. In either event, by focusing on the procurement law we tend to not notice the binding constraint, the invisible infrastructure.

Looking ahead

Before making laws, we need to identify the causes of the poor performance of public procurement in India. We have a history of failing in implementation and monitoring in India. Both require robust, invisible infrastructure which is missing. The first step is to build the load-bearing capacity of the procurement system. Pritchett et al. point out that premature load-bearing arising from unrealistic expectations about the level and rate of improvement of the ability of a state lead to stresses and demands on systems that cause capability to weaken if not collapse.

Two websites which aggregate procurement across government departments may provide clues on how to improve state capacity. The Government E-Marketplace (GEM) and the Central Procurement Portal (CPPP), operated by the central government, aggregate and standardise procurement notices across various government bodies. These websites aid the procurement process in many ways. Tenders are made public on a common portal instead of being scattered across multiple publication sources. This increases competition as bidders are less likely to miss a tender because they do not buy a specific newspaper. The method of tender publications is standardised, and this helps bidders apply for tenders with lesser effort. Moving away from paper-based systems reduces the chance of bids getting lost.

The more significant benefit from these websites is that they allow the government to measure/monitor the quality of the procurement process (outcome measurement) across multiple variables. This is better than measuring the quality of some legislation (input measurement) of BPP. The CPPP website publishes 16 performance indicators derived from the transactions carried out on the site. For instance, in 2019-20, 23% of the open tenders were not awarded within the bid-validity period. i.e. the buyer did not finalise the transaction in time. Sadly, most of the performance indicators tracked by the CPPP website, since 2016, show no discernable trends that procurement performance is improving.

Other jurisdictions have implemented interventions, similar to the performance indicators in the CPPP website, to improve public procurement system. The Government Accountability Office of the U.S. publishes performance reports on government procurement (which does worse than Kazakhstan on the BPP Score). Instead of legislating, India may benefit from looking at the performance indicators on the CPPP website and working on improving them every year.

We should not be lured by silver bullets, such as enacting legislation. While legislation has a role to play in governance, the evidence indicates that it is not a panacea for our problems. Some countries with good outcomes do not necessarily have an extensive legal framework for public procurement. Some nations with comprehensive laws continue to demonstrate poor results. The pathway to a better procurement system perhaps lies in detailed research that integrates public administration, law and public economics.

References

Erica Bosio, Simeon Djankov, Edward L. Glaeser, Andrei Shleifer, Public Procurement in Law and Practice. National Bureau of Economic Research, May 2020

Matt Andrews, Lant Pritchett, Michael Woolcock, Looking Like a State: Techniques of Persistent Failure in State Capability for Implementation, CID Working Paper No. 239 June 2012.

OECD, OECD Foreign Bribery Report: An Analysis of the Crime of Bribery of Foreign Public Officials, OECD Publishing, 2014

Sandip Sukhtankar, Milan Vaishnav, Corruption in India: Bridging Research Evidence and Policy Options, India Policy Forum 2014-15: Volume 11, April 2015

Stephen Knack, Nataliya Biletska, Kanishka Kacker, Deterring Kickbacks and Encouraging Entry in Public Procurement Markets, Development Research Group, World Bank, May 2017

Tina Søreide, Corruption in public procurement Causes, consequences and cures, Chr. Michelsen Institute of Development Studies and Human Rights, 2002

United Nations Office on Drugs and Crime, India: Probity in Public Procurement, 2013

Vijay Kelkar, Ajay Shah, In Service of the Republic: The Art and Science of Economic Policy, 2019

Ware, Glenn T., Shaun Moss, J. Edgardo Campos, and Gregory P. Noone, Corruption in Public Procurement: A Perennial Challenge in The Many Faces of Corruption Tracking Vulnerabilities at the Sector Level - Handbook of Global Research and Practice in Corruption, Washington, DC, The International Bank for Reconstruction and Development, 2007

World Bank, Benchmarking Public Procurement - Assessing Public Procurement Regulatory Systems in 180 Economies, World Bank Group, 2017

Shubho Roy is a researcher at the University of Chicago. Diya Uday is a senior researcher at the Finance Research Group, Mumbai and visiting faculty at the Tata Institute of Social Science, Mumbai.

Pricing education: An example from Uttar Pradesh

by Bhuvana Anand and Shubho Roy.

School shutdowns across the country have sparked disagreements between parents and schools about fees. Parents filed a plea in the Supreme Court seeking more time to pay schools due to COVID-19. The Supreme Court refused to hear the petition, arguing that it had to be tackled by the executive first. Schools need money to pay their staff, including teachers, and are threatening to cut off access to online classes in case of non-payment (here, here and here). Both parties have approached High Courts in at least 15 states for a ruling (for example, in West Bengal, Madhya Pradesh, and Gujarat).

COVID-19 has only exacerbated an old fight. School fees have been an oft litigated issue in India. Courts have pronounced judgements against capitation fees, profiteering and fee hikes for over two decades (See 1992, 1993, 2002, 2004 and 2019). Several states also enacted laws to regulate school fees. Such price regulations are a poor way of addressing the underlying issue of market failure in school education. The primary reason for fee disputes with parents is that the entry of new schools in India is severely restricted due to a cumbersome regulatory environment.

In this article, we discuss the fee regulation architecture across India. In particular, we focus on the legislative drafting and implementation of the UP Self-Financed Independent Schools (Fee Regulation) Act, 2018.

Regulation of school fees in India

Nine states and union territories in India have stand-alone Acts regulating the collection of fees. These Acts were passed between 2009 and 2019 and mandate a Fee Regulatory Committee to hear fee-related complaints and proposals.

Bihar limits fee hikes to 7% over the previous year’s fee. Schools which wish to increase charges beyond 7%, need to seek approval from a divisional fee regulatory committee. These committees are usually composed of parents, private school representatives, and government officials.

Gujarat law empowers the district fee regulatory committees to determine fees for schools. However, schools charging fees below a specified amount are exempt from the regulation.

Rajasthan and Maharashtra require a school-level committee to approve fee hikes. The school-level is composed of representatives from school management, teachers and parents. If the school-level committee fails to agree on the increase, the school can approach a divisional fee regulatory committee.

The Maharashtra law adds a nuance, missing in Rajasthan. Schools can choose between a block declaration or capped revision. During admission, schools can declare fees for a block of classes (for example, grade 1 to 5). Or, a school can revise fees subject to a cap. Under this option, costs cannot be raised more than 15%, once every two years. In case of unforeseen circumstances, schools may increase fees beyond this cap. But, such increases, above the cap, has to be approved by either 76% of the parents, or the school-level committee. The Act also allows for management and parents (not less than 25% of parents in the affected standard/school) aggrieved by the decision of the school-level Committee to approach the divisional fee regulatory committee.

Other states pass orders and notifications to regulate fees but struggle with implementation. In Delhi, districts are supposed to set up Fee Anomaly Committees. But these are either not constituted or defunct, so parents raise their complaints to the Directorate of Education (Agarwal et al. 2019).

Uttar Pradesh

Uttar Pradesh enacted the UP Self-Financed Independent Schools (Fee Regulation) Act, 2018 to control fees for schools. Sadly, the law suffers from two drafting problems: a contradiction in fee fixation provisions, and the lack of clear instructions on the price index to use.

Section 3(1) of the law lays down the heads which the school can take into consideration. It is the governing principle of the law on fixing school fees. It reads:

"A recognised School shall determine its fee structure under subsections (1) and (2) of Section 4 … commensurate to, inter alia, meeting its operational expenses, providing for augmentation of facilities and expansion of infrastructure and for providing facilities to the students, to generate reasonable surplus to be utilised for development of educational purposes including establishment of a new branch or a new school under the management of the same eligible educational entity;"

The law is refreshingly pro-school in this provision. It recognises that a fee increase is not just to meet operational expenses. Schools have to augment facilities, expand infrastructure (build new classrooms, maybe a swimming pool), provide facilities to students. The law also recognises that a school must be allowed to generate some reasonable surplus and may wish to expand by opening new branches or schools. It is a surprisingly frank and forward-looking recognition of the myriad expenses that a school faces. In India, where price controls laws rarely recognise the costs that the provider has to undertake, the provision stands out as one recognising the genuine needs of the school.

Section 3(1) states that the process of determining fees is laid down in Sections 4(1) and 4(2).

Section 4(1) completely undermines the approach of Section 3(1). It reads:

“A recognised school may revise its fee annually for its existing students by itself for each grade/class/level of school equivalent to average percentage per capita increase of monthly salary of teaching staff of previous year, but the fee increase shall not exceed latest available yearly percentage increase in consumer price index [CPI] + five per cent of the fee realised from the student;”

(emphasis added)

Gone are the grounds recognised in Section 3. Section 4(1) reduces all those grounds to only one: teacher salaries. No more can schools increase fees to pay for expanding infrastructure, providing facilities, opening branches or generating a surplus. The only amount that the school can raise fees is the increase in salaries. If a school does not increase teacher salaries but wants to build a new auditorium, it is out of luck. Buying a new computer lab? Section 4(1) will not allow you to raise money for it. School’s financial reserves are low? Section 4(1) has no solution for management. The only criteria for school fees increase are teacher salaries. All the good ideas in Section 3 have been washed away by the restrictions in Section 4.

The pegging of fee increases to teacher salary is indicative of a deeper problem in Indian education: teacher interest domination. Too often, laws designed for education end up protecting teachers. For example, the only performance measure that the Right to Education Act enforces in the parent legislation itself is the teacher-to-student ratio, even when the evidence of the effectiveness of this measure is weak. This one measure is baked into the Parliamentary law. All other performance measures are left to be decided by the government through subordinate legislation.

The second problem in the UP Act arises from the formula under Section 4(1). The law provides a cap on the fee hike. Fee hikes have to be less than CPI + 5% per year. The drafters have left out defining CPI. In India, there are two bodies which provide five types of consumer price indexes. The Labour Bureau publishes two indexes, (CPI industrial workers and rural workers) and the Ministry of Statistics publishes three indexes (Rural, Urban, and Combined). Narrowing down to the applicable index is not the end of your problems. These indexes are published monthly, while the fee increase is supposed to happen once a year. The law is silent about which CPI to use and how to convert the monthly numbers into a yearly value. Predictably, different district fee regulatory committees have come up with different values for the maximum fee hike. Gautam Budh Nagar calculated the maximum fee hike as 7.88% (5+2.88), and Varanasi calculated the same as 8.71% (5+3.71).

This problem could have been solved by clearly cross-referencing to the specific index that the schools should use. Since the value of the index does not change across districts, there is no need for each district committee to decide the CPI. This function could have been done at the state level itself and saved schools from the confusion.

Conclusion

Why is the UP law drafted so poorly? The underlying reason is that the legislators have misidentified the problem. The best way to regulate prices is through a market mechanism. Parents should have a wide choice of schools at different price points. Sadly, we do not have that in India. Regulatory burdens imposed on schools reduce the supply of private schools. State governments control the availability of land in urban areas, mandate minimum salaries for teachers, and impose many requirements on schools through state school laws and the Right to Education Act. The consequence of these laws is two-fold: it raises the costs of running a school and makes it difficult to set up new schools. In turn, the existing schools raise fees. The entry barrier to new schools ensures that they do not face any competitive pressure to reduce fees.

Instead of encouraging competition in private schooling, the laws put administrative controls over the fee setting mechanism. An administrative price-setting usually misprices the fees. A government committee is in no better position in deciding what the price of education in a school should be. Even the legislature is unable to articulate any principles by which such committees should determine fees. The U.P. law starts with a wide range of costs that a school may incur. But when it comes to the implementation clause, it narrows down to just teacher salaries.

The price control laws are trying to solve a problem which should not exist in the first place. It would be much better if we tried to identify and dismantle the entry barriers to setting up low-cost private schools in the first place and encourage competition.

References

Does Class Size Matter?, Ronald G. Ehrenberg, Dominic J. Brewer, Adam Gamoran and J. Douglas Willms, Scientific American, November 2001.

How are private school fees regulated?, Ritika Agarwal, Atreyi Bhaumik, Adit Shankar and Anindya Tomar, in Anatomy of K-12 Governance in India, Centre for Civil Society, October 2019.

Bhuvana Anand is a researcher at Centre for Civil Society and Shubho Roy is a researcher at the University of Chicago. The authors thank Tarini Sudhakar at Centre for Civil Society for research support.