More ammo: Improving resilience against extreme surges in demand

by Ajay Shah.

The Javelin anti-tank guided missile is important for the defence of Ukraine. Under normal times, the production capacity seems to be about 3600 a year. The Ukrainians seem to be using 500 per day, or roughly one missile per kilometre of battlefront per day. The peak load is about 50 times bigger than normal times.

Vershinin, 2022 estimates the Russian army is using 7,176 artillery rounds a day, and argues that these numbers are challenging for the modern Western military manufacturing capacity. He estimates that present US annual artillery production would last for about two weeks of combat in Ukraine. In more recent times there are estimates about Russian use of as much as 60,000 rounds/day.

It may appear that with precision guided weapons, a smaller number of weapons will be required to get the job done. However, precise information about targets is lacking, and the military is reduced to shooting at numerous low probability targets. There are more pathways to target acquisition owing to drones, low earth satellites, night vision, etc., and therefore there are more opportunities to use ammo per unit time. The Ukrainian Armed Forces (UAF) innovated with their new `GIS Art for Artillery' system, where rumoured gains on the delays in the kill loop run from 20 minutes to 30 seconds. As a consequence, modern wars are facing production constraints. As an example, in the small air war in Libya in 2011, the UK and France quickly ran out of precision guided munitions (PGMs).

Such problems with the peak-to-base ratio are not unique to ammo. Consider medical oxygen. The peak load in the delta wave was much bigger than normal times. Alongside this, the bulk of the oxygen production is in the economically advanced peninsula, the biggest demand was in the Hindi heartland, and transporting oxygen is difficult as the refrigerated trucks cannot go at over 25 kph.

Or consider surgical masks and personal protective equipment (PPE). The peak demand during the pandemic perhaps went up by 50 to 100 times when compared with normal times.

Or consider medical education. With students returning from Ukraine, there was a small surge in demand for medical education in India. In a healthy economy, there should be a supply response. In a well functioning society, the resource allocation is not fixed.

Or consider electricity. Electricity demand peaks in the evening, windmills are unreliable, the sun shines in the day and can be obscured by clouds. There is substantial intra-day variation of demand (that is quite predictable), but supply is unpredictable and has a different natural intra-day variation. The puzzle of the energy system lies in dealing with the peak-to-trough ratio.

How should we think about such problems? How does the price system respond to these challenges? Is there market failure? What, if anything, is the role for the state in improving things?

Using more civilian parts

To the extent that commercial, off-the-shelf technologies ("COTS") are utilised, this eases the problem as very large sourcing can be achieved in the normal world of business. This calls for a new kind of design philosophy for military equipment, which emphasises the use of as much as possible of industrial parts that are readily sourced. This leaves a smaller problem of exotic specialised components which require special solutions for surge manufacturing.  

Surge capacity as an option

The right but not the obligation to buy is an option. When the buyer has the right, but not the obligation, to buy 2$\times$ more or 20$\times$ more from the seller, at a preset price, this is an option.

As we know from the field of options, options are always valuable (i.e. they come with a non-zero cost). Being there with excess capacity is not free, for the seller. And, the value of the option goes up when there is more volatility. While financial options loom large in the imagination, the world is full of real options.

Surge capacity in the price system

Prices move, from moment to moment, till supply equals demand. When faced with a shortage, prices go up so as to ration out many prospective buyers. And, equally, those high prices tickle firms into producing more. Vast amounts of patience and intelligence are put in, by buyers and sellers, in order to reduce demand (e.g. by finding substitutes) and increase supply (e.g. by producing in innovative ways). Every surge in prices contains the seeds of its own demise, as buyers establish alternatives, and through the supply surge that follows. Covid vaccines were always going to be a short hot market, and production is now being shut down.

When demand surges or supply drops, the price system sends out signals for firms to produce more through high prices. This tends to be accompanied by a lot of hand-wringing about shortages and high prices. If you think "something should be done", to increase output, you should be happy at what is unleashed by the price system, as there is no force more powerful than high prices, in encouraging buyers to buy less and sellers to produce more.

The market economy is not a bureaucracy; it thinks in all sorts of creative ways. If the price of oxygen is high enough, steel factories will stop making steel and sell oxygen into the public market. If prices go sufficiently high, oxygen cylinders from the Indian peninsula, and from abroad, would be airlifted into the Hindi heartland. The sources of increased supply will always surprise us.

But with the best of effort, mobilising enhanced output is hard and takes time. There is a cost to reallocating the resources of the economy, in order to shift from making widget $x$ to widget $y$. The price system finds this reallocation at the lowest cost to society, at the lowest disruption to society, without harming the incentives for sound behaviour and long-term growth.

Many times, a disruption on the output side is also a disruption of the inputs of the firm. When vast increases in output are required, the inputs (whether physical raw materials or the precise human capital) also become costlier. Both supply and demand curves change in many a surge. Such a combination of factors exacerbates the price rise.

Resilience

The price system will sort things out, in the sense of finding the price at which demand equals supply. It is interesting to go one step further and ask: How big was the supply response, of masks produced per day at its peak divided by masks produced per day before the pandemic? A more resilient economy is one where the price system induces a bigger output surge in a shorter time while requiring a smaller rise in the price.

Alternatively, we can focus on quantities and wonder, under what conditions can very large surges be achieved? We can identify a few sources of resilience.

Complexity in the production process

In a country where many things are produced, and in a country with deep pools of skilled people, there will be more headroom for adaptation. If there is a civilian aircraft industry, it can more easily retool to make military craft. If the world's biggest vaccine manufacturer is in our backyard, it can license a good vaccine from abroad and mass produce it. Tractor factories can become tank factories. For a contrast, a country like Saudi Arabia or Russia has simple structures of production, and the price system has inferior raw material to work with.

A successful software tool
is one that was used to do something
undreamed of by its author.
-- S. C. Johnson

The most important ingredient is the human capital: the managers, the chemists who know multiple routes to get to a given molecule, the creative people who can hack a machine or a software system to do things that were `undreamed of by its author'. Resilience comes from deep pools of these individuals, who are sparked into self-interested action by the price system. It is equally about the raw STEM knowledge, and about the creative thinking of the business folk who see profit opportunities, who imagine new kinds of deals, who innovate. These pools of capacity lie in the private sector. Even when a government-controlled system has the creative people, it does not have the incentives for them to think, take risks, innovate, and solve problems.

Of particular importance are adjacent products and dual-use technologies. A factory that makes vaccines can be the right starting point to rapidly get a factory to make Covid vaccines. Cylindrical engineering products made using special alloys, for civilian applications, can be rapidly retooled to make ammo. The lowest costs for augmenting supply come from the presence of these neighbours to the desired product.

In normal times, the optimal structure of production tends to become monolithic. The market tends to collapse into a small set of firms and techniques of production. Monolithic methods of production are inherently risky. When crises come along, we see the value of more diversified and more eclectic methods of production. Price surges, in a crisis, create profit opportunities for obscure strategies for production, and obscure producers. These occasional bouts of profiteering serve to keep these obscure firms, these option sellers, alive.

Private sector confidence

The private sector will stand ready with option-like capabilities, it will be alert, it will move mountains to produce when there is a price surge, all in search of one outcome: high profit rates in those brief extreme moments. A society that views supernormal profits as unjust, and tries to expropriate these private firms, is a society where private firms will layer risk premia on top of their ordinary market-based responses. In other words, we would require an even bigger price surge to elicit the supply side response when the probability of expropriation of the firms goes up.

Globalisation

High domestic prices incite imports; the productive capacity of the whole world is brought to bear upon the shortage within one country. Covid vaccine manufacturing in India was about an Indian facility that licensed a British vaccine design, and used numerous imported materials. A deep engagement with globalisation also increases resilience by fostering higher human capital of the elite. An inward oriented economy, with barriers to cross-border activities in the laws and in the minds, is likely to be less resilient.

Storage

If more ammo, oxygen or PPE are held in storage, this creates greater resilience. There is no free lunch; this storage has costs in terms of the opportunity cost of capital, the cost of storage and depreciation. Someone has to pay for this.

Production capacity that has an upside

Consider a factory that makes ammo. If the private person has a contract where there are the assembly lines and staff running at 1 shift, but are ready to jump up to 3 shifts, then there is headroom for a 3$\times$ increase in output. Sometimes assembly lines can be designed in a way where additional workers can be added and the line then runs faster. This can potentially create space for another 2$\times$ increase in output.

In the case of oxygen, firms in the field of industrial gases can have additional equipment on standby, through which medical oxygen output can go up on demand.

As with storage, there is no free lunch. The private firm would have to have contracts with skilled workers in order to be able to surge the production on demand, and design a production system with this kind of headroom. As with the `disaster recovery systems' in the world of software, the principal should randomly trigger these provisions every once in a while, and verify that each agent is indeed able to surge output as promised under contract.

Capabilities in government contracting

When there was a sudden requirement to fly students from Warsaw to India, the best pathway lies in the government rapidly running an auction, where global airlines compete to deliver the lowest price. Surge capacity for the state lies in the combination of (a) A capable and innovative private sector and (b) A state that is able to enter into contracts with private persons.

Is there a role for public policy here?

Fighting wars is a service that is produced by the government. The strategic planners in the field come up with a requirements document such as `We need to be able to sustain a war for 3 months where we are using 100 tubes a day'. Establishing this level of surge capacity is required as part of production of the public good of defence.

In the case of health, what is required is a careful counting of deaths owing to Covid-19, and assessing the number of deaths which are attributable to the shortage of medical oxygen. A careful analysis is then required, where the statistical value of a life is compared against the costs to society of higher surge capacity for oxygen. If a certain enhanced surge capacity for oxygen is able to save lives, while spending less than the statistical value of a life, there is market failure, and then there is a case for public policy to think about state action.

The fact that there is a surge in oxygen demand does not necessarily imply that there is market failure. We can envision private hospitals propositioning health insurance companies and to individuals, saying that they have established the following kinds of surge capacity for oxygen. This is not unlike the work that private hospitals do, in order to assure themselves of electricity in the event of a disaster. We should skeptically evaluate whether we want a government to do something.

Consider the field of masks and other personal protective equipment (PPE) at the early stages of the pandemic. When demand went up by 50 to 100 times, prices skyrocketed. Some policy makers were red in the face and barged into the economy, with export bans, with efforts to supplant the managers of private firms and organise production. But the right response was to do precisely nothing. High prices created near-magical responses by the private sector; there was a surge of import and production, and competition drove down prices.

State intervention that harms surge capacity

When the price system gets going, solving the mismatch between supply and demand through high prices, we often get many calls for state intervention into the working of the economy with tools like price limits and ordering private firms to operate in certain ways. It is ironic that the very feature that incites more production and reduces the demand -- high prices -- is what irritates some people.

Firms will earn supernormal profits in a surge. These supernormal profits are the fair return for (a) The hard work to modify production capacity in a short time; (b) The alertness and risk taking when faced with an incipient surge; and (c) The long years of holding option-like capabilities which are not earning high returns in normal times. When a society begrudges these supernormal profits, and uses state power to expropriate firms, the response of firms is to be less alert, take less risk, do less hard work in modifying production capacity and hold less real options, all of which worsens the problem faced by society in responding to the surge.

To commandeer resources, to order private firms, without proper compensation, is expropriation. During the second wave, many private firms were forced to stop their production in order to transfer oxygen to medical applications. If they were not compensated for their lost production, this constitutes expropriation.

Price controls hamper the very process of healing. High prices kick off the modification of the resource allocation in order to produce more and consume less. When policy makers use state coercion to force transactions to take place at artificially low prices, this reduces both responses. The one thing worse than a price that moves rapidly by a lot is one that does not.

There are always eclectic and opportunistic firms that jump into the fray and reap huge profits when a certain situation presents itself. These firms might even earn nothing at normal times, and just provide options to society. When the state interferes with the 'profiteering', their viability is adversely impacted.

State intervention that gets surge capacity at an excessive cost

One path to having the requisite amount of peak ammunition is to build a large number of public sector factories, which are idle in normal times, where the full cost of a factory is paid and the workers do nothing. While this does get the job done, it is an inefficient path; it does not harness the cleverness of private firms to get the same surge capacity at a lower price.

When there is a shortage in the country, it is tempting to ban exports. This appears to augment supply in the country, and bring down prices, in the short term. But it harms the trust of all firms to produce in India and thus harms India's long-term growth.

The Indian state attacked firms who were importing oxygen concentrators at the time of their peak demand [example]. This amplified the required rate of return for doing this important work.

The most damaging state interventions are those that directly control the resource allocation (e.g. forcing factories to close down so as to grab their oxygen), and in violating the rule of law with outright threats to coerce private persons. When the state becomes such a bull in the china shop, it tends to disrupt the complexity and sophistication of the resource allocation of the market economy. This encourages private people to produce less in India.

The discussion here, of unwise state intervention, is related to the problem of supply chain resilience when faced with Chinese exports of APIs to the Indian drugs industry. There also, it is possible to do clumsy things. Bambawale et. al. 2021 show how to do this better, how to go with the grain of the price system.

Going with the grain of the price system for surge capacity in ammunition

In the field of defence, strategic thinking should ideally generate a requirements document such as `We need to be able to sustain a war for 3 months where we are using 100 tubes a day'. Alongside this, there may be a peacetime requirement of 5 tubes a day, i.e. a peak-to-base ratio of $20\times$. This problem would get handed off to defence economics.

The best way for defence economics to solve this problem is to undertake the following kind of contract:

1. To ask for multiple private vendors who add up to a peak capacity of 100 tubes/day while actually running every day in peacetime at one-twentieth this rate;
2. The private firms would find the cost-minimising paths for obtaining this flexibility in production, and they would do this better than a PSU or a government department;
3. Each private firm would be subjected to random fire drills, where they are asked to suddenly up their production by $20\times$ for a period of $n$ days with $n < 90$.

In this procedure, we have fixed the surge capacity and are procuring on the price. Alternatively, the procurement can fix the price of the tube, and ask for bids which promise the highest surge capacity.

Through this, the energy and intelligence of the private sector would be brought to bear on the problem of obtaining surge capacity for the public goods of defence. It is better to have multiple private vendors, rather than one, so as to avoid single points of failure/attack, and to set off the spiral of quality where private firms compete with each other to deliver bigger surge capacity at a lower price.

This requires complexity in government contracting. Government contracting is a critical homeostatic capability that is required by all states, which works poorly in India. This is an important field for research.

Once contracts are in place, state actors must work within the rule of law: they must not not coerce private persons to behave in ways which were not contracted. Once the Indian state has behaved correctly for a few generations, the private sector will become more comfortable, and will require reduced safety factors in their pricing.

I thank Akshay Jaitly, Amrita Agarwal and Pranay Kotasthane for useful conversations.

Keshav Desiraju

by Naman Shah.

Honoring the dead is tricky, more so when their loss is so unexpected. I imagined decades more of dialogue and friendship with Keshav before having to reflect this way. We all know what he accomplished, so I won’t dwell on that. Besides, legacy making is problematic and I think Keshav would’ve found it to be quite a bore. Instead, I would like to remember what made him special so we might imbibe those qualities ourselves:

1. Keshav spent time with young people and he had a blast doing so. He was curious and carried no airs about him. On the receiving end, whether he agreed or disagreed with you, it was such a rush to be taken seriously. One could also not escape noticing how very kind that act was and wanting to do the same for others. I remember a brisk winter walk in the Purana Qila zoo with him and another friend, a designer without an inkling of the policy world. Keshav still tried, for some time, to explain to her what his typical day entailed and in the end accepted with good humor and grace her synopsis “so you just sit in meetings and sign lots of papers?” as the superior if unflattering summary.

2. Keshav could acknowledge heartbreak. We know this from having seen it. His pre-election, overnight dismissal as health secretary by Congress, the party of his honored grandfather no less, broke him. He did not need the position to define himself, rather it was the sense of betrayal and losing a long awaited opportunity to do something of meaning (Keshav had turned down promotion twice to lead other ministries for what he saw as his best chance to make a difference in the misery of many). To outward appearances, he may have masked his emotions well. He remained active in many groups and found other new meanings. But underneath, there was pain, and his energy was never the same. For me, and I’m sure many of us, his experience had personal import. I had to reorient my theory of change, for if he couldn’t move the beast from within, what chance did I have?

3. Keshav always made space for others. I mean this both at the level of the individual and in his role in governance. For the former, Keshav was never too busy. We met during work hours for chai. He could spend the weekend sitting with his elderly aunt. He didn’t succumb to the modern plague of busyness and never invoked time scarcity as a status symbol. He thought it appropriate to write back to others who reached out to him. Unlike many of his peers, he identified as Keshav and never referred to himself as ‘the Government’. In the social realm, Keshav was a pluralist. He brought in a broader perspective to Nirman Bhawan, i.e. beyond the typical multilateral and Ansari Nagar crowd that are mustered for such things. He also made it a point to travel outside those confines. I can recall a vigorous nighttime meeting with our malaria team in Orissa. More than simple diversity, I think he sought the credibility and competency from those doing daily, direct work. Whether or not he had read Sen’s Positional Objectivity, his actions lived its message. The view from Delhi is limited. Also, ‘small’ things outside the Centre mattered. Or, at least, there was some justice in getting them resolved. In the midst of drafting national law, he pushed the NBME to expand nascent Family Medicine training at a handful of wonderful, small hospitals scattered in our hinterland.

4. Keshav loved to learn. While I admire and share the drive to fix problems, seeing the world in that lens alone gets bleak. Only making terrible situations passable misses the full range of human experience. He explored the beauty of literature, music, and museums. Keshav was joyous about these and, in sharing that joy, enriched those around him. At least ten books, both gifted by and borrowed from him, remain with me. To learn is to be open and to be open is to be liberal. From his philosophy, policy approach, and here, culturally, Keshav was the consummate Nehruvian Indian. The Oxbridge accent helped that impression too I guess. I am grateful to him as my introduction and living interlocutor to the rich, though diminishing, world of liberal Indian thought and politics.

5. Finally, Keshav was a terrific listener. There’s nothing to add here, as all the prior traits attest to this. His ability to listen was the foundation of the rest of the above. It was the simple basis for his widespread admiration and now its absence for our collective mourning.

I’ll end with what I think was the peculiar, though perhaps not for him, way we met. I had dropped by IIC for a mental health conference organized by colleagues. At some point they introduced me to Keshav, one of the speakers, and we found ourselves discussing literature including how much we both enjoyed Beteille’s essay My Two Grandmothers. He then asked me what I was currently reading. It was Guha’s The Last Liberal, and then, sheepishly, as we bid farewell, inquired whether I had read the dedication. I hadn’t and imagine my surprise when I did so after reaching home. The most civilized of civil servants indeed.

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.

Department of Expenditure, Ministry of Finance, Manual of Procurement of Goods 2017, Government of India, 2017.

Atul Dev, COVID-19: ‘Panic’ among India health workers over PPE shortages, Al Jazeera, March 2020.

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.

World Bank, World Bank PPP - Legal Resource Centre, 2021.

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.

Distribution of self-reported health in India: The role of income and geography

by Ila Patnaik, Renuka Sane, Ajay Shah and S. V. Subramaniam.

In health research, we study the causes and consequences of health at the individual level. This requires measurement of the health status of individuals. One simple path lies in asking a person: "Are you feeling well today?". This `self-reported health' (SRH) is a measure that is easy to implement, and has limitations in that psychological factors are present. A significant global literature has emerged, which draws on this measure to explore the causes and consequences of health.

The CMIE CPHS is an important new dataset which has longitudinal data for about 170,000 households, measured three times a year. They measure SRH for each individual in each wave. This measurement of SRH, alongside a rich array of household characteristics, makes possible many interesting research projects. In a new paper, Distribution of self-reported health in India: The role of income and geography, we discern some new facts and phenomena about health in India, through this data.

We use data for calendar 2018 and 2019, which works out to 3.5 million observation of a person in a wave. These years were chosen in order to obtain a baseline description of health in India, while avoiding the pandemic of 2020 and the possible impact of demonetisation in 2017.

What do we find? On average, ill health is observed in 3.25% of the records. On average, people in India are unwell for about 12 days a year. There is a U-shaped curve in age, with higher ill health rates for the young and the old.

We get a nice map of the variation of the ill-health rate across the country. This is interesting, in and of itself, as it shows us something about health care requirements. However, some of this variation reflects geographical heterogeneity in income and age structure.

We estimate logit models which explore correlations between standard socio-economic measures and the ill-health rate. The important sources of variation turn out to be age, income and location.

We then focus on an approximately modal person. Model-based predictions for the ill-health probability are constructed for this individual. This yields a map of the predicted ill-health rate --  

 

This shows the variation of ill-health in the 102 `homogeneous regions' (HRs), after controlling for income, age structure and other standard socioeconomic characteristics. It is an interesting and new map. These results do not conform with the standard stereotypes of north vs. south. Epidemiological research is required in understanding what is at work in each of the difficult HRs. Major gains in the health of the people could potentially be obtained by focusing on these hot spots and finding the right public health interventions.

We then ask: are rich people healthier than poor people? As the rich fare better on nutrition, housing quality, knowledge and access to health care, we expect there would be such a correlation. This is indeed the case in the overall aggregate data. However, there is strong geographical variation in this correlation. Ill health and poverty are positively correlated in only half of the country. There are even HRs where the relationship is reverse -- where poor people report better health than the rich. Further, the two maps (the map of ill health of the modal person, and the map of the places where ill health is not positively correlated with income) show different patterns. They are distinct phenomena that invite further exploration.

How elements of the Indian state purchase drugs

by Harleen Kaur, Ajay Shah, Siddhartha Srivastava.

There is one well known problem in India: the problem of drug quality. A significant fraction of the drugs purchased and consumed are sub-standard.

There is another well known problem in India: the difficulties of government contracting. When state organisations choose to buy instead of make, they face difficulties in the entire pipeline from bid preparation to tendering to contract disputes to contract renegotiation to payments. Weaknesses in government contracting are a cross-cutting problem that hamper the emergence of state capacity in all fields.

Research on government drug purchase thus lies at the intersection of two literatures: the drug quality literature in the field of health and the government contracting literature in the field of public administration.

Government purchase of drugs is particularly important for three reasons:

1. The government is a large buyer of drugs, and the people would become more healthy if the quality of government-purchased drugs could go up.
2. If procedures for drug purchase by the government are improved, this could potentially have an impact on the optimisation of an important subset of firms who may then improve their quality standards, and this would impose positive externalities upon private buyers of drugs.
3. There are some policy pathways based on information about government testing of drugs, where the release of test data into the public domain, as a side effect of a well structured government purchase procedure, can also reshape the incentives of private firms in favour of higher quality.

A research literature on government drug purchase is required. For all researchers looking at this field, obtaining basic institutional knowledge is a bottleneck. A first building block of this is a description of how various elements of the Indian state buys drugs. This is the kind of paper that everyone wants to read but nobody wants to write. We have made a first attempt at this descriptive paper.

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.

The market for Covid-19 vaccines and the tipping point to herd immunity

by Ajay Shah.

Many firms are developing Covid-19 vaccines. Enormous resources have to be deployed, up front, to develop a vaccine and to build manufacturing capacity. It is likely that many vaccines will get through to approval in mature regulatory regimes. Not all vaccines will work identically for all situations, e.g. some vaccines may work better for an elderly person than others.

It is commonly assumed that the global market size for a Covid-19 vaccine is about 6 billion people. In this article, we argue that this might not be the case. Let's think about the situation in the market once one or more vaccine reaches the market.

The buyers perspective before vaccine sales have commenced

The private gain for an individual from buying a vaccine are shaped by the probability of getting sick when leading an unconstrained life. This is shaped by the extent to which Covid-19 has burned through the communities that the person plans to engage with. As an example, in the slums of Bombay or Delhi, herd immunity has set in. A person living there knows that few people in her circles are now getting sick, and she feels relatively safe. Well known factors such as age and co-morbidities will also shape the threat perception of each person. Therefore, for her, the gains from a vaccine are relatively modest, and the willingness to pay is small.

In each city of the world, there is a different numerical value for the attack rate (the fraction of people who are infectious) and the extent of immunity. The state of the epidemic in Pune is different from that in Bombay. As time passes, each city is inching towards herd immunity, and the passage of time thus diminishes interest in paying for a vaccine. Vaccine IP and manufacturing facilities are wasting assets.

It it were possible to develop a combination of tests that add up to an `immunity passport', then the price of this test and the odds of coming out positive would shape the demand function for the vaccine.

Progress on immunisation and herd immunity

Into this world, let us imagine that the sale of multiple vaccines commences. At first, there would be a rush of demand and high prices. As immunisation progresses, the attack rate would go down and the gains from buying the vaccine would further go down. In places like Bombay and Delhi, where a considerable proportion of the population has already been exposed to the disease, when a modest fraction of the population is vaccinated, this could tip the population over into herd immunity, and the disease could die down.

In such a world, vaccine makers face the prospect of a short hot market. At first, vaccine demand will be high and the factories will not be able to keep pace. Competition will come about and that will exert pressure on prices. In a city like Bombay, with about 20 million people, after (say) 5 million persons buy the vaccine, this may significantly change the threat perception in the eyes of the average individual. Vaccine demand would then decline.

Under such numerical values, the market potential in Bombay is not roughly \$50 $\times$ 20 million people or \$1 billion, but perhaps more like \$25 $\times$ 5 million people or about \$125 million.

All of this reduced revenue potential will go to the first few firms that get 5 million doses into the Bombay market. Competition would exert downward pressure on the price, demand would tail off as herd immunity sets in, and there would be a price crash. The late comers would flood the market with output but would obtain low revenues in return.

The vaccine demand collapse in a simple model and in the real world

We have always known that a vaccine is not just a private good; there is a positive externality. The novel idea of this article is about tipping points.

Consider a simple model in which herd immunity is achieved at 60%. Suppose 50% of the population is already immune and knows it. The first 10% that gets the vaccine tip the system over to $R_0<1$ and then the fires start dying out. Once the fires start dying out, the attack rate goes down, the threat perception changes, and the incentive for private people to buy the vaccine drops a lot. Under these conditions, the positive externality imposed by vaccine purchase by the early vaccine buyers, upon the overall system, is particularly large.

A key factor that drives behaviour in this model is that when a person is immune, she knows it and then has no incentive to buy a vaccine. In the real world, people don't know whether they are immune, and would be more inclined to buy a vaccine just to be safe. In the limit, the veil of ignorance is complete, nobody is able to assess the threat, and everyone wants to buy a vaccine.

In the real world, the veil of ignorance is not complete. At every place, people do have a personal judgement about the threat level based on the extent to which their friends and family are getting sick (or not) per month. Age and co-morbidities will also shape vaccine demand. As a general principle, it is always wise to think that humans are sentient optimising creatures. Individuals have a noisy estimator of the threat that they face and this will shape their willingness to pay for a vaccine.

Wall street tells Main street what to do

These problems feed into the thought process of private firms and shape the commitments of capital to the problems of vaccine development and manufacturing when faced with a novel epidemic. 

Numerous vaccines are under development. The process of vaccine approval is necessarily slow. At present, we generally think that over time, one by one, many of these vaccines will get through to the market. By the reasoning of this article, the first few will get through, within a few months the market will collapse, and all funding will be yanked for other projects. This will be a bit reminiscent of how funding for vaccines against Sars-Cov-1 was abruptly yanked when the funders realised that Sars-Cov-1 had reached $R_0<1$.

The numerical values used here (e.g. 60% for herd immunity, 5 million immunised in Bombay to tip over into herd immunity, $50, etc.) are of course purely illustrative. To translate these ideas into practical calculations requires data on the extent to which immunity has come about. In many places worldwide, there are good estimates of the persons who have antibodies, but there is more to immunity than measured antibodies. In India, the information available about the state of the disease in (say) Bombay is rather poor.

If we take this dynamics of the vaccine market seriously, vaccine makers have an incentive to create such datasets. Alongside the construction of such datasets, there is a need for derivatives trading on underlyings such as the fraction of Bombay residents who have antibodies.

The argument of this article is a special case of the long-standing problems of incentives for vaccine development. An effective pathway for state intervention, and philanthropic capital, lies in offering contracts for R&D and manufacturing which change the incentives of private persons to engage in these activities.

Implications

To the extent that this reasoning is correct, individuals will at first face a vaccine market with high prices and shortages. For many individuals, particularly for low-risk persons, there is a tradeoff between paying more to get the vaccine early versus paying less to get it late or even to not get vaccinated if the pandemic has subsided.

For firms with a vaccine under development, this article paints a winner-takes-all scenario, where the first few vendors who get output on scale will capture all the revenue. To the extent that this reasoning is correct, plodding along to the finish line late will induce low revenues.

For policy makers and philanthropic capital, it is important to avoid a `coronavirus winter', a collapse in coronavirus research of the kind which happened after the SARS epidemic achieved $R_0<1$. There is enormous knowledge, and capable teams, which has been created by the early gold rush of building vaccines against SARS-Cov-2. This knowledge should not be lost. As an example, it would be nice if research groups will publish research papers and release code before they put out the lights. We need to think of the sustainable frameworks, where we achieve a new normal of high R&D into pathogens that can trigger pandemics.

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).