Implications of free transmission of renewable energy

by Akshay Jaitly and Ajay Shah.

Inter-state electricity transmission

Transporting electricity across long distances requires investments in the transmission system where high voltages are used to minimise losses. An emphasis on renewable electricity generation requires significant new transmission capacity to transport electricity from the natural locations for generation (e.g. Himalayan hydel, or SPV in Rajasthan) to the centres of consumption in the peninsula. In an announcement in December 2021, 23 inter-state transmission system (ISTS) projects have been initiated by the government, at a cost of Rs.159 billion.

As with other elements of the electricity system, investments in transmission would ideally be done through the price system, where the price for transmission is discovered on a market. Once the price system is in motion, present or anticipated high prices would create incentives for investment in transmission. The structure of the Indian electricity market does not permit this: as this announcement of 23 projects shows, we effectively have a centrally planned system where officials control the resource allocation, and only bring in private firms as vendors playing a defined role in a centrally planned system. Transmission investments and prices are largely government controlled, and not discovered through the price system, which always involves misallocation of resources.

In the remainder of this article, we discuss the outlook on ISTS and its implications for renewable energy. To summarise ISTS, it is an electricity grid that runs across the entire country. It connects to end-points who are either generators or users. There is a process, and there are rules and capacity constraints, which determine whether a given person gets on to ISTS. Once a person is physically on ISTS, they are directly buying and selling from others on ISTS; these transactions are immune to the policies of the local discom. There is one constraint: the buyer and seller on ISTS cannot be within the same state.

Special prices for transmission of renewables

The CERC (Sharing of Inter-State Transmission Charges and Losses) Regulations, 2010 had some remarkable clauses: 7(u) and 7(v) established that for a period of three years, solar generation would be charged zero rates for transmission charges or losses. This suggested a world where a solar generator could sell to any buyer in India with no friction from transportation. These zero charges have been expanded and carried forward to cover all renewable energy commissioned till 30 June 2025. For renewable energy projects commissioned prior to 30 June 2025, for a period of 25 years, there will be no charge for transmission. For projects commissioned from 30 June 2025 onwards, the charges come back in gradually, to a level of 100% of the normal charge for projects commissioned after 1 July 2028. This creates a special deal for any renewables project that gets to the finish date by 30 June 2025.

Open access through discoms: In the present legal system, discoms are supposed to give out ‘open access’, where a buyer and seller of electricity are able to privately negotiate transactions, and have guaranteed access to the transportation services of the discom for the transport or electricity within or outside the state. In practice, this de jure situation does not map out into the de facto: many discoms refuse to provide or otherwise impede these services, as they would like to continue overcharging their best customers.

Open access through ISTS: Transmission across the state border through the ISTS seems to offer an increasingly viable way out of this barrier. It appears that when a renewables generator connected to the ISTS network sells to a third party outside the state who is also connected to the ISTS network through a PPA, neither of the two discoms can impede the transaction. This has been possible for a while, but the expansion of ISTS mentioned above will make such transactions more accessible to a wider range of sellers and buyers.

We could thus have generator $A$ in Dahanu (at the north end of Maharashtra) who is unable to sell to a buyer $B$ in Palghar (40 kilometres away), but she would be able to sell to a buyer $C$ who is across the state border in Vapi (at the south end of Gujarat, 70 kilometres away), assuming that connectivity to ISTS exists.

Implications

There are two kinds of ‘free’ in the title of this article. One refers to transportation of electricity without paying for it. Another refers to economic freedom: rational transactions under open access which are impeded and disincentivised within and across states (between a renewables generator and a buyer) and those using ISTS that are seemingly encouraged across the state border. What are the implications of these two kinds of free coming together?

There is no free lunch. When transportation is subsidised for renewables, someone has to pay for this. This can either be an explicit on-budget subsidy, or it can be a within-sector subsidy. In the Indian case, when government-owned transmission utilities undercharge transmission for renewables, this comes with higher prices for fossil fuel generators. Such tax-and-subsidy policies normally require sophisticated public finance analysis, which is not visible, thereby elevating the risk of unanticipated effects.

The ability of renewables generators to frictionlessly transport electricity across state borders is likely to significantly impact upon the distorted pricing being run by discoms. The paying customers (C&I) in any state have a strong incentive to cut the discom out of the transaction and directly buy from any generator. In addition, some C&I customers have ESG equity investors, and need to demonstrate they are using renewable energy. Both imperatives create incentives for C&I customers in each state to find a renewables generator somewhere in India (but not in their own state, where ISTS transactions are absent), and buy directly, thus avoiding the exaggerated prices charged by the discom and freeing themselves from their often unreliable service.

We will have situations where a Gujarat renewables generator will sell to a Maharashtra C&I customer, while at the same time a Maharashtra renewables generator will sell to a Gujarat C&I customer. At an engineering level, transmission between two states would only take place in one direction, and the two streams would get netted out. This would yield the efficient outcome where in each state, buyers and sellers achieve higher economic freedom, and are less controlled by the discom.

Zero or low pricing for transmission of renewables has been around for a while, but earlier there were capacity constraints in inter-state transmission which was holding back this process. The substantial expansion of the ISTS described above would help translate the threat of exit by an increasing number of C&I users into a reality. The rise of ESG investment is also relatively recent. We would hence hazard a guess that these transactions will become more important by 2023 and 2024.

In a recent paper, we argued that the Indian electricity sector in 2021 or 2022 is different from what was seen in the preceding 30 years. While electricity went along a muddled path of non-reform for decades, while private participation only came into the edges of a fundamentally centrally planned system, the stress on the incumbent system is mounting. We are coming to the point where the good old ways are untenable. Inexpensive ISTS, which enables C&I customers to buy cheap renewables from across the state border, adds to this scenario. Other recent developments are also pushing discom finances over the edge [example].

We expect that increased ISTS access will increase economic freedom, and help private investors think more in terms of market opportunities rather than regulatory constraints. But this present moment of the policy configuration will also not be seen as stable, for a 25-year horizon, by private investors. What the state giveth, it can equally take away. All in all, we expect that discom finances will weaken, the ROE in renewables will go up, but the impact upon investment will be somewhat muted owing to fears about the next string of policy actions.

The lowest hanging fruit on the coconut tree: India's climate transition through the price system in the power sector

by Akshay Jaitly and Ajay Shah.

The world is projected to emit about 50GT of CO2 per year by 2055. Climate scientists say (net) emissions need to be ended by 2055, in order to avoid catastrophic events with reasonable probability. At present, India is emitting 2.5GT per year with a long term trend growth rate of about 5%. India is the 4th largest source of CO2 in the world, accounting for 7\% of emissions, with emissions that are roughly as large as those of the European Union. In a new paper, The lowest hanging fruit on the coconut tree: India’s climate transition through the price system in the power sector, we engage in strategic thinking about India's decarbonisation.

Decarbonising any economy is a large and complex problem. The electricity sector is a key site of the carbon transition, as it directly makes CO2 (e.g. by burning coal and gas), and because decarbonisation in other areas (e.g. cooking) involves switching away from fossil fuels to electricity. The sector is formally organised, which makes it more susceptible to policy intervention. Thus, in every country, decarbonisation calls for a large modification of the resource allocation in the electricity sector. Technical and business model decisions are required at each location in an economy about the optimal mix of renewables, storage and demand-side adjustment for the zero emissions world.

The Indian electricity sector is poorly placed to perform the required modification of this resource allocation. At present, it is a centrally planned system that is under growing financial stress. The process of private investment in electricity has lost momentum. Resource allocation is inefficient owing to multiple prices and a command-and-control system, rather than one based on producers and users that respond to prices. The command-and-control system works poorly in steady state, and particularly poorly when large changes in the resource allocation are required. By imposing enlarged costs upon the economy, a centrally planned decarbonisation runs the risk of greater political difficulties. The electricity sector is thus the critical choke point in India's climate transition.

Looking forward, the problems of the electricity sector are likely to deepen. Rising Indian emissions in coming years will sit uneasily alongside a decarbonising world. Regardless of the speed at which Indian policy makers might desire a change in course, there are forces reshaping the behaviour of Indian firms which are narrowing the options. Indian firms now operate under international asset pricing, and ESG investment has changed the incentives of Indian firms to favour buying and selling renewables. Some large economies could, in coming years, introduce trade taxes upon the carbon content of Indian exports. This would additionally induce Indian firms to desire reducing emissions in their supply chain. The cross-subsidy system within the electricity sector will come under increasing stress when buyers see renewables inducing some combination of a lower cost of capital, a lower operating cost and reduced trade barriers.

For 30 years now, political and fiscal resources have been expended in periodic incremental reforms of the electricity sector. These have not delivered the desired results. It is unlikely that similar efforts will work in coming years. In the meantime, 2021 is likely to be a turning point in the demands made upon the electricity sector owing to the carbon transition.

The climate transition is one of the most complex problems in Indian public policy and will now be subject to the new commitments made at COP26. A coherent strategy needs to be established and articulated, which can reshape the behaviour of a billion private persons across space and time.

This involves going with the grain of the price system, i.e. stepping away from the command-and-control system. All firms in the electricity sector need to be creatures of the market economy, which constantly reshape technology and business models in response to prices. Such firms have the incentive and the ability to look at the changing landscape of technology, financing and carbon taxation, and solve local maximisations that yield the correct engineering and business solutions all across the country. This distributed intelligence, this self-organising system, processes information better, values profit over conservatism and populism, engages in a process of search with risk-taking where some win and some lose, and avoids the state capacity constraints that hamper the central planning system. It will achieve the required Indian climate transition at a lower cost to the economy when compared with a centrally planned path.

Under an electricity sector that is grounded in the price system, there is a clear pathway to the climate transition: the single instrument of the carbon tax. Following a 5-10 year reform process of the electricity sector, the Indian state would announce levels of carbon taxation for the next 25 years, based on international commitments towards decarbonisation and net zero. Private persons would respond to these numerical values with business and technological strategies that are optimal at every location in the country. Every five years, policy makers would review the emissions, and modify the trajectory of taxes for the coming 20 years. Policy makers would control this one lever -- the carbon tax -- and the decarbonisation of the economy would be achieved through private decisions on the demand side, in generation and in storage.

Without a carbon tax, the union government lacks instruments for carbon policy, and intricate regulatory activities will induce enhanced costs upon the economy. Without an electricity sector that is organised around the price system, the resource allocation will be distorted thus enhancing the economic cost of decarbonisation. The optimal way forward is a combination of electricity regulation at state governments, a carbon tax led by the union government, and a private electricity sector organised around the price system.

While this appears to be an attractive vision, it is also a difficult policy project. Immense effort has been put into electricity reform in the past, by insightful policy makers. These leaders of Indian electricity reform, of the last 30 years, stayed within the strategy of a centrally planned electricity system. Why do we believe that things could work differently today?

There are six aspects in which the present situation is different, which creates a pathway to the fundamental reform that was elusive for the last 30 years: (1) There is greater understanding of the political economy landscape, and it is possible to design bargains where the losers from the reform are compensated. (2) State capacity in regulation is essential for the operation of an electricity sector organised around the price system, and there is now a greater understanding in India of how to establish the objectives and methods of regulation. (3) There is a path to electricity reform, one state at a time, which is more tractable and feasible when compared with grand schemes led by the union government which apply to the entire country. (4) The materiality of climate policy in the international discourse has shifted the political salience of domestic electricity reforms. Alongside this, the domestic policy envelope on establishing more market-led solutions has improved. (5) It is possible to fund the transition. (6) The fiscal cost of upholding the status quo in the electricity sector is likely to rise.

Lessons from the COVID-19 vaccine procurement of 2021

by Charmi Mehta and Susan Thomas

Introduction

The recent announcement on procurement and project management shows a heightened policy interest in improving how government contracts with private parties for projects. However, several problems in public procurement in recent times have been in the procurement of goods. The most visible were the failures in vaccine procurement in the first half of 2021.

In the middle of 2020, at the time of the first pandemic lock-down, Serum Institute ("SII"), an Indian firm, had been gearing up to manufacture the Astrazeneca vaccine (a.k.a. Covishield). The union government placed advance orders with SII and Bharat Biotech in January 2021 for doses that would cover 0.6% of the population with two doses. Deployment of Covishield began in the UK on 4 January 2021 and the first vaccination took place in India on 16 January 2021. The union government's vaccination program was the only one available in the country, and it was delivering about 2 million doses a day in April and May 2021. The surge of the disease raised questions about the efficacy of this program. The union government changed course with a press release on 19 April 2021 through which state governments could also work on vaccination if they desired and the procurement could be done directly from global suppliers and manufacturers (Agarwal and Shah, 2021).

It was a difficult time to buy vaccines. The Union government had a unique power to indemnify an overseas vaccine producer against legal liability, without which no overseas firm was willing to sell into India. Sub-national governments did not have this power, and were thus not able to purchase from firms like Moderna or Pfizer. Some global firms refused to transact with sub-national governments.

A certain set of state/city governments started on the process of procuring vaccines directly, in an attempt to do better on managing the disease within their states. Tenders to procure COVID-19 vaccines were published by 14 para-statal agencies. Of these, five were successful in attracting bids. Vaccine purchase by states largely ended by June, when the union government declared on 6 June 2021 that it would buy 75% of the total vaccines manufactured in India, and supply vaccines to states.

From a research perspective, this was a natural experiment where multiple state governments tried to solve the identical problem at dates that were just a few days apart. While the union government had negotiated contracts for vaccine purchase, the state governments chose to engage in open, competitive, global tendering. We hand-collected a data-set by breaking down published tender documents, and extracting fields that gave us insights into the procurer details, details of the bidding process including tender timelines, eligibility criteria for bidders, quantities to be procured and quality/storage requirements, procurement price constraints, payment features, delivery schedules and locations.

We do not observe whether a state government actually purchased vaccine or not. Information in the public domain stops at observation of responses to tenders.

This dataset gives us an opportunity to see differences in purchasing strategy and to look back at these experiences, in order to obtain insights on many questions: What kinds of states tried to buy vaccines? What were the features of their attempts? What states appeared to fare better? What lessons can we draw, from this episode, for better government contracting, in an emergency and in normal times?

We find that existing contracting processes have significant flexibility, particularly when procuring in emergency situations. The tenders published had flexibility of awarding contracts at prices away from the default L1, as well as in choosing efficient delivery schedules and locations. These were evident across all the tenders we studied. But this flexibility was not sufficient to attract bids for the tenders. Instead, what appeared to matter was the speed to tender and speed to award. Further, this was the first episode of direct procurement by state governments. The lack of prior experience and standing in the global vaccine market place was the essence of low state capacity.

What is the legal framework governing vaccine procurement in India?

I. Procurement of vaccines In India, there is a legal framework for the procurement of drugs, but not one to directly procure vaccines (Kaur et al, 2021). In the National Vaccine Policy (2011), Section 6.4 states the following on vaccine procurement:

1. All UIP (Universal Immunisation Programme) vaccines are purchased at the central level for distribution to the states.
2. While the UIP vaccines are purchased by the central government from indigenous sources, Oral Polio Vaccines (OPV) for mass immunization campaigns as well as Japanese Encephalitis (JE) vaccine is procured through other mechanisms. OPV immunization was conducted as part of a World Bank, WHO and UNICEF joint campaign that sought to eradicate polio in India (World Bank 2014). Likewise, the JE immunization programme was coordinated by WHO, UNICEF and PATH, who negotiated vaccine supplies from China (PATH 2019).
3. There are three takeaways about the Indian vaccine procurement from this: (1) Vaccines are usually procured only by the Union Government; State Governments do not routinely procure vaccines. (2) The Union Government usually procured vaccines solely from domestic suppliers. (3) The Union had additional support from international agencies for both vaccines that are globally tendered.

II. Procurement in emergency situations Several provisions in the Manual of Procurement of Goods (2017) ease competition requirements in an emergency cases.

1. There is a relaxation of the requirement to procure solely from domestic sources. Conditions for Global Tender Enquiries are listed in Section 4.3 and 4.4 of the Manual as `Where Goods of required specifications/quality are not available within the country and alternatives available in the country are not suitable for the purpose; in case of non-existence of a local branch of the global principal of the manufacturer/vendors/contractors;or Requirement for compliance to specific international standards in technical specifications; or the absence of a sufficient number of competent domestic bidders likely to comply with the required technical specifications, and in case of suspected cartel formation among indigenous bidders.'

2. There is also a relaxation in using L1 tendering as the sole mode of tendering. The Manual states that `Limited Tender Enquiry procedures should be default mode of procurement when the estimated value of procurement is between Rs. 2.5 lakh to Rs. 25 lakh.'

3. Section 4.7 of the manual permits single tender enquiries in case a situation of emergency warrants goods/services to be procured from a particular supplier. 'In case of emergency procurement, facility of withdrawing requisite advance cash amount and its subsequent accountal may also be considered', whilst procuring through a direct contract. In case of emergency, the purchaser may purchase the same item through ad hoc contract with a new supplier.

4. In all these cases, there is a greater onus on the procuring entity to ensure that value-for-money is ensured.

Observations about the vaccine procurement by states

Who procured?

Of the 33 states and union territories in the country, 14 published tenders between May to June. The others were either unresponsive to the situation or concluded that purchase was infeasible. As an example, the Punjab Government approached manufacturers but Moderna refused to contract with them. Punjab was not one of the states that put out a tender for vaccines.

What was the buying organisation?

Eleven out of 14 tenders were issued by independent medical services agencies, and three were issued by government ministries/departments. The literature suggests that organisational efficiency is often better in independent agencies as compared to ministries or departments, owing to their internal capacity, audit mechanisms and higher accountability mandates. Three out of the five tenders that received responses were issued by independent agencies/societies/corporations in charge of medical services procurement for the state. However, most of the states that did not receive bids procured through independent agencies.

Who received bids?

Of the 14 that published tenders, Karnataka, Odisha, MCGM, Maharashtra and Rajasthan received bids. Andhra Pradesh, Delhi, Haryana, Kerala, Madhya Pradesh, Tamil Nadu, Telengana, Uttar Pradesh and Uttarakhand did not receive any bids.

Did tender timelines matter?

The figures show the tender timelines as the number of days from the starting date of 19 April to the 23 June 2021 (which is the day after the Uttar Pradesh closed its tender on 22 June). The coloured portion of the time line shows the period from when the tender was published to when it was closed. Figure 1 shows the states that received bids, and Figure 2 shows the states that received no bids.

Figure 1: States that received bids

Figure 2: States that did not receive bids

 

From the starting date of 19 April, most states took 25-30 days to issue tenders. Uttar Pradesh and MCGM published tenders within 12 days, while Madhya Pradesh, Haryana and Delhi took more than 30 days. Uttar Pradesh kept the process going for the longest period, i.e. 34 days. In contrast, MCGM and Maharashtra closed within 6-8 days. The Maharashtra state tender was issued the day the MCGM tender first closed.

There is considerable variation in tender timelines. For example, Odisha had a 21-day tender open period and received responses, while Delhi had a 10-day tender period but did not receive responses. But from Table 1, we see that the average values of the timelines are different for the two samples. For example, on average, the states that did not receive bids took 4 days more to publish the tender compared to those that did receive bids. The difference is larger for the days that the tender remained open. States that did not receive bids kept the bids open for almost two weeks longer on average than those who did receive bids. In a period of great supply shortage, speed in closing the tenders appear to be more attractive to bidders.

Table 1: Comparison of timelines

	Received bids	Did not receive bids
Median days to start	25	29
Average days to start	25.4	29.9
Median days of tender being open	8	21
Average days of tender being open	10.2	19.22
Median number of corrigenda	1	1
Average number of corrigenda	1.1	1.2
Average quantity (million single doses)	25.6	17.6

Our research in government contracting has revealed the common procedure of weak preparatory work followed by numerous corrections to the tender documents, termed corrigenda (Roy and Sharma, 2021). There were corrigenda to some of the vaccine tenders. However, the number of corrigenda to a tender does not serve to differentiate between states that received bids or not. The median number of corrigenda issued across both sets is 1.

Finally, we compared the average quantity tendered for, and the states that received bids had a larger quantity requirement on average than those that did not receive bids.

Did payment terms matter?

The problem of payment delays in public procurement is significant (Mannivanan and Zaveri 2021). This has adverse effects on the perception of participating bidders and the cost of doing business with the government. We know from public reports that the Union Government was paying an advance to manufacturers are part of its negotiated contracting approach. However, most of the 14 tenders did not have advance payment, other than Odisha (which did receive bids) and Tamil Nadu (which did not).

Was there flexibility in the tendering process?

Rigidity in tendering processes such as adherence to L1 (lowest price bid) awards is often cited as leading to constrained optimisation for procuring entities. In contrast, the tenders for COVID-19 vaccines showed flexibility in the procurement process, from awarding contracts to bids beyond L1 to allowing for significant differences in tender parameters such as quantity, delivery, and who can bid. We find the procurers were empowered to empanel a larger number of suppliers to distribute their total requirement amongst bidders.

Was there expertise to design complex, non-standard tenders?

A reading of the tenders suggest a mechanical replication of standard drug procurement tender. In certain cases, tenders contained text referring to drugs rather than vaccines. So while there were specific areas where there was considerable expertise deployed (such as the variation in delivery schedules where manufacturers were required to submit a schedule of delivery and there was a clearly stated preference for the soonest supply), such lapses suggest that greater state capacity needs to be developed to handle complex goods procurement. In a simplistic view, standard tender templates that minimise ground-level discretion are favoured, e.g. as a pre-requisite for international funding agencies (World Bank 2021). However, there is no escape from deep rooted capabilities in contracting for every contracting organisation; mechanical use of templates is unlikely to work well.

In summary, our analysis finds some covariates that differentiate the states that were able to attract bids for the supply of the vaccine. What stands out is the speed to tender and to have a short tender period. In our data-set, we see a minimum time taken of 20 days for the most speedy tender issuance. While procuring entities must take adequate time to ensure value for money on contracts, lengthy tender cycles also tend to discourage bidders who must lock-in capital and resources in the anticipation of an award (National Audit Office 2007). Even in India, the Manual of Procurement of Goods 2017 prescribes a period of 30-45 days for tender processing, as delays in finalising procurement deprive the public of the intended benefits and results in lost revenues and cost over-run. If speed to issue tenders is important for procurement efficiency, then it is important that procurers must have the capacity to do so.

Conclusion

In this article, we have looked at a moment of sharp change in the rhythm of government contracting in India. At the height of the second wave of the pandemic, there was a rush of vaccine purchase by at least 14 Indian sub-national government organisations, within days of each other. Only five of these got bids. Within weeks after, sub-national governments stopped trying to buy vaccines.

We have documented the numerous constraints these organisations faced. Contrary to popular perception about the rigidity enforced by procurement laws and rules in India, our examination of different tender documents reveal that there was significant variation across tenders. There were important constraints in the form of private firms who were skeptical about dealing with Indian government organisations. Private firms are not confident about timely payments. Some overseas vaccine sellers required an indemnity which could only be issued by the union government. Some overseas firms refused to deal with sub-national governments.

The main finding of this article is that even when presented with supreme urgency and the highest prioritisation of the political leadership, it was often not possible to successfully buy vaccines. Given that vaccine procurement has always been undertaken by the union government, state governments were permitted to procure a commodity that they had scarce experience in doing, and in a market where they had no previous experience or credibility. Fire-fighting and "mission mode" works poorly. There is need to develop state capacity in calm times before they being asked to perform in an emergency (Kelkar and Shah 2019). State capacity can only arise slowly. A stable team of policy practitioners needs to engage in a given fixed activity (e.g. vaccine purchase from the global market) repeatedly. An ongoing relationship needs to be established with dozens of private firms. There needs to be continuing and repeated interactions through which learning takes place, and further, gets encoded into purchase manuals and document templates. Once such a framework is in place for many years, it would become possible to readily purchase vaccines in a given government organisation. If such a framework is not in place, episodic government contracting in a crisis management mode is unlikely to succeed.

References

Amrita Agarwal and Ajay Shah, An important change of course by policy in Indian Covid-19 vaccination, The Leap Blog, 20 April 2021.

Matt Apuzzo and Selam Gebrekidan, Governments Sign Secret Vaccine Deals. Here’s What They Hide, New York Times, January 2021.

Centre for Vaccine Innovation and Access, Indias leadership in the fight against Japanese encephalitis, PATH India, 2019.

Chartered Institute of Public Finance and Accountancy, Good Governance in the Public Sector, 2013.

Ruchika Chitravanshi and Sohini Das, Covid-19 vaccination: Govt books 440 million doses with 30% advance, Business Standard, June 2021.

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Harleen Kaur, Ajay Shah and Siddhartha Srivastava, How elements of the Indian state purchase drugs, xKDR Working Paper 5, August 2021.

Vijay Kelkar and Ajay Shah, In Service of the Republic, Penguin Random House India Private Limited, 2019.

Pavithra Manivannan and Bhargavi Zaveri, How large is the payment delays problem in Indian public procurement?, The LEAP Blog, March 2021.

Ministry of Health, Family and Welfare, National Vaccine Policy Government of India, 2011.

Ministry of Health and Family Welfare, Revised Guidelines, Government of India, May 2021.

Ministry of Statistics and Programme Implementation, Government of India, 2021.

Atri Mukherjee, Regional Inequality in Foreign Direct Investment Flows to India: The Problem and the Prospects, Reserve Bank of India, 2011.

National Audit Office, Improving the PFI process, Office of the Comptroller and Auditor-General, National Audit Office, United Kingdom, 2007.

Press Information Bureau, Government of India announces a Liberalised and Accelerated Phase 3 Strategy of Covid-19 Vaccination from 1st May, Ministry of Health and Family Welfare, Government of India, April 2021.

Vikram Rajan, A Polio-Free India Is One of the Biggest Achievements in Global Health, World Bank, 2014.

Shubho Roy and Anjali Sharma, What ails public procurement: an analysis of tender modifications in the pre-award process, The Leap Blog, November, 2020.

Arup Roychoudhary, Centre should share some financial burden of states' vaccine procurement, Moneycontrol, May 2021.

Pankaj Shah, Uttar Pradesh amends global vaccine tender, Pfizer, Moderna can now bid, Times of India, May 2021.

The Hindu, Moderna refuses to sell vaccines directly to Punjab, 23 May 2021.

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xKDR Forum, Government vaccine procurement, August 2021.

Acknowledgements:

Charmi Mehta is a researcher at xKDR Forum and Chennai Mathematical Institute and Susan Thomas is a researcher at xKDR Forum and a Research Professor of Business at Jindal Global University. We thank Diya Uday and Bhargavi Zaveri-Shah for their enthusiastic support and intellectual inputs into the design of the tender dataset, and Harsith Ravichandran for research and data assistance.

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.

An important change of course by policy in Indian Covid-19 vaccination

by Amrita Agarwal and Ajay Shah.

Strategy for Covid-19 and vaccination

A global race took place on building vaccines for Sars-Cov-2. By late 2020, it became clear that vaccine development was progressing rather well.

With the vaccines in sight, the standard economics knowledge about vaccination came into play. Each vaccinated person reduces the possibility of spread of the disease. While the individual who gets a vaccine is gaining protection, that individual is also imposing a positive externality upon the population. There is a market failure -- a positive externality -- as an individual would tend to under-spend on buying a vaccine. There is a case for state financing, to augment personal expenditure on personal protection, to tip more people over into vaccination. The end goal of vaccination is not to vaccinate everyone, but to change the disease dynamics by achieving herd immunity.

A debate took place in India in 2020 about two alternative pathways to roll out vaccines, on a significant scale.

On one hand was the vision of a centrally planned program, where the government would control everything, and the citizenry would obediently wait for their turn. This involved (a) Using the coercive power of the state to block any vaccination activities in India other than the union government, and (b) Organising a nationwide vaccination program at the union government. This was similar to the vaccination efforts prevalent in many other countries.

An alternative approach involved recognising that in India, state capacity is limited. A centrally planned effort was likely to work out poorly. It was better to harness all the energy available in the country to do more vaccination -- whether it was at a state government, city government, club, association, educational campus, private non-health firm, health care firms, etc. This involved (a) Not using the coercive power of the state to block any other energy in vaccination, alongside (b) Some work on vaccination by state organisations in order to address market failure. An example of this perspective is in an article from 30 November, and this talk, at an NCAER event on 29 December 2020. Shruti Rajagopalan, Mihir Sharma, Naushad Forbes were some of the thinkers who wrote on this.

In the event, decision makers in government chose the first path. There were difficulties [8 March, 5 April]. Using data for 19 April 2021, the New York Times tracker shows India at rank 62 in the world, with 1.2% of the population fully vaccinated, in roughly the league of Malaysia (rank 61) at 1.4% or Bangladesh (rank 64) at 1.0%.

At present, the union government is able to push out 3.5 million doses a day. Looking forward, the rate achieved (by the unreconstructed union government program) is likely to go down:

1. It is likely that the process design used, in any centrally planned union government program, would work for one (hopefully modal) use case, but peter out once we reach out beyond this zone.
2. The present vaccine production for the Indian market [SII, Bharat Biotech] is below the required 100 million doses a month.

By this reasoning, the present run rate, of 3.5 million doses a day, may not be sustainable. If we are to get to half the Indian people fully vaccinated in the coming four months, this requires about 10 million doses a day or 300 million doses a month. We need to get up to 10 million doses/day and we face difficulties in maintaining the present rate of 3.5 million doses/day.

An important change in course

On 19 April, the union government has announced an important change in course. The nature of state coercion will now change as follows:

1. Indian vaccine makers are forced to sell half their output to the union government, at an unspecified price, the remaining half being available for sale to state governments and private persons in India (at a price that must be publicly disclosed),
2. Private firms which perform vaccination services are forced to publicly announce the price at which these services are provided,
3. All providers of vaccination services are forced to supply data to the union government's CoWin IT system, and
4. Private persons and state governments are free to import vaccines.

This is important progress. The union government has stepped back from blocking every other energy in the country in vaccination. State governments, and private persons, will be able to buy/import vaccines and run vaccination programs. Vaccine makers remain in the grip of central planning in the new world, but it is a step forward when half of their output can be sold to state governments and private persons at market-based prices.

Implications

The 19 April decisions harness energy in thousands of organisations all across the country. Some state governments and many private organisations will now be able to embark on vaccination efforts. Each of them would tailor their process designs for local conditions and the practical problems as seen by them. The sum total of resourcing and energy that would go into vaccination, in India, would go up. This would improve the overall progress in conquering the pandemic.

The private sector will surprise us with innovation in business models, billing arrangements, etc. Perhaps some firms will find it easier to deliver the one-dose J&J vaccine in difficult locations. Perhaps telecom companies will call their vast subscriber base and sell vaccination services. Private firms know how to segment the users into a large number of categories, and devise strategies for each of them. This is what a union government, which solves for one use case, is ill suited for.

In the short run, it is hard for SII to drastically change its production. Import of vaccines holds the key. In the world market for vaccines, a buyer asks for a price quotation at a certain quantity. These prices are on the decline. Vaccine supply in India will go up through imports.

There are some concerns about the AZ vaccine with younger persons and particularly with young women. Availability of mRNA vaccines in India would help address the needs of these users.

If India were an AZ vaccine monoculture, there is greater vulnerability to a new strain that is able to breakthrough. The self-organising system will bring diverse vaccines to play into the Indian populace, and generate greater pandemic security.

The second wave will not be the last one. Existing vaccine makers will regularly make booster doses through which people will become safe against new variants. Covid-19 is only one among many infectious diseases which call for sustained large-scale adult vaccination programs. The work done this year, flowing from the 19 April decisions, will matter not just in conquering the second wave. Thousands of organisations in India need to view this as a sustained activity. As an example, it would make sense for every large employer to organise quarterly vaccination camps for their employees and their family members, through which an array of adult vaccines are regularly delivered.

Improvements required in the policy framework

The pathway to elicit better production by private firms does not lie in coercing them with quantity restrictions or dictating terms on issues such as price. Such coercion will bring out reduced output by Indian manufacturers. We learned, in the 1960s and 1970s, that it is impossible for a state organisation to go inside the firm, and discuss elements of the cost function with the firm. It is not the job of the state to be a financial service provider for a firm. There should be market-based engagement with vaccine producers, that is free of coercion, and couched in the language of prices, quantities and foreign competition.

Some vaccines are distinctly less efficacious and/or more dangerous than others. The union government can play a useful role by wielding its coercive power to limit the vaccines that are permitted for use in India to the class of vaccines which have achieved approval in an advanced economy such as the US, UK, Japan or Germany.

The use of coercive power by the union government, to harvest data through CoWin, raises concerns given the absence of legal protections against state access to the data. State surveillance is particularly harmful when it comes to health data, so enhanced state legibility will have unintended consequences. This program of capturing data will exacerbate vaccine hesitancy.

The decisions of 19 April are important and will get India up from 3.5 million doses a day. It is, however, likely that we will not get up to 10 million doses a day. It is useful to think about two distinct problems on the demand side:

The rich

If protecting a family of five costs Rs.5,000 to Rs.10,000, many individuals / employers will spend this much. While a positive externality influences the decision making, the decision will be correct as long as the personal gains from protection exceed the price of the vaccine.

The poor

Many poor families will balk at this magnitude of expenditure. This is where market failure bites, in generating the wrong decision because there is a gap between the gains to society as a whole vs. the gains for the individual. State governments and the union government need to step into this breach. Vaccine vouchers are the precise instrument through which this market failure can be addressed.

Conclusion

Central planning has worked well for Covid-19 vaccination in countries like the US and the UK. These countries intelligently used private sector energy [example] as opposed to many varieties of coercion. But central planning works poorly under conditions of low state capacity. It is better to harness the energy of the self-organising system.

The 19 April announcements make important progress in stepping back from a centrally planned system, in increasing freedom, and in harnessing the power of the self-organising system.

The role of the state lies in addressing market failure. There is a need to use the coercive power of the state to require that vaccines used in India must have achieved approval in an advanced country. Poor people will make better decisions when nudged towards vaccination through the tool of vouchers.

The three tiers of government in public health

by K. P. Krishnan.

The Covid-19 pandemic has provided us with fresh insights on health policy in India. One key element of this thinking lies in a careful understanding of what elements of public health are best done at the city/district level, at the state level or at the union government. The Constitution of India has allocated the tasks in some detail. Considerable policy research work is now required, to bring life to the Constitutional scheme, based on a first principles understanding of the work that is required in public health, drawing on our experiences of 2020.

Market failure in health policy

There are great insights that can be obtained in the field of health policy by applying the toolkit of market failure. It is best to define the task of government as addressing market failure, and market failure comes in four categories: concentration of market power, presence of positive or negative externalities, presence of information asymmetry, and the need to provide public goods. There is a neat split in the field of health: public health is about public goods and externalities, while health care may contain market power and asymmetric information.

Public goods are a compelling example where the government is central, and the things that are not done by the government are hard to achieve through purely private initiatives other than pure philanthropy. Knowledge is the ultimate public good -- once a research paper is released on a website it is non-rival and non-excludable -- and we need public funding for research. When one person coughs and communicates Covid-19 to another, this is a negative externality, and there is some role for the government in reducing this externality. The main task of health policy thinking lies in analysing the landscape of public health, identifying the market failures (public goods and externalities), defining the tasks of the government, and finding a path to achieving state capacity on these functions.

Where should each function be placed?

Once we have a picture of the various functions which have to be performed in public health, we come to the question of the best place where it should be performed: the union government or the state government or the local government. The famous `Subsidiarity principle' of public economics asserts that every function should be placed at the lowest level of government where it can possibly be performed.

As an example, Amy Harman and Farah Stockman have an article in the New York Times which describes the treatment of travellers from China into the US. The federal government (which we in India call the union government) is the right agency to track flights and obtain lists of passengers. After this, there is a handover of information, that person x flew in from China, to the local government where that person resides. At this point, the local government is the one best equipped to work on contact tracing, testing, and isolation. This is an optimal allocation of the two tasks. It is hard for a local government to keep track of who flew in from China. It is hard for the union government to manage front line staff in a city or a district.

It is interesting and important to think about the elements of a public health system, and to think about the optimal placement of each of these elements, between the union, state and local governments. However, we do not engage in policy thinking on a tabula rasa. We do policy thinking in India where the Constitution of India has a well-developed point of view on these questions, and amendments to the Constitution on this aspect are rare. Hence, our puzzle in thinking about public health in India lies in taking full cognisance of the Constitutional scheme and best adapting it for our present understanding.

Health in the Indian Constitution

The distribution of subjects in the Constitution is reasonably elaborate. It sets up a division of labour between different levels of government, viz, the union, state, panchayat (rural local bodies), and municipalities through a list of subjects which are enumerated in its schedules VII, XI, and XII.

The Seventh Schedule of the Constitution lists the distribution of the subjects between the union and the states, while the eleventh and twelfth schedules deal with the distribution of responsibilities at the local level, i.e., panchayats and municipalities. Every policy thinker in India needs to fully understand these three schedules. Table 1 summarises the distribution of subjects in the domain of public health.

Table 1: Distribution of 'health' related subjects in the Indian Constitution

Government	Subject	Reference
Union	Port Quarantine	Schedule VII, List I, Item 28
Union	Union agencies and institutions for professional, vocational or technical training, etc.	Schedule VII, List I, Item 65
Union	Co-ordination and determination of standards in institutions for higher education or research and scientific and technical institutions	Schedule VII, List I, Item 66
Union	Inter-state migration and inter-state quarantine	Schedule VII, List I, Item 81
State	Public health and sanitation; hospitals and dispensaries	Schedule VII, List II, Item 6
Concurrent (both union and state subjects)	Lunacy and mental deficiency, including places for reception or treatment of lunatics and mental deficients	Schedule VII, List III, Item 16
Concurrent	Medical education and profession	Schedule VII, List III, Items 25 and 26
Concurrent	Prevention of the extension from one State to another of infectious or contagious diseases	Schedule VII, List III, Item 29
Panchayat	Health and sanitation, including hospitals, primary health centres and dispensaries	Schedule XI, Item 23
Panchayat	Family welfare, women and child development	Schedule XI, Items 24 and 25
Panchayat	Social welfare, including welfare of the handicapped and mentally retarded	Schedule XI, Item 26
Municipality	Public health, sanitation conservancy and solid waste management	Schedule XII, Item 6
Municipality	Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded	Schedule XII, Item 9

There is a significant role of union government in subjects relating to contagious diseases and pandemics. It is also responsible for setting standards of medical education and profession along with the state government. On the other hand, state and local bodies are responsible for most public health functions such as sanitisation and family welfare.

A simple reading of the distribution of functions induces many questions. For instance, vaccination is a public health function which is a part of state list under the Constitution. This is logical, given that immunisation programs require a large front-line workforce that interacts with the population. However, the design of the standard package of vaccinations for all kids, and envisioning ambitious projects like the eradication of smallpox or polio, require thinking and coordinating by the union government.

Similarly, in a public health crisis such as COVID-19 all levels of government are required to perform their specific functions that are elements of the overall public health response. These elements include tasks such as planning, funding, managing and on-ground implementation. These elements are not described in detail in the Constitution but are an important part of the legal and policy mechanisms adopted by the government.

There is at present relatively little in place, in India, by way of Parliamentary law which shapes and circumscribes the work of public health. The British-era Epidemic Diseases Act, 1897, has many problems. The legal framework under which India is responding to the COVID-19 crisis is the Disaster Management Act, 2005 which sets up a National Authority whose role is briefly discussed below.

The role of the National Authority

The Disaster Management Act, 2005 is the union law that was used by the union government in its Covid-19 response. In this Act, a disaster is defined to be:

a catastrophe, mishap, calamity or grave occurrence in any area, arising from natural or man-made causes, or by accident or negligence which results in substantial loss of life or human suffering or damage to, and destruction of, property, or damage to, or degradation of, environment, and is of such a nature or magnitude as to be beyond the coping capacity of the community of the affected area;

Under this law, the National Authority is responsible for drawing a national plan for disaster mitigation, prevention, and preparedness. This plan is to be reviewed and updated periodically. The law also recognises the role of multi-level governments as it sets up the national, state and district level authorities which are responsible to follow the guidelines of the National Authority.

The National Disaster Management Plan in India was last updated in November 2019, its only revision after the first plan was released in 2016. While the plan deals with Biological and Public Health Emergencies (BPHE), it does not provide detailed guidelines on the structural frameworks required for dealing with a global pandemic at the scale of COVID-19. In this sense, India does not have a national plan to deal with the COVID-19 crisis as of now. It would be useful to design a national plan which guides the government in undertaking a well-coordinated action to deal with the crisis. The national plan should be mindful of the spatial element of the public health interventions in COVID-19 such as:

1. Inter-state migrations, operations of flights require intervention by the union government.
2. Hospital preparedness, such as the presence of an adequate number of hospital beds, medical equipment such as ventilators and oxygen etc. require intervention at the state level.
3. Contact tracing and quarantine enforcement require intervention at the municipal or local level.

A guidance document by the National Authority with conceptual clarity about the elements of public health will be useful to minimise policy failures in COVID-19 management. At present, some clear policy failures in COVID-19 management are being observed. These failures are at all levels of the government, the union, state, and local levels. Some of them are described below as illustrations:

Union-state coordination

Actions taken by the government during a pandemic have political repercussions and therefore, a tension between the state and union government priorities can exist. For instance, in Delhi, the elected government and the Lieutenant governor had disagreed on the conditions being imposed on businesses during the lockdown period leading to uncertainty for the public.

Varying state priorities

Border state conflicts relating to inter-state travel of persons became common in the early period of the COVID-19 pandemic. In the first week of April, Karnataka state sought intervention of the Supreme Court to resolve a dispute regarding border movement with the neighbouring state of Kerala during lockdown imposed due to COVID-19. This was after the Kerala High Court passed a verdict asking Karnataka to allow movement of persons between the states. Eventually, the union government was involved in reaching an amicable settlement between the states regarding conditions of movement of persons during the lockdown.

Varying priorities of local bodies

The local bodies are empowered to take action in public interest under the Disaster Management Act. During the COVID-19 crisis, it was observed that local bodies failed to take into consideration the impact of their decision on neighbouring districts. For instance, the Noida district administration barred entry of persons from the Delhi border without a pass issued by them. This caused trouble to essential workers such as doctors and nurses who worked across the district border who would be left stuck at the border without knowledge of requirements for such a pass.

Heterogeneity within the vast country

There is great heterogeneity within the 3.3 million square kilometres of India, in the state of the epidemic, in trade-offs between mobility and disease control, and in state capacity. There is great value in having democratic legitimacy in each city or each district in choosing the optimal path.

While working through the Disaster Management Act was expedient when faced with the pandemic, as the dust settles, there is a need for health policy thinkers to envision a public health system for India. It is important to, lay this on sound legal foundations, whereby the Disaster Management Act is ultimately focused on natural disasters like earthquakes, and public health has its own legal and institutional architecture that is fit for this purpose.

Conclusion

There is a need to bring greater coherence to all the elements of state power that are in play in the response to Covid-19. This has led to twin challenges of a) micromanagement by the union bodies, and b) excessive delegation of powers to the state and local governments without adequate checks and balances. For instance, approval for Covid-19 testing labs throughout the country is done by a single body, the ICMR, an approach that has difficulties. Similarly, certain orders by district and state authorities have also been criticised during the course of the pandemic for being arbitrary.

We should utilise our fresh understanding of the present problems, to build a body of knowledge on (a) What are the tasks of public health in India (b) What is the role of the union / state / local government in each of these and (c) How to achieve state capacity on each of these components?

K. P. Krishnan is Professor at National Council of Applied Economic Research (NCAER).

Covid-19 in India in the coming months: The puzzles faced by leaders of health care organisations

by Ajay Shah.

Peering into the next six months

How might the pandemic play out in India in coming months? There are newspaper reports about some important statistical evidence from ICMR about the spread of Covid-19 in 70 districts of India (caveat). Based on antibody testing, it appears that about a third of the people in containment zones in some large cities had antibodies in late April. We can cautiously expect significant progress towards herd immunity, in containment zones, by today, i.e. mid-June. Recent stories from Dharavi in Bombay are consistent with such an argument (while also being a testimony to the public health capability of the municipal authorities).

In most of India, however, the picture is quite different. E.g. while about a third of the people in the containment zones in Bombay had antibodies in end-April, the fraction of persons in Bombay as a whole who had antibodies is small. In most of India, the bulk of the epidemic lies in the future.

There is a public health problem (how to slow down the spread of the disease) and there is a health care problem (how to care for the people who get sick). In this article, we focus on the health care problem. For the leadership of health care organisations in most of India, this is an extremely important moment, when they need to plan for this coming surge. In this article, we think about the pandemic from their point of view. A given facility might appear to be relatively unruffled today, but it is important to envision the coming surge of demand for health care, and to lay the groundwork for faring better at the peak of the pandemic in the catchment of the facility. What are the issues, and what are the potential actions that can be taken?

About 70 per cent of health care in India is in the private sector. In this article, we place ourselves in the shoes of the leaders of health care organisations of all kinds, but we have an accent on private organisations as this is where the bulk of the action will lie.

Equipment

Oxygen therapy is a key element. There has been a lot of talk, internationally, about ventilators. However, from the viewpoint of both efficacy and cost, ventilators are a poor solution. The skill required of health care workers, to use a ventilator, is substantial and this will limit scale up. It is more useful to develop a strategy that involves oxygen cylinders and oxygen concentrators. The former is associated with the problem of managing the supply chain for oxygen cylinders. All hospital beds should be equipped with oxygen ports.

In many hospitals, there is a need to introduce physical isolation and establish a dedicated wing in which Covid-19 patients will be treated.

Beds in the ICU are a scarce resource. It is useful to establish `step down beds', where patients exiting the ICU can be safely placed, when they require a high standard of care but no longer require to be in the ICU. This will improve the extent to which the ICU is available to the patients who need it most.

Internal management

The medical community in each city needs to debate and agree on the clinical protocols that will be put into play, that are feasible and cost-effective under their local conditions. This will reduce fumbling and recrimination in the surge. Conversations and documents around rules of triaging will help.

Economies of scale and cost reductions can be obtained by establishing `eICUs', where a central command centre has skilled staff which monitors the data coming in from a remote ICU. This is a more feasible path to scaling up ICU capacity, particularly in places when the skilled staff in ICUs is hard to find.

When the surge comes, the management processes of the hospital will be tested. Every element of the process requires analysis from the viewpoint of coping with a surge environment. Enhancing non-medical staff and processes, ahead of time, will help cope with the surge.

Health care workers

A key problem concerns health care workers (HCWs), who face the risk of high dose exposure to the virus. While some HCW are driven to serve the community, many may retreat from work when the surge gathers momentum. At precisely the time when the most capacity is required, the capacity could degrade, thus increasing the chances of an organisational rout.

The leadership needs to undertake many measures which will be fair to HCW and reinforce their commitment to hold the ranks:

1. It is penny wise, pound foolish, to skimp on the quality and quantity of PPE. If a few ward boys get sick, word of this will leak to other ward boys. For ward boys to feel safe, their training and consumables have to be of high quality.
2. HCW and their families need to be reassured that there will be ample effort on giving them treatment if required.
3. PPE and training is required not just in the ICU but also for the primary care providers, who are the first point of contact for patients when they reach the facility.
4. Periodic antibody testing for all HCW will be particularly useful: (a) In assessing the extent to which infection and immunity has come about, (b) Generate metrics of the class of situations where new infections are coming about and feed back to process improvements, and (c) Increase the confidence of HCW as a stream of process improvements are visible, and when it is seen that the infection rate and severity of the disease is low.

Community initiatives

These elements (equipment, management, HCW) constitute a reasonable work plan to gear up for the surge. But many or most hospitals today are beset with difficulties. In the best of time, their management bandwidth was limited. Covid-19 has induced a financial crisis with a decline in non-Covid revenues, and the Indian financial system is not able to engage effectively with most hospitals. The thin capabilities have been adversely affected by the retreat of HCW. The puzzle lies in finding the energy and resources to actually pull off a significant amount of preparatory work.

There are many problems which are hard to address at the level of one hospital. Consider a city like Nagpur. There is significant value in constructing a Coalition of hospitals and of the local business community, which can work towards many initiatives -- without any government involvement -- which will reduce the damage caused to the city from the epidemic. Examples of such collaborative initiatives are :

1. Nagpur requires facts, through random sampling, about the state of infection and antibodies in Nagpur. The weekly or monthly construction of these facts is vital for health care organisations to know the planning horizon that they face, before the surge. The citizenry requires these facts to make decisions about the economic and social activities that are safe. The Indian state does not produce this information. Better planning by health care organisations is good for them and for the citizenry and economy of Nagpur. It would be valuable if such a work program can be put together by the Coalition.
2. The Coalition can collaborate with the medical testing industry to establish capacity, and negotiate bulk rates.
3. The Coalition can establish a process of discussion and drafting of appropriate clinical protocols which can then by used by all HCW in the city.
4. When an individual requires health care or a bed, there is chaos during the surge, with patients running around across multiple facilities looking for spare capacity. The Coalition should establish a shared information system and call centre for patients to use. This will reduce the operational overheads and queues outside facilities. This will increase bed utilisation and improve the allocation of facilities based on the condition of the patient.
5. The Coalition can pool resources to do bulk buying and inventory management on medical supplies such as PPE or oxygen cylinders, and dynamically respond to the shortages of consumables that are discovered at future dates.
6. There has been significant friction between health care organisations and the government. The Coalition could be more effective in addressing inappropriate behaviour of various arms of the Indian state. The Coalition is a natural locus for addressing bad behaviour by some health care actors, and can head off such problems so as reduce the probability of the state getting involved.
7. The Coalition can be more effective in overcoming the frictions faced by hospitals in empanelment with the various government sponsored health insurance schemes (GSHIS) and address frictions associated with dealing with health insurance companies.
8. Some health care organisations may falter in their commitment to stay in this fight. The Coalition will be valuable in exerting peer pressure, and in helping transmit management knowledge to some organisations who are sitting on the fence.

To the extent that the health care problem in a city like Nagpur is worked out well, individuals will feel more safe, and will get back to working and consuming, thus bolstering the economy. If the health care system gets crushed, there will be greater reticence on the part of the citizenry to spend or work, and the economy will be more adversely affected. Supply chains will get disrupted if there is a lockdown in the future in Nagpur. There is thus ample self interest which should drive the business community, and the health care community, to come together, and expend financial and management resources on building such a Coalition.

There are severe financial problems in many health care organisations today, as the traditional revenue stream has dried up as a consequence of fearful households. The leadership of many health care organisations is firefighting a financial crisis, which is exerting a tax upon their management bandwidth, at a time when they should primarily be working on laying the groundwork for the surge. The Indian financial system works poorly and is not able to perform its role, of efficiently supplying capital. There is a need for owners to bring in equity capital to alleviate this problem. It is also in the self interest of business interests in a given city, to offer loans to health care organisations, so as to diminish the organisational rout of health care organisations in the surge, which would adversely impact upon the economy of the city.

Conclusion

The bulk of the discussions surrounding Covid-19 in India are focused on public policy. But state capacity in India is low, and we should have low expectations for what the state can do. As the de-lockdown progresses, the pandemic will accelerate. We are now at the last barricade: Health care.

How things work out in 2020 will now be shaped by the sagacity and leadership qualities of the senior managers of health care organisations across the country. There are about 10,000 important hospitals in India, and about 50,000 key persons who make up the leadership of these hospitals. All eyes are on the actions of these 50,000 people, which will have an impact upon millions of lives. Seldom has so much depended on so few.

In this article, we have shown some areas of planning and preparedness that are required in health care organisations. All large hospitals in the country, private or public, need to plan for the surge. A key theme we have emphasised is negotiation and collaboration between private persons. The Indian state is generally not able to usefully intermediate in the interactions between private persons. A key feature of the way forward lies in organising communities, in privately negotiated local solutions. It is in the best interests of the citizenry and the health care community of (say) Nagpur to take their future in their own hands, to plan their best way forward.