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

CONTENTS
Lists of Abbreviations, and Figures ..... SECTION I: INTRODUCTION AND BACKGROUND Introduction .... Background .... SECTION II: THEORETICAL CONSIDERATIONS Justifying the Use of the NIE.. 11 NIE Insights Used in This Paper .... 13 A Framework Of Incentives Within Formal And Informal Constraints . 17 SECTION III: APPLICATION PART I: EXPLAINING PERFORMANCE The Institutional Arrangements, and their Performance Explained through Transaction Costs and Agency Chains . 21 1 4 ii

Explaining Performance through Institutional Incentives .. 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 Institute CWP: 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 Pradesh SPE: 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.. Figure 2: Proposed Framework for Analysis of Institutional Incentives . Figure 3: Focus Levels for Explaining Performance and Choice Figure 4: Apparently Simple Agency Relationship between Departments . Figure 5: The Two Departments Working in Parallel, with No Direct Meeting Point. Figure 6: Apparently Simple Agency Relationship in MP .. Figure 7: DPEP Civil Works Management Madhya Pradesh ... Figure 8: DPEP Civil Works Management Structure, Assam . Figure 9: DPEP Civil Works Management Bihar . Figure 10: Financial Progress in DPEP II and III, September 2002 Figure 11: Transaction Costs and Accountability in Different Arrangements Figure 12: Institutional Incentives Affecting Performance of Implementing Staff in Different Arrangements ... Figure 13: Institutional Incentives of Decision Makers Affecting Choice of Arrangements ... 7 17 20 21 23 24 25 28 30 32 32 37 44

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I
INTRODUCTION AND BACKGROUND

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.2 Interestingly, 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 the programme. 2 Final 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 accepted 3. 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 nonexcludable 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

see 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 was4 a 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).5 With 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 mode6 in its offices across the country. DPEPs substantial infrastructure component (called the Civil Works Programme 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
4

As 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. 5 The source mentions a count of 248 districts, but 9 additional districts were added in Rajasthan subsequently. 6 A 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,7 and 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 million8. 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).

According to district infrastructure status documents prepared by all DPEP states in 2002. 8 A very conservative estimate based on DOEEL (2002). 9 Such as in the infrastructure components of the Malawi Primary Education Programme, or the Pakistan Primary Education Programme.

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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).

Donors

Government of India, MHRD: Elementary Education Bureau Director in charge of Civil Works

State PWD; External Consultants

State Society for DPEP State Project Director; State Project Engineer

National TSG Civil Works Group; National External Consultants

(the two prime foci of this study) District Project Office Engineering Cell (or) Line Ministry Engineering Departments
District Administration; DRDA; Panchayat Body; Engineering Agency

Village/ Ward Education Committees Village/ Ward Construction Committees

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

Source: adapted from Bonner and Mukerjee (2001:6)

10

The 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.

The District 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.11 As mentioned before, variations in performance can 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.

11

The village level implementation agency is used as constant in this study although 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.12 Care 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.
12

Across DPEP Phases I and II for MP and Assam, and across BEP and DPEP in the case 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 19962002). 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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II
THEORETICAL CONSIDERATIONS

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 do they 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 traditional practice of 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 across states, 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.

13

While 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 socioeconomic development it is empty - he and others such as Harriss et al. (1995) agree that it provides substantially advanced tools for analysis at the micro level. Since the present study is micro in nature, the NIE is considered adequate for the purpose.

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NIE INSIGHTS 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 that affect 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 institutional14 failure that have been addressed within the NIE approach which 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).
14

He 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 institutions 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)

15

For 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 by human beings, who also alter them over time hence, 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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A FRAMEWORK 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

Formal Constraints / Rules

Informal Constraints / Rules

Incentives 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 normall y 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 costs and agency chains. The next sub-section explains performance by applying the framework of institutional incentives to 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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Donors

Government of India, MHRD: Elementary Education Bureau

(Focus while explaining choice)

State Project Director

National TSG Civil Works Group; National external consultants

(Focus while explaining performance)

Engineering Cell (or) Line Ministry Engineering Departments

Village/ Ward Construction Committees

Figure 3: Focus Levels for Explaining Performance and Choice

External Consultants

State Project Director; State Project Engineer

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III
APPLICATION PART I: EXPLAINING PERFORMANCE

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.

State/ Central Department of Education (Principal)

State Engineering Department (Specialised Agent)

Output: Educational Infrastructure

Figure 4: Apparently Simple Agency Relationship between Departments 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

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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 hazard problem 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 within the 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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State Education Minister

Education Department State Education Secretary and State Education Officers

Engineering Department State Chief Engineers

State Rural Development Minister

State Level

District Level

District Education Officer

District Engineer

Sub-district

Block Education Officer

Block Engineer

School Level

Teachers (delivering education)

Private contractors / hired labour (delivering infrastructure)

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)

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 education department maintains enrolment data, and the engineering department maintains the data on classroom availability but this data is not shared and collated (Bonner and Mukerjee, 2001; Interview 6, 2003). The two

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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. State Project Society (Principal)

Rural Engineering Services (Specialised Agent)

Output: Educational Infrastructure

Figure 6: Apparently simple agency relationship in MP 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-

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National Level State DPEP Society RES

State Ministers

State Level

State Project Director; State Project Engineer

ministra State Chief Engineers

State Project Director; State Project Engineer

District Level

DPEP Engineers (in a few districts)

Department Engineer

p;

Sub-district

(progress monitoring only)

Department Engineer External Consultants

School Level

Village Construction Committee

DRDA; Panchayat Body;

ministration;

Figure 7: DPEP Civil Works Management Madhya Pradesh

Source: adapted from DOE (1998:16) s

Engineering Agency

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

consultants Grover, 2003) gives it a C in most of its evaluation indicators, including ering Agency implementation procedures, design quality, cost of construction, and ease of maintenance. s RES) 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

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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 within the 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 staff while 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: INTERMEDIATE ARRANGEMENT 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 department the 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 deputation 16 , 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

16

Staff 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).

State DPEP Society State Project Director; State Project Engineer (on contract)

State Level

Private consulting architectural / engineering firm (limited strategic role)

District Level

District Engineer (on deputation)

Sub-district

Block Engineer (on deputation/ contract)

School Level

Village Construction Committee

Figure 8: DPEP Civil Works Management Structure, Assam

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

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

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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: RADICAL ARRANGEMENT 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 subblock 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 Level

State Project Director (IAS) Private consulting architectural / engineering firms (playing central role)

District Level

District Engineer (on contract)

Sub-district

Block Engineer (on contract)

School Level

Supervisor (on contract), and Village Construction Committee

Figure 9: DPEP Civil Works Management Structure, Bihar

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

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This arrangement17 for 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
17

Which 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.

120 100 80 60 40 20 0
H P U P es tB en ga l AP uj ar at a Bi ha ris s r

Total target Achieved Target

Figure 10: Financial Achievement in DPEP-II and III, September 2002 (data drawn from: TSG, 2002b)
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 Transaction Costs Accountability HIGH LOW Assam LOW MEDIUM Bihar LOW 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.

Professional Incentives
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

18

Career 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
Within formal context 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 the possibility of more and better contracts, or jobs with the consultancy firms directing the project (as happened in many cases).

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Within informal context 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 only project sites 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
Within formal context 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.

Within informal context 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.

Political Incentives
Within formal context Formally, implementing technical staff is not supposed to be influenced by politicians, and is supposed to work in the technically optimum manner.

Within informal context 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
19

As 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) Professional Incentives (Formal Context) Professional Incentives (Informal Context) Social Incentives (Formal Context) Social Incentives (Informal Context) Economic Incentives (Formal Context) Economic Incentives (Informal Context) Political Incentives (Formal Context) Political Incentives (Informal Context) LOW LOW LOW LOW LOW INVERSE

Creative Arrangement (Assam) LOW HIGH HIGH MEDIUM LOW LOW

Radical Arrangement (Bihar) HIGH HIGH HIGH HIGH HIGH 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 choose to adopt them.

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IV
APPLICATION PART II: EXPLAINING CHOICE

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)?

Professional Incentives
Within formal context 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 use the 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.

Within informal context 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 radical change 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 change since 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
Within formal context 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.

Within informal context 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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Political Incentives
. . . effectiveness as a public administrator is predicated on both an 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).

Within formal context 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.

Within informal context 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) Professional (formal context) Professional (informal context) Social (formal context) Social (informal context) Political (formal context) Political (informal context) HIGH LOW HIGH HIGH HIGH

Incentives to change Incentives to to intermediate change to radical arrangement arrangement (such as in Assam) (such as in Bihar) INVERSE MEDIUM MEDIUM LOW INVERSE HIGH LOW INVERSE INVERSE 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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V
CONCLUDING DISCUSSION

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 inhouse 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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