institutional incentives in social infrastructure provision

8/13/2019 Institutional Incentives in Social Infrastructure Provision

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Institutional Incentives

in Social Infrastructure Provision

the District Primary Education Programme in India

Sumeet Manchanda

September 2003

The views expressed in this paper are those of the author who retains the copyright


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CONTENTS

Lists of Abbreviations, and Figures ..... ii

SECTION I:INTRODUCTION AND BACKGROUND

Introduction ....

Background ....

1

4

SECTION II:THEORETICAL CONSIDERATIONS

Justifying the Use of the NIE..

NIE Insights Used in This Paper ....

A Framework Of Incentives Within Formal And InformalConstraints .

11

13

17

SECTION III:APPLICATION PART I:EXPLAINING PERFORMANCE

The Institutional Arrangements, and their Performance Explained

through Transaction Costs and Agency Chains .

Explaining Performance through Institutional Incentives ..

21

33

SECTION IV:APPLICATION PART II:EXPLAINING CHOICE

Explaining Choice through Institutional Incentives ... 40

SECTION V:CONCLUDING DISCUSSION

Concluding Discussion... 46

Works Cited .... 50

Works Consulted . 54


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List of Abbreviations

BEO: Block Education Officer

BEP: Bihar Education Project

CBRI: Central Building Research InstituteCWP: Civil Works Programme

DfID: Department for International Development

DOE: Department of Education

DOEEL: Department of Elementary Education and Literacy

DPEP: District Primary Education Programme

EdCIL: Educational Consultants (India) Limited

EEB: Elementary Education Bureau

GOI: Government of India

IAS: Indian Administrative Services

JRM: Joint Review Mission

MP: Madhya PradeshSPE: State Project Engineer

SPD: State Project Director

TSG: Technical Support Group

UP: Uttar Pradesh

VEC: Village Education Committee

VCC: Village Construction Committee

WB: World Bank

List of Figures

Figure 1: Institutional Setup for Delivery of Social Infrastructure under DPEP.. 7

Figure 2: Proposed Framework for Analysis of Institutional Incentives . 17

Figure 3: Focus Levels for Explaining Performance and Choice 20

Figure 4: Apparently Simple Agency Relationship between Departments . 21

Figure 5: The Two Departments Working in Parallel, with No Direct Meeting Point. 23

Figure 6: Apparently Simple Agency Relationship in MP .. 24

Figure 7: DPEP Civil Works Management Madhya Pradesh ... 25

Figure 8: DPEP Civil Works Management Structure, Assam . 28Figure 9: DPEP Civil Works ManagementBihar . 30

Figure 10: Financial Progress in DPEP II and III, September 2002 32

Figure 11: Transaction Costs and Accountability in Different Arrangements 32

Figure 12: Institutional Incentives Affecting Performance of Implementing Staff in

Different Arrangements ... 37

Figure 13: Institutional Incentives of Decision Makers Affecting Choice of

Arrangements ... 44


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IINTRODUCTION AND BACKGROUND


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INTRODUCTION

Developing countries are still in the process of building social (educational and

health) infrastructure, especially in poor, remote and rural regions. The provision of such

infrastructure in such regions is characterised by market failure, and the public sector is

the only viable option in spite of the fact that it has delivered poorly so far (Israel, 1987;

World Bank, 1992; 2003). This conundrum has led many analysts to regard the problem

of social infrastructure provision as one of the most difficult in development management

(Hughes, 1998; Paul, 1991; Israel, 1987). The problem is likely to continue, as

governments continue their attempts to match supply to requirements. The challenge is to

find ways and means to improve efficiency within the public sector paradigm.

The District Primary Education Programme (DPEP) in India is a useful laboratory

to examine this issue.1 In this nation-wide central government programme, different

states attempted different institutional arrangements to deliver educational infrastructure

such as school buildings, water and sanitation facilities, educational management

institutes and training centres. Some states chose to follow traditional practices, and

transfer execution responsibilities to specialised public sector agencies. Others chose

greater amounts of private participation. Still others chose an alternative institutional

arrangement within government, where they pulled out public sector staff from their

regular work environment, and provided them with a different one. The performance of

all the states has been closely monitored and documented through the project period, and

final evaluations have recently been conducted.2Interestingly, a study of these documents

shows that patterns of variation in performance can be traced to the variations in

institutional arrangements applied.

1 This study is on the performance of the infrastructure component of DPEP, and

does not in any way reflect the performance of the other aspects of theprogramme.2Final drafts of evaluation reports were available at the time of writing.


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Using the theoretical framework of the New Institutional Economics (NIE), and

working within its typical rational-choice framework (Knight, 1992:ix), this paper first

attempts to explain why some institutional arrangements have demonstrably worked

better than others in DPEP. Using the experience of Madhya Pradesh as an example of a

state that followed conventional practice, it attempts to explain why this practice leaves

much to be desired. Then, it uses the experience of Assam to describe a creative

arrangement that worked well within the overall institutional structure, or rules of the

game. Lastly, it tells the story of Bihar, which attempted a radical arrangement and

succeeded for a while but which could not sustain the arrangement, and slipped badly

in performance.

The paper then goes on to explain the institutional incentives that guided

decision-makers in choosing between the above arrangements. Here, it finds empirical

support for the insights of institutional theorists who argue that inefficient institutional

arrangements can get locked in (Harriss 2002; Nugent, 2002), and are difficult to

remove and replace (with more efficient ones), because they are outcomes of

distributional functions in society (Knight, 1992). The paper, in effect, provides an

empirical example of the informal and formal rules of the game that structure individual

incentives in a manner that reinforces inefficient institutional arrangements even when

there is demonstrable evidence and knowledge of other arrangements that could lead to

better social results.

From the experiences of DPEP, the paper derives important understanding of

institutional incentives that affect social infrastructure provision in particular, and public

provision in general. Significant empirical lessons are learnt which should provide

insights helpful to similar future programmes.


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BACKGROUND

Locating Social Infrastructure Provision

The distinction between social, and economic infrastructure was prominently

made by the World Bank (1993; 1994) and is now widely accepted3. Social infrastructure

refers to infrastructure in the health and education sectors, which are seen as long-term

investments in human resource development and poverty reduction. On the other hand,

infrastructure such as dams, roads, canals, telecommunications, electricity and the like is

seen to contribute more directly and quickly to economic growth, and is termed

economic infrastructure.

Economic infrastructure can be provided through various institutional

alternatives: public ownership with public provision; public ownership with private

operation; private ownership with private operation; community ownership and provision

(World Bank, 1994). Due to the nature of social infrastructure, however (as detailed

below), public provision remains the only viable option here.

Social infrastructure is classified in the economics literature as merit goods,

which are not pure public goods, nor pure private goods. According to Hughes (1998),

pure public goods are generally provided by the government because they are non-

excludable goods, such as street lighting. On the other hand, pure private goods, such as

cars, are excludable, and it is generally left to the market to provide them. While merit

goods (such as education and health infrastructure) are excludable and can be considered

private goods, the government is generally obliged to step in where the market is not able

to provide them in an optimal fashion (World Bank, 1992). This market failure could be

due to reasons such as the inability of poor people to pay; or the prohibitive cost of

3see DfID (2002), and Willoughby (2002)


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private provision in remote and scattered locations (such as in DPEP, which operated in

remote, poor and underprivileged locations).

The government is obliged to provide these goods because they are considered

socially desirable in a welfare context.

[A]n educated workforce is economically desirable and government

assistance may improve overall educational outcomes for the benefit of

society as a whole . . . [but] . . if education is regarded as a private good

there are equity problems and efficiency ones if those with innate ability

are not educated (Hughes, 1998: 98).

The DPEP Civil Works Programme

DPEP was4a programme of the Indian central government funded by the World

Bank, DfID, the EU, UNICEF and the government of Netherlands. It was the largest

primary education programme in the world (Bonner and Mukerjee, 2001), expanding

from 42 districts in its first phase, to 257 districts across 18 states by its fourth phase

(DPEPMIS, 2001).5With lofty objectives and an innovative approach, the project stood

out among government development projects as being particularly inspirational for its

participants, and creating a sense of working in mission mode6in its offices across the

country.

DPEPs substantial infrastructure component (called the Civil WorksProgramme

henceforth referred to as CWP) provided new school buildings, additional classrooms,

water and sanitation facilities, and repairs services in school campuses. In addition, it

also provided infrastructure for educational and training and management facilities at

state, district and sub-district levels. The numbers of facilities created by the programme

are, for example, upwards of 30,000 new school buildings, 50,000 additional classrooms

4As of September 2003, programme work activities are complete in all states but

four. Since the programme has ended in the majority of states, including the

case study states, I speak of it in the past tense.5The source mentions a count of 248 districts, but 9 additional districts wereadded in Rajasthan subsequently.6A common term used to describe working practices in DPEP.


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and 15,000 toilet blocks (TSG, 2002b). In the creation of these facilities, the programme

attempted to demonstrate the innovations of child-centred design, appropriate

technologies, and community participation.

Even after DPEP, the infrastructure gap is still large in many programme

districts,7and is much larger in non-programme districts. The DPEP CWPs budget has

been less than one-tenth of that required to fulfil the identified educational infrastructure

need of the country in primary education (Bonner and Mukerjee, 2002). Efforts to match

supply to demand will continue for some time - DPEP is being followed up with an even

more ambitious programme called the Sarva Shiksha Abhiyan (SSA), which aims to

universalise elementary education in India by the year 2010 (DOEEL, 2002), and which

will expend funds for infrastructure in excess of USD 1200 million 8. The findings of this

paper should provide guidance for the institutional arrangements to be used there, and in

other similar programmes across the developing world.9

Institutional Arrangement for Infrastructure Delivery

The broad institutional arrangement is described in figure 1. It is useful to briefly

introduce all participants in this arrangement as relevant to this paper.

The donors, notably DfID, possessed in-house infrastructure experts who

reviewed the programme bi-annually, in a Joint Review Mission (JRM) with

the Government of India (GOI).

7According to district infrastructure status documents prepared by all DPEP

states in 2002.8A very conservative estimate based on DOEEL (2002).9Such as in the infrastructure components of the Malawi Primary Education

Programme, or the Pakistan Primary Education Programme.


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(the two prime foci

of this study)

State PWD;External Consultants

District Administration;DRDA;

Panchayat Body;Engineering Agency

Government of India, MHRD:Elementary Education Bureau

Director in charge of Civil Works

State Society for DPEPState Project Director;State Project Engineer

Donors

National TSGCivil Works Group;National External

Consultants

District Project Office

Engineering Cell(or)

Line Ministry EngineeringDepartments

Village/ Ward EducationCommittees

Village/ Ward Construction

Committees

Figure 1: Institutional Setup for Delivery of Social Infrastructure under DPEPSource: adapted from Bonner and Mukerjee (2001:6)

The Elementary Education Bureau (EEB)10 in GOI was made up of senior

Indian bureaucrats who directed the programme. These bureaucrats were

primarily from the elite and famous (see Tendler, 1997) Indian Administrative

Service (IAS).

10The unit in GOI which directed DPEP was called EEB, DOE or DOEEL at different

times over the years.


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The EEB was provided technical and management support by the Technical

Support Group(TSG), made up of private consultants hired full-time for the

project. These consultants also hired other national consultants as per need.

The State Society for DPEP was set up specifically to implement the

programme, and was separate from the State Education Department. It was

headed by a State Project Director (SPD), who in most cases again was a

middle to senior level IAS officer. The society had a State Project Engineer

(SPE) who headed the CWP. It could hire external consultants from the

market, or take help from the state Public Works Department (PWD), for

technical and management support.

TheDistrict Project Office was in charge of planning and implementation at

the district level. It either had an in-house engineering cell, or had to

coordinate with state engineering departments, to manage the works.

Village Construction Committees (VCCs) were in charge of actual

construction.

All the participants in this arrangement were constant across all programme states,

except for the district and sub-district management arrangement.11As mentioned before,

variations in performancecan be traced to variations here, and thus this is one of the

prime foci of this paper. The choice of this arrangement, however, rested on the state

decision-makers, primarily the State Project Director (SPD). These decision-makers are

the other prime focus of this paper.

11The village level implementation agency is used as constant in this studyalthough it was not so across the project. Further clarification on this is

provided in the notes on research methodology.


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Notes on research methodology

Isolating institutional arrangements as factors affecting performance

Groups of states can be isolated based on institutional arrangements. From the

JRM reports (TSG 1996 2002), and the final evaluation studies, patterns of

performance can be found that coincide strongly with this grouping. This finding was

substantiated by triangulation through interviews with key individuals. Thus, the action

of isolating institutional arrangements as the factors affecting performance in this paper

can be said to be non-controversial in nature.

Comparing Assam, Bihar and Madhya Pradesh

The states of Assam, Bihar and Madhya Pradesh are compared in this paper.

While they share many commonalities (such as pockets of deep poverty), they are also

divergent not least in the performance of their politicians and administration over the past

few years.

However, they are comparable here since DPEP was a central government

programme, implemented by state project societies independent of state administration

the programme was thus partially insulated from local influences.

Assam, Bihar and MP have been chosen as the study states since firstly, they

represent different institutional arrangements in the most pure sense, since they

persisted with their respective arrangements over the longest possible period of nine

years.12Care has been taken here to report aspects of their programmes that were shared

by, and thus are representative of, other states that chose similar arrangements. Secondly,

they all had a substantial number of districts under DPEP and thus their experiences

can be said to be state-wide rather than district-specific.

12Across DPEP Phases I and II for MP and Assam, and across BEP and DPEP in thecase of Bihar. Other states adopted different arrangements in different

districts or across phases.


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Implementation agencies

Various implementation agencies were used in DPEP private contractors;

government engineers; and village construction committees (VCCs). VCCs were the

most common, and are accepted as being the most successful (DOE, 1998; TSG 1996-

2002). They are being used in SSA as well, and are fast becoming the standard

implementing agency for social infrastructure in India - thus, this paper limits itself to

describing arrangements where VCCs were implementing agencies.

References

I worked closely with DPEP from 1999 to 2002 as part of the national TSG.

While the prime references here are from published and official documents, and

interviews conducted specifically for the purpose of this paper, a few select references

are from my own observations and discussions with participants at state and field level

within the institutional structure of the programme. I was fortunate to have to prepare

visit reports in all my various visits across the programme, for which I kept personal

notes, which, though not intended for this use, have proved reliable enough to be used in

a work of this nature.


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IITHEORETICAL CONSIDERATIONS


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JUSTIFYING THE USE OF NIE

The questions that this paper asks of the DPEP CWP are: (1) Why did different

states choose different institutional arrangements? (2) How effective were different

arrangements in achieving project targets, and why? (3) Why were some states more

successful in adopting better arrangements than others?

The NIE is used in this paper since it has developed in order to answer precisely

such questions

Why are [institutions] the way they are? . . .How and to what extent dothey explain differences in productivity? . . .Why and how do inefficient

institutions get locked in? (Nugent, 2002:2)

Institutional analysis, or the NIE, is a paradigmatic change from the traditional

approach [of Public Administration] (Ostrom et al, 1993:18). The traditional approach

of public administration was built around the traditionalpracticeof public administration,

and described it as it evolved. Even one of its main building blocks, Webers theory of

bureaucracy, is considered by some to be no more than a skilful depiction of what he saw

in practice (Hughes, 1998). Now, this approach is fast losing relevance since patterns in

public administration have rapidly changed over the past three decades due to the

reduced financial powers of governments of the developing world, and the increased

private sector and civil society involvement in public management (Ostrom et al., 1993).

The alternative of the NIE does not describe patterns of behaviour, but more

usefully, provides general tools of analysis, mostly adapted from pure economic theory.

In addition, it can usefully be employed in conjunction with other theories and concepts

to sort information (Harriss et al., 1995:9). It is thus more universal in its application,

and allows one to explain patterns and theories of human behaviour that are specific to

particular issues. For instance, Ostrom et al. (1993) have effectively used it to analyse the


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problem of collective action in the particular case of rural infrastructure. Again, using

NIEs tools, Leonard (2000) has provided deep insights into human behaviour in the

specific case of health and veterinary services in Africa. Such studies have shown that the

NIE is useful in the analysis of non-macro socio-economic issues13.

There are two substantial criticisms of NIE to be addressed in this justification.

The first is that [t]he NIE engages with the problem of culture, as it does with politics,

but with difficulty (Harriss, 2002:6). I cannot claim to have got around this problem.

However, since I base my analysis solely on findings that are common acrossstates, this

may not take away from the findings.

The second criticism is that while the NIE is, in most situations, perfectly capable

of explaining change, it is not equipped to always predict it (Nugent, 2002). This also

may not pose a problem since this paper does not attempt to go beyond explanation at

any stage.

13While the NIE has been criticised for its limited power to analyse macro

issues - such as Toye (1995:64), who says that as a grand theory of socio-

economic development it is empty - he and others such as Harriss et al.

(1995) agree that it provides substantially advanced tools for analysis at themicro level. Since the present study is micro in nature, the NIE is considered

adequate for the purpose.


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NIEINSIGHTS USED IN THIS PAPER

Institutions, formal and informal

Institutions are the rules of the game in a society, or, more formally, are

the humanly devised constraints that shape human interaction (North,

1990: 3).

North goes on say that the humanly devised constraints can be both formal,

and informal. These can reinforce, or undermine each other. Informal constraints are

derived from culture, and its influence on the constraints that people impose on

themselves in their transactions. They can be (1) extensions, elaborations and

modifications of formal rules, (2) socially sanctioned norms of behaviour, and (3)

internally enforced standards of conduct (1990: 40).

Formal rules include political (and judicial) rules, economic rules, and contracts

(page 47). They evolve as societies become increasingly complex, and help reduce

transaction costs within the complexities of human interaction.

An interconnected web of formal and informal rules makes up the overall

institutional constraints that influence the opportunity sets of individuals. This web, in

different combinations, influences choice sets and decision-making in various contexts

(North, 1990). I shall return to this concept later in this section.

Accountability, and Agency Theory

NIE has prominently applied the tool of agency theory (traditionally applied to

the private sector), to the public sector, where it is useful in describing accountability

systems (Hughes, 1998). The agency problem is described as

a situation in which a principal (or group of principals) seeks to establish

incentives for an agent (or group of agents), who takes decisions thataffect the principal, to act in ways that contribute maximally to the


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principals objectives. The difficulties in establishing such an incentive

structure arise from two factors: (a) the objectives of principals and agents

will typically diverge, and (b) the information available to principals and

agents will generally be different. (Vickers and Yarrow, 1988:7)

Arrow (1985) has elaborated on part (b) above and identified two sub-problems

within this. One, where information of the effort of the agent is not available to the

principal, and the principal cannot check to see if the actions of the agent are as

scrupulous as they could be. This problem is referred to as moral hazard.

The second case described by Arrow is one where the agent has made some

observation that the principal has not made, and while the agent should use this

information in making decisions to maximise the principals interest, the principal cannot

check that this has been done. This problem is referred to as adverse selection.

Transaction Costs

While institutions are derived to increase efficiency by lowering various types of

costs and risks, there are also costs in their establishment and operation which are

broadly termed as transaction costs (Nugent, 2002). One simple categorisation of

transaction costs is by Ostrom et al. (1993), where transaction costs include coordination

costs (such as organising and communicating); information costs (related to time and

place, and superior/ scientific knowledge), and strategic costs (such as shirking and

corruption).

Institutional change and state failure

Khan (1995) distinguishes between two types of institutional14failure that have

been addressed within the NIE approachwhich he calls Type I, and Type II failures.

Type I state failure, or structural failure occurs if a particular formal

institutional structure results in lower net benefits to society compared to

an alternative structure (Page 73).14He uses the terms state failure, and institutional failure interchangeably.


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NIE analysis of this type of failure attempts to understand the contribution of

different institutions to social and economic performance. In this static analysis, better

and worse performing institutions could be theoretically identified or empirically

observed.

Type II failures are dynamic in nature and describe failures of transition in

institutions:

Type II state failure or transition failure occurs when the process for

changing the structure of institutions attains a lower cumulative set of net

benefits for society compared to an alternative process over a given

period (page 73).

North offers that institutional change is overwhelmingly incremental (1990:83),

and insists that discontinuous or sudden change is generally unsuccessful. He presents

discontinuous change as a matter of conflict between two coalitions, where [o]ne faction

may eliminate the others, but more common is a lengthy period of uneasy and

quarrelsome compromise (page 90). In addition, institutional theorists recognise that it

is perfectly possible for a society to get locked in to an inefficient set of institut ions

because of the interests of power-holders in their reproduction (Harriss, 2002:2).

Institutional Incentives

The incentives of individuals are central to every theoretical framework in public

management

15

, and the NIE is no different in this respect. Norths great stress on

incentives is clear when he says:

Incentives are the underlying determinants of economic performance. . .

bringing incentives up front focuses attention where it belongs, on the key

to the performance of economies. (1990:135)

15For discussions of individual incentives under traditional Public

Administration Theory, see Simon (1997); under newer Public Management Theory,see Hughes (1998); under NIE, see Leonard (2000) and Ostrom et al (1993); under

network models of Public Management, see Kickert et al (1997).


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This emphasis on individuals incentives in institutional analysis is due to two

reasons: firstly, building on the concept of the (rational) individual helps towards

building on a theory of human behaviour, which all studies based on institutional analysis

aim to do. Secondly, institutions are created byhuman beings, who also alter them over

timehence, any theory of institutions needs to begin with the individual (North, 1990).

There is no single framework of incentives that is used within institutional

analysis - different institutional theorists have used different frameworks. Ostrom et al

(1993:8) use the framework defined by Simon, Smithburg, and Thompson (1958:62) who

proposed that individuals incentives to perform, (in addition to material ones), were:

(1) opportunities for distinction, prestige, and personal power; (2)

desirable physical conditions in the workplace. . . .; (3) pride in

workmanship, service for family or others, patriotism, or religious feeling;

(4) personal comfort and satisfaction in social relationships; (5)

conformity to habitual practices and attitudes; and (6) a feeling of

participation in large and important events.

Chong (1991; 2000) has used a broader set of incentives to explain human

behaviour, such as material (or economic) and social incentives. To tackle the variety of

possible variables in my study, I would prefer to use and extend this broader

classification, by taking a cue from North (1990) who states that incentives are key to

interaction whether in the social,economic or political spheres. To these three spheres,

I would add the insights of traditional public administration theory and propose that the

professional sphere needs to be added to this conceptualisation, incorporating

individuals motivation to contribute to organisational goals (Simon, 1997).


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AFRAMEWORK OF INCENTIVES WITHIN FORMAL AND

INFORMAL CONSTRAINTS

Returning to Norths (1990) web of formal and informal constraints that

influences choice sets, I propose a framework that sets up a dialogue between the

incentives in the four spheres described above, and this web of constraints. Such a

framework can be denoted as a matrix (below).

Context

Incentives

FormalConstraints /

Rules

InformalConstraints /

Rules

Professional

Incentives

Social

Incentives

Economic

Incentives

Political

Incentives

Fig. 2: Proposed Framework for Analysis of Institutional Incentives

Professional Incentives

Here, professional incentives within formal rules would include career

progression as normally understood. Informal professional incentives would include

solidary and purposive incentives as spelt out by Clague and Wilson (1961), where

solidary incentives are the feeling of belonging in a team, loosely defined as team spirit;

and purposive incentives are the ideological incentives that motivate individuals towards

performance. This category would also subsume categories (1), (2) and parts of (3) and

(6) from Simon, Smithburg, and Thompson (1958) quoted above.


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Social Incentives

Especially in the public sector at the local levels, there can exist a strong

relationship between staff involved in service provision, and the local communities they

serve (as demonstrated by Tendler, 1997). The desires to gain or sustain friendships, to

maintain ones social standing, and to avoid ridicule and ostracism (Chong, 1991:34)

are goals that provide inducements to performance that may be described as social

incentives. Such incentives are built up through repeated interaction, which Chong

(1991) has described in iterated game models.

More formally, media attention can also produce social opinion that affects

individuals incentives.

Economic Incentives

All theories of incentives agree that material, or economic incentives are central

to human behaviour and interaction. Formal economic incentives include those that are

available as part of the job contract. Informal ones include rent-seeking and corruption.

Political Incentives

the administration or management of the public sector does not exist in a

vacuum; the public, the political leadership of government and its public

services are closely tied to each other by institutional arrangements and

political interaction . . . the business of government is embedded in

politics. (Hughes, 1998:225)

Political incentives include the pressures exerted by politicians at all levels, on

government staff, to perform in accordance with political goals whether or not these

agree with immediate socio-economic, or organisational goals. An example of this to do

with public infrastructure provision, is the reluctance of any government programme to

invest in repairs and maintenance, and allot preference to new construction instead

(which is wasteful in the long run). According to Ostrom et al.(1993), this reluctance is


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due to political disincentives, where, for politicians, new infrastructure creation is a

sure vote-gatherer, while repairs and maintenance are not. Another example of political

incentives is where job appointments in the public sector are based on recommendations

by politicians rather than being strictly merit-based. Such pressures abound in a

clientelist environment, of which Indias public sector is no doubt an example.

Applying the Framework

The following section (section III) aims to explain performance of different

institutional arrangements within DPEP. It does this in two sub-sections: the first

introduces the various institutional arrangements and partially explains performance

through the lenses of transaction costsand agency chains. The next sub-section explains

performance by applying the framework of institutional incentivesto the individuals who

directly affect performance, at the field management and implementation level within

DPEP. Since this section identifies better and worse institutional arrangements, it can

also be thought of as explaining Type I failure (Khan, 1995) in a micro context.

Section IV attempts to explain choice of institutional arrangements by the

decision-makers empowered to make that choice by applying the same framework of

institutional incentives to these individuals. And since this section attempts to explain

transition failure due to poor selection of institutional arrangements, it can also be

thought of as explaining Khans Type II failure, again in a micro context.


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(Focus whileexplaining

performance)

Government of India, MHRD:Elementary Education Bureau

State Project Director

Donors

National TSGCivil Works Group;National external

consultants

Engineering Cell(or)

Line Ministry EngineeringDepartments

Village/ Ward Construction

Committees

(Focus whileexplaining

choice)

Figure 3: Focus Levels for Explaining Performance and Choice


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IIIAPPLICATION PART I :

EXPLAINING PERFORMANCE


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THE INSTITUTIONAL ARRANGEMENTS,AND THEIR

PERFORMANCE EXPLAINED THROUGH TRANSACTION COSTS

AND AGENCY CHAINS

THE CONVENTIONAL ARRANGEMENT

Educational infrastructure in India is conventionally provided by public sector

engineering departments such as state Public Works Departments (PWDs), Panchayati

Raj Engineering Departments (PRDs), and so on (DOE, 1998; Bonner and Mukerjee,

2001). The state and central ministries of education and health send across requirements

and budgets, and the engineering departments manage and implement the works, either

through private contractors or by directly procuring material and hiring labour. On the

face of it, thus, the principal-agent relationship between the two departments seems

straightforward and logical.

The general consensus is, and expert evaluation studies show, however, that the

infrastructure created as an outcome of such a relationship is highly inadequate. For

example, extremely poor outcomes were found within the infrastructure created in the

much vaunted, nation wide Operation Blackboard (OB) central government scheme that

Output: Educational Infrastructure

Figure 4: Apparently Simple Agency Relationship between Departments

State Engineering Department(Specialised Agent)

State/ Central Department of Education(Principal)


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used this procedure (CBRI, 2000). Most indicators such as those of design, site selection

and construction quality showed inadequate results. More seriously, buildings were

found to be incomplete even years after their completion date, with some missing basic

elements such as floors and doors and windows. Similarly, an external evaluation

(Sulabh International, 1996) found comparable problems with the infrastructure created

by the Rural Engineering Services (RES) in Uttar Pradesh. Why did this apparently

logical relationship create such poor outcomes?

Agency Problems

While the engineering department acts as the agent for the Department of

Education (DOE), a clear moral hazardproblem is present. The basis of the relationship

here is that the engineers know much more about construction than the staff of the DOE.

There is no possible mechanism for DOE staff to be able to check that the efforts of the

engineers are diligent enough. Again, when these two departments work in isolation of

each other, there are problems of information asymmetries (Bonner and Mukerjee, 2001).

There are often cases where teachers require permanent teaching aids that are deliverable

through infrastructure programmes; or, the engineers may come across a construction

technology or design element that could help in classroom transactions (DOE, 1999a).

These pieces of information, though are not transferred and shared, and this leads to the

problem of adverse selection.

When looking at the workings of the two departments in practice, a second

problem becomes apparent: that the agency chain is actually not as straightforward as it

might seem (figure 5). Accountability within each department is strictly hierarchical

withinthe department, and there is actually no accountability in practice between the two

agencies. The two departments, in practice, work in parallel with each other and report to

different heads.


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Transaction Costs

Coordination and information costs in such an arrangement are clearly very high.

In many instances, the schoolteacher does not know when the site was examined, or

when elementary decisions such as the number of classrooms to be built, were taken

(Notes 3, 2001). At the state level, the educationdepartment maintains enrolment data,

and the engineeringdepartment maintains the data on classroom availability but this

data is not shared and collated (Bonner and Mukerjee, 2001; Interview 6, 2003). The two

Figure 5: The Two Departments Working in Parallel, with No Direct Meeting Point

Source: own observations(arrows pointing up denote accountability; arrows pointing down denote authority)

State Level

EducationDepartment

EngineeringDepartment

State EducationSecretary and StateEducation Officers

State ChiefEngineers

District Education

OfficerDistrict Engineer

Block Education

OfficerBlock Engineer

Teachers(delivering

education)

Private contractors /hired labour(delivering

infrastructure)

DistrictLevel

Sub-district

SchoolLevel

StateEducationMinister

State RuralDevelopment

Minister


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- 24

agencies are not responsible to each other, nor even to the same superiors - and as such,

there is no incentive to attempt to devise mechanisms to lower transaction costs, leading

to such inefficient arrangements getting locked in.

DPEP ARRANGEMENT 1:CONVENTIONAL ARRANGEMENT IN MADHYA

PRADESH

In spite of the poor performance of the conventional model described above, most

DPEP Phase-1 states attempted to work with it at least for a while. Madhya Pradesh (MP)

followed the conventional arrangement throughout the project period and is the ideal

example.

MP chose to use the Rural Engineering Services (RES) as the managers of their

CWP. They utilised the logic of the principal-agent relationship as in figure 6, in

depending upon this arrangement to deliver the goods. They also appointed an in -house

engineer at the state, and in some districts (Ramani-Grover, 2003). MPs management

structure was described by DOE (1998) as in figure 7. As with other states that chose this

arrangement (TSG 1996-2002; DOE, 1998; Grover, 2002; Ramani-Grover, 2002), the

outcomes here were discouraging. The final evaluation report of the MP CWP (Ramani-

Output: Educational Infrastructure

Figure 6: Apparently simple agency relationship in MP

Rural Engineering Services

(Specialised Agent)

State Project Society

(Principal)


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Grover, 2003) gives it a C in most of its evaluation indicators, including

implementation procedures, design quality, cost of construction, and ease of maintenance.

Agency Problems

As in the conventional arrangement, the agency chain is actually not as

straightforward as it might seem. Here, the village construction committee is accountable

to the block and district-level engineers of the RES, who are accountable to their state

(progress

monitoring only)

State Level

State DPEP Society RES

State Project Director;State Project Engineer

State Chief Engineers

DPEP Engineers(in a few districts)

DepartmentEngineer

DepartmentEngineer

Village Construction Committee

District Level

Sub-district

School Level

Figure 7: DPEP Civil Works Management Madhya Pradesh

Source: adapted from DOE (1998:16)

Note: arrows pointing upwards denote accountability; arrows pointing downwards denote authority

National

Level

State

Ministers


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chief engineer, who is accountable to the state ministers. At no stage does the department

become accountable to the DPEP Society.

The appointment of a few engineers withinthe project society at state and district

levels was designed to avoid the moral hazard problem. The in-house engineers could

supervise and monitor the works and note technical flaws such as the use of poor

material, or inappropriate construction practice. This monitoring, though, was of little

value in affecting the course of events at site. Due to the skewed agency chains, for

example, an in-house engineer could meet a departmental engineer on site but could not

issue any instruction. Monitoring reports were to be submitted to the district project

office (DPO). The DPO would then send letters to the state level, from where the letters

would go to the RES. No replies, however, were forthcoming from the RES, and there

was little the state society could do about it (Notes 2, 2000).

Transaction Costs

Coordination thus was a problem not just because of the division of duties, but

also because of poor accountability, which led to poor incentives to coordinate, in the

first place. Information, too, was a major problem. DPEP conducted many training

programmes for its staffwhile the project engineers would faithfully attend, many RES

engineers would not. Information and coordination were such a problem that no RES

engineer could be contacted to report to site even during the visits of the National

Evaluation Team (Ramani-Grover, 2003).


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DPEP ARRANGEMENT II:INTERMEDIATEARRANGEMENT IN ASSAM

An intermediate arrangement was attempted by the majority of DPEP states,

especially towards the second phase of the programme when results of other

arrangements were becoming known. Assam was one of those states.

Initially, Assam took the same decision as MP to use an existing government

departmentthe Public Works Department (PWD) in this case. As in other cases where

this model was used, the outcomes were poor (Choubey, 2002; Interview 5). The state

then decided to try an arrangement that was conceptually in between MP and Bihar. It

asked public sector engineering departments to give them staff on deputation16, who

would then become part of the project, instead of being outsiders to the process. In

districts where there was not enough staff that could be spared by the departments, the

state recruited from the market (Interview 5, 2003).

This strategy utilised the public sector in a creative manner, different to the

conventional arrangement as used by MP. It used the services of the same staff, but

pulled them out of the working environments of their parent departments and exposed

them to the mission mode working practices of the project. It also made them work side

by side with private sector participants.

The state used private consultants for specialised activities such as resource

mapping, and design preparation. These consultants were not given a central place in the

programme, but played a supporting role, where they provided technical support and

helped in capacity building. The onus of performance was primarily on the engineers.

Like other states that chose this arrangement, Assams performance has been

reasonable to good in all the important components design, quality, community

16Staff on deputation are staff who are transferred (or selected on the basis

of applications) to serve in a different government department for a period.


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involvement (Choubey, 2002; TSG 1996-2002). It has performed quite consistently

across the project period, even with leadership changes. In fact, a member of the final

evaluation team for Assam (who is familiar with all DPEP arrangements), was impressed

enough by the consistency of the programme to proclaim it the best in DPEP (Interview

4, 2003).

Agency Chains and Transaction Costs

As evident from figure 8, this arrangement created clear accountability chains.

Since engineers were now part of the project, coordination and information costs were

State Level

State DPEP Society

State Project Director;State Project Engineer

(on contract)

District Engineer(on deputation)

Block Engineer(on deputation/

contract

Village Construction

Committee

District Level

Sub-district

School Level

Figure 8: DPEP Civil Works Management Structure, AssamNote: arrows pointing upwards denote accountability; arrows pointing downwards denote authority

Private consultingarchitectural / engineering

firm (limited strategic role)


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much lower. All staff attended training programmes and shared a common knowledge of

the goals and objectives of the programme. Technical training programmes too, had a far

greater effect due to the regular attendance of all implementing staff (Choubey, 2002).

The Assam CWP thus was not faced with the problems of moral hazard and adverse

selection.

DPEP ARRANGEMENT III:RADICALARRANGEMENT IN BIHAR

A radical model was attempted in the state of Bihar. The SPD there had travelled

to other innovative pilot projects before the project began, and had returned inspired to

create a big difference in the state. Upon his return, he hired a private team of local

consulting architects and engineers to work under his guidance and help direct the

programme (Bonner and Mukerjee, 2001). Initially, he did not even hire a state project

engineer for a long time, placing all management responsibility on the consultants.

He also set up in-house implementation cells at the state, district, block and sub-

block levels, staffed by private sector individuals. The arrangement, in effect, was a

rejection of the clientelist public sector in Bihar. This was a sudden, and discontinuous

institutional change (as outlined in North, 1990).

The engineers and supervisors hired to manage the works were local to the setting

and communities where they worked. The consultants, too, were hired on the basis of

being local to the state. These were typically young and enthusiastic professionals who

had trained in other parts of the country with national level firms, and who had returned

anxious to make a difference (Interview 2, 2003).

This arrangement was strongly approved of, and backed by donors, for example:


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Bihar has had the most promising school infrastructure delivery

programme under DPEP. Young engineers and architects have been

contracted to develop and implement creative, functional and cost

effective buildings working with local communities in each district

(Bonner and Mukerjee, 2001:9)

State DPEP Society

State LevelState Project Director

(IAS)

District Engineer(on contract)

Block Engineer(on contract)

Supervisor (oncontract), and

Village ConstructionCommittee

District Level

Sub-district

School Level

Figure 9: DPEP Civil Works Management Structure, Bihar

adapted from DOE (1998:16)Note: arrows pointing upwards denote accountability; arrows pointing downwards denote authority

Private consulting architectural /engineering firms

(playing central role)


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This arrangement17for a while, created near-perfect outcomes - deep community

involvement; innovative designs; cost-effective construction techniques; quality in

construction; low maintenance buildings; good progress (Bonner and Mukerjee, 2001;

DOE, 1998; TSG 1996-1999). The Bihar programme was arguably the most high profile

at that point, and the second DPEP national cross-state sharing workshop (1998) was

specifically held there to demonstrate good practices to the other DPEP states.

The new institutional arrangement, however, was not sustained, and disintegrated

slowly. The inspirational SPD left in 1997, and the successors did not care to put their

weight behind this new institutional setup that had effectively turned its back on the

traditional ways of working. The raise in consultants inadequate fees did not materialise

as had been promised, and consultants views began to be taken less seriously than they

had before (Interview 3, 2003). The state society showed less and less interest in the

activities and compensation of the private staff. From 1999 to 2001 was a lengthy

period of uneasy and quarrelsome compromise (North, 1990:90). The consultants

reluctantly withdrew from the programme in 2001, and while the in-house engineers

struggled on, they had lost direction.

The earlier enthusiasm seems to be on the wane as there is yet no clear

picture of how secure their futures are going to be. Dispiritedness and a

feeling of being let down is overtaking all the civil works staff that one

met. The lack of a clear policy being articulated and the lack of open

communication on this from the SPO are greatly affecting the morale of

the teams at present (Jandhyala et al., 2003: 26-27).

Progress slowed down considerably from 2001 and targets were not fulfilled.

Bihar suffered the ignominy of being the only DPEP state where infrastructure targets

had to be slashed rather than increased (and the funds reallocated) as the programme

progressed. This was because, as of September 2002, when the programme was supposed

17Which followed the model set in place by a previous similar project, the

Bihar Education project (BEP).


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to be drawing to a close, the state had only achieved around 50% of its financial target

a tragedy of substantial proportions for a state that so desperately needs social

infrastructure to be put in place.

Figure 10: Financial Achievement in DPEP-II and III,

September 2002 (data drawn from: TSG, 2002b)

0

20

40

60

80

100

120

APGujarat HP Or

issa UP

WestB

engal Bih

ar

Total target

Achieved Target

Agency Chains and Transaction Costs

Bihars institutional arrangement itself was not the cause of the decline. As in

Assam, the creation of an in-house cell considerably reduced the transaction costs of

information and coordination. Accountability chains, too were very clear and linear, and

did not pose a problem.

A comparison of transaction costs and accountability within the three models, as

shown in figure 11, would show that the Bihar model is likely to perform the best; the

Assam model not as well; and the MP model not well at all. This is a partial but

important explanation of performance patterns within DPEP.

MP Assam Bihar

Transaction Costs HIGH LOW LOW

Accountability LOW MEDIUM HIGH

Figure 11: Transaction Costs and Accountability in Different Arrangements


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EXPLAINING PERFORMANCE BY INSTITUTIONAL INCENTIVES

The tools of transaction costs and agency theory have explained performance

only partially. One is still justified in asking the following questions: (1) in MP, why do

not the RES staff work to their potential to fulfil the goals of the project, simply as part

of their duties? In Assam, why did public sector staff put in a much better performance

when on deputation while within the project structure, versus when they were within

their parent departments? In Bihar, why did private staff put in a near-perfect

performance until the support ran out?

Some answers to these questions are provided when the incentives framework

developed in Section II is applied.


Within formal context

The formal rules of the game in the civil services make for low professional

incentives - career progression is not based upon performance, but on seniority

(Hughes, 1998). In formal practice, the most serious sanction possible, and the

most commonly used, by a superior is an inconvenient job transfer (Notes 3,

2001). For the engineers in MP and Assam, thus, the formal rules made for low

professional incentives.

For the private participants in Bihar, on the other hand, the formal rules were

highly conducive to good performance for them, good performance would lead

to career progression.18

18Career progression of course, means different things to different people. To

some, good performance and recognition meant the chance of a place in the


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Within informal context

DPEP project offices everywhere had a sense of working in a mission mode

together as a team, towards a cause. Informal, yet powerful solidary and

purposive incentives (Clark and Wilson, 1961) were at work in the office

environment. As argued by Ostrom et al., (1993), this environment had a very

positive effect on the performance of engineers in both Bihar and Assam. In MP,

however, the engineers worked from their parent departments, and missed out on

these incentives created by the project environment.

Social Incentives


The project had a high social profile, with every new building inaugurated by

local politicians with much pomp and show. There were ample opportunities for

staff members to appear in the media. Also, the new ways of working, learnt

through regular training programmes meant that staff always had something to

say to local newspapers. Just as in Tendler (1997), this formal social recognition

was a major incentive for staff members to perform.

Now, being part of this social profile was much easier for people working within

the project, such as in Bihar and Assam. The RES in MP were not part of this

scenario due to the imperfect information flows, and poor communication

between them and the project (Interview 1, 2003).

public sector (notes 1, 1999). For the more entrepreneurial, it meant thepossibility of more and better contracts, or jobs with the consultancy firms

directing the project (as happened in many cases).


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- 35


Many government staff at the local level are motivated to perform by the

(informal) recognition they receive from the community, especially when they

play the iterated games that are essential to the building up of social incentives

(Chong, 1991). The in-house project staff in DPEP had onlyprojectsites allotted

to them (an average of 5 sites per supervisor in Bihar, and an average of 15 sites

per engineer in Assam). Their interaction with the communities was high, and so

were the informal social incentives.

An additional factor was at play in Bihar. The local boys hired by the

programme were previously unemployed or in poorly paying jobs. The new,

prestigious jobs (government-sponsored jobs are considered prestigious in Bihar,

primarily due to the lack of opportunities in the private sector, since big players

have stayed away from the state) spurred them on to establish their social

standing among their local communities (Notes 1, 1999). The social incentives

for Bihar engineers were thus even higher than those in Assam and resulted in

excellent performance.

During the field visits, there was a great deal of satisfaction

expressed by the communities about the technical as well as

emotional support received from the project supervisors and

engineers (Jandhyala et al., 2003: 25).

On the other hand, RES staff in MP handled DPEP project sites in addition to

other works, and were able to involve themselves less intensively. This led to

lower number of interactions and thus lower social incentives. The MP final

evaluation report states that the engineers visited a site just three times in the


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entire project period. 19 Technical support to VEC has been a major area of

failure in all sample sites visited (Ramani-Grover, 2003:1).

Economic Incentives


In the cases of both MP and Assam, formal economic incentives are low since

the pay scale of government employees is fixed, and progression is through

seniority and not through performance.

In Bihar, conversely, there was a strong economic incentive to perform since

contracts could be terminated anytime at a months notice.


With the funds in the hands of the Village Construction Committees in all cases,

there were little opportunities for rent seeking (unlike in the conventional model,

where there is a strong incentive to acquire funds through use of poor materials

and so on). As such, there were no informal incentives at play in any of the cases.



Formally, implementing technical staff is not supposed to be influenced by

politicians, and is supposed to work in the technically optimum manner.


Informally, however, local politicians do exert some influence over implementing

staff. Politicians want greater investment into their constituencies in order to

strengthen their vote bases, and exercise political clout in order to redirect funds

19As against 30-40 times in Bihar (notes 1); or 20-25 times in Assam (notes 4).


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meant for communities that may have less voice or who may be marginalised.

Hence, it is common to see engineers manipulating investment priorities to the

overall social detriment. Political incentives, in the informal context, may thus

prove to be inverse.

Most political interference occurs within the specialised departments and not in

the projects, since projects have a more transparent working practice for site

selection. Even so, project staff in Assam and Bihar have mentioned coming

under political pressure to redirect priorities (Notes 1, 1999; Notes 4, 2002). As

such, the political incentives in the informal context may be said to be low.

Conventional

Arrangement

(MP)

Creative

Arrangement

(Assam)

Radical

Arrangement

(Bihar)


(Formal Context)LOW LOW HIGH


(Informal Context)

LOW HIGH HIGH

Social Incentives

(Formal Context)LOW HIGH HIGH

Social Incentives

(Informal Context)LOW MEDIUM HIGH

Economic Incentives

(Formal Context)LOW LOW HIGH

Economic Incentives

(Informal Context)- - -


(Formal Context)- - -


(Informal Context)INVERSE LOW LOW

Figure 12: Institutional Incentives Affecting Performance

of Implementing Staff in Different Arrangements

Tabling the discussion above results in a summary of the web of institutional

incentives affecting performance, as shown in figure 12. Overall, the incentive systems


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encouraging good performance are best in Bihar, followed by Assam, with poor

incentives to perform in MP.

Thus far, analysis of the different arrangements through the lenses of agency

chains, transaction costs and institutional incentives, has found that the conventional

arrangement (MP) is likely to perform poorly; the intermediate arrangement (Assam),

satisfactorily; and the radical arrangement (Bihar), very well.

It is now time to explain why, given that some arrangements were demonstrably

better than others, decision makers did, or did not chooseto adopt them.


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IVAPPLICATION PART I I :

EXPLAINING CHOICE


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EXPLAINING CHOICE THROUGH INSTITUTIONAL INCENTIVES

Over the ten-year combined project cycle in DPEP (phase - 1 began in 1994),

state-level decision-makers (the SPDs) had ample opportunities to choose to adopt, or

change to, different institutional arrangements in order to achieve better performance.

However,

The agent of change is the individual entrepreneur responding to the

incentives embodied in the institutional framework (North, 1990: 83)

What were the incentives in the institutional framework that these agents of

change were responding to, when confronted with the options to either (1) retain a

conventional arrangement, and likely attain poor performance (MP), (2) switch to an

alternative arrangement and probably achieve reasonable performance (Assam), or (3)

reject the conventional arrangement in favour of a radical one, hoping for high

achievements (Bihar)?



Changing institutional arrangements in government means having to make the

staff perform to different specifications. It is far easier to allow set systems of

working to continue. Also, no formal rewards are available here for attempting to

improve existing systems - since again, progression is not based upon

performance, but on seniority (Hughes, 1998). The incentives for change are thus,

inverse.

Furthermore, in attempting to ignore the existing structures (such as in Bihar),

there are three other points that lead to inverse incentives. First, it is the job of


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senior bureaucrats, especially at the scale of DPEP (Interview 1, 2003), to usethe

substantial existing government machinery to its maximum effect hiring

private sector agents is effectively an admission of not being able to make the

public sector perform. Secondly, in Bihar (as in most states), the engineering

departments had less work due to decreasing spending power of the government.

Therefore, it made all the more sense to give them the work. Thirdly, the

perception of the leaders is that government staff is easier to take action against

in case they perform poorly (Interview 1, 2003; Interview 6, 2003). This is

especially so in the case of infrastructure programmes, where it is felt that poor

performance may be noticed later (for example, when cracks begin to appear). If

private staff perform poorly and then leave, it becomes difficult to sanction them

later.


In bringing about intermediate change such as in Assam, the decision-maker only

has the informal incentive of the knowledge that this system will likely work

better. Professional satisfaction can be derived in the knowledge that things

could have been worse (Interview 5, 2003).

Interestingly, though, the informal professional incentive to effect radicalchange

such as in Bihar may be very high. As a powerful bureaucrat in the IAS, there can

be a temptation to be the agent of changesince it is the most high-profile cadre

of the Indian bureaucracy, and every action of every individual in it is noticed and

discussed by the wider community donors, the private sector, and civil society

at large. Apart from the purposive incentive, there is undoubtedly a component of

playing to the gallery and demonstrating power (Notes 1, 1999).


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On the other hand, this applies only to the decision-maker who has initiated the

change. The successors are faced with a lower incentive of being recognised

only as agents who sustained a change initiated by the predecessor. This incentive,

thus, becomes lower with change in leadership.

Social Incentives


Again, here, the incentives to maintain conventional arrangements are high, and

incentives to change are inverse: in many cases, decision-makers in government

refrain from contract hiring solely due to fear of public scandal over rent-seeking

behaviour in contract hiring (speculative allegations of which are freely made in

local presses) (Notes 5, 2000).

Staff who go on deputation, however, normally volunteer to do so (a more

suitable job location is cited as a common reason to volunteer) and as such there

is no social pressure on decision makers with regard to that change.


Due to the low interaction of these decision-makers with communities, there are

no informal constraints at play.

Economic Incentives

Since salaries are tied to position and not to performance in the civil services,

there is no formal incentive to change.

Again, due to the fact that the village committees were in charge of the funds in

DPEP, there are no rent seeking opportunities either.


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. . . effectiveness as a public administrator is predicated on bothan understanding of politics and of the political process and an

ability to manage public programmes in a political context

(Frederickson, 1989:12, quoted in Hughes, 1997:225).


With politicians frustrated by the decreasing amounts of public funds, and the

increasingly poor spending capacity in the states, there is a general tendency for

them to be more agreeable with cutting public expenditure in whatever way

possible (Interview 5). Politicians apply constant pressure on civil servants to use

existing machinery (Rajasthan Education Minister, 2001). In the formal context,

thus, incentives for involving private sector individuals are low.

This same paradigm ensures a high incentive for the use of government staff,

however. Involving government staff on deputation is to make idle staff active

and this is politically correct and desirable. Being seen as an administrator who

uses resources carefully brings a certain level of political endorsement.


Informally, there is pressure on bureaucrats to perform political favours in the

hiring or transfer of government staff. The process of deputing staff gives some

(albeit limited) leeway for the decision-maker to be able to transfer staff to

favoured locations, and this also helps in political appeasement (Interview 5,

2003; Notes 3, 2001).


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Once private staff become involved, on the other hand, the power of the

bureaucrat to perform such favours reduces. In a clientelist environment, such

loss of power is a substantial disincentive to change institutional arrangements.

The above discussion can be summarised in the following matrix of incentives:

Incentives to retain

conventional

arrangement

(such as in MP)

Incentives to change

to intermediate

arrangement

(such as in Assam)

Incentives to

change to radical

arrangement

(such as in Bihar)

Professional

(formal context)

HIGH INVERSE INVERSE

Professional

(informal context)LOW MEDIUM HIGHLOW

Social

(formal context)HIGH - INVERSE

Social

(informal context)- - -

Political

(formal context)HIGH MEDIUM INVERSE

Political

(informal context)HIGH LOW INVERSE

Figure 13: Institutional Incentives of Decision Makers

Affecting Choice of Arrangements

As we can see from figure 13, the incentives for retaining the conventional

arrangement are the highest - this explains why some decision-makers chose to retain

these arrangements throughout the project period in spite of poor performance. This also

explains to some degree why this arrangement exists, and whose interests it serves.

Incentives to effect non-controversial change such as that adopted in Assam, are

conflicting some are inverse while others are medium to low. Here, credit must be

given to the decision-makers for at least overcoming the contradictory incentive structure

to effect the change.


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On the face of it, explaining decision-makers withdrawal of support to the Bihar

arrangement was the most difficult, since the arrangement performed so very well. As a

key donor representative stated,

Bihar put in place what I would regard as the ideal management system

for the innovative civil works programme. I cant understand why it

deteriorated. I must confess that, as far as Bihar is concerned, Im still

confused after all these years . . . (Interview 2, 2003).

The incentive structure affecting the decision-makers, however, does give us

important insights into the puzzle. As we have seen, the incentives to effect radical

change, are inverse in the main, with the exception of the informal professional incentive

to be recognised as the agent of change. Only a leader who responds strongly to that

incentive can counter the other inverse incentives and effect such change. When

leadership changes, however, the incentive to continue the change is much lower. This

explains why the radical arrangement was not supported in Bihar by the successors of the

first official, and the arrangement was allowed to decline.


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VCONCLUDING DI SCUSSION


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CONCLUDING DISCUSSION

This paper has attempted to analyse and explain the performance, and choice, of

different institutional arrangements used for social infrastructure provision under the

DPEP. Using the tools of the NIE, it evolved and applied a framework of institutional

incentives to these arrangements. This framework looked at the dialogue between

individuals professional, social, economic and political incentives to perform, within the

formal and informal rules of the game (North, 1990).

In order to identify institutional arrangements that lead to better and worse

performance(in a sense, attempting to explain Type I micro-institutional failure), it was

found necessary to apply the framework to the participants within the various

arrangements. In this case, it meant applying the framework to the staff that were in

direct charge of programme management and implementation of the CWP under DPEP.

It was found that the conventional arrangement in India, where specialised

government agencies are directly given the responsibility for this infrastructure provision,

is wanting. The agency problems of moral hazard and adverse selection are not addressed,

and the transaction costs of coordination and information are high. Furthermore, the

institutional incentives at play are not conducive to good performance.

The traditional arrangement is wanting in comparison to an alternative

institutional arrangement such as that followed in Bihar, where the responsibility of

implementation lies with private staff operating under the umbrella of the government

agency. This arrangement, of in-house cells occupied by staff on contract, effectively

reduces the agency problems of moral hazard and adverse selection, and also reduces the


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transaction costs of coordination and information. The institutional incentives at play,

moreover, are very conducive to good performance.

However, making the transition from the traditional arrangement to the one

followed in Bihar is not easy. It was found that, after an initial period where Bihar was

best performer, the programme began to lag and finally ended up unable to fulfil its

targets even in numerical terms. This can be called a case of Type II micro-institutional

failure, where the process for changing the institutional arrangement resulted in a lower

set of benefits for society compared to an alternative process over a given period (Khan,

1995).

The alternative process for changing the institutional arrangement that resulted

in better outcomes was the process adopted in states like Assam. Here, instead of turning

its back on the traditional institutional arrangement, the programme creatively

incorporated a mix of traditional and alternative mechanisms. While it did set up an in-

house cell, and it did hire some staff on contract, it also took care to recruit key staff on

deputation from government departments. Agency problems and transaction costs were

again reduced, and the institutional incentives at play took on a different, more positive,

hue.

In order to fully explain choice in institutional arrangements, it was found

necessary to apply the incentives framework not to the implementation level, but to the

decision-making level. At this level, it was found that the incentives to initiate full-scale,

or radical change were inverse, and in Bihar it took a person extraordinarily motivated to

attain professional satisfaction to attempt such a change. However, the inverse incentives

acted upon his successors, and the programme wilted. On the other hand, the

intermediate change of Assam was much more in line with incentives structures of

decision makers, which is why it was taken up in many states. While these states were


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not able to demonstrate results such as those that Bihar had shown for a short period,

they nevertheless showed reasonable and consistent performance.

The majority of states chose the intermediate solution and produced satisfactory

or better performance. This points to the following:

the incremental change by these states was independent of personality. The

institutional incentives at work were conducive to such arrangements.

Because of the above, this change is sustainable and can lead later to more

change. For example, many states, while deciding their CWP management

structures in SSA, are continuing the systems adopted under DPEP. States

that are beginning SSA without prior experience of DPEP (such as Punjab,

and Jammu and Kashmir) are closely examining these systems, and are likely

to adopt them as well (Interview 1, 2003).

Conclusion

While this dissertation does not claim to have found results that can be

generalised across different contexts, it has established evidence to make the following

argument: while certain types of institutional arrangements may be demonstrably better

than existing ones, making the transition to those arrangements may not be possible in

the overall institutional structure, which is made up of formal and informal constraints.

This is especially because that structure gives rise to incentive systems of the

participating individuals, that may be adverse to the better institutional arrangement.

When introducing change, therefore, it is essential to first examine the institutional

incentives at play and then decide on the arrangement to be followed. While it may not

be possible to install the arrangement that is theoretically most efficient, it will be


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possible to nudge at the institutions that have got locked in (Nugent, 2002), and move

them step by step in a more practical manner towards efficiency.


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