Who's more Consumer friendly - Government or Private sector?

Two different countries, two different experiences, a common thread! Let me narrate...

1. Transportation between Bangalore and Chennai

Many months ago, I was having a discussion with a colleague (now former colleague and a good friend). It was our daily luncheon conversation. This colleague had ideas that seemed socialist to others. The topic of discussion was the travel options between Bangalore and Chennai. Bangalore, being the Information Technology capital of India, attracts Indian talents from far and wide. Naturally there are a scores of people that have relocated to Bangalore and travel to their hometowns quite frequently. Among those, quite a many are from Chennai. These Chennai travelers use various modes of transport from and to Bangalore - a few drive their cars, many travel by trains, many by Karnataka State Road Transport Corporation (KSRTC, a state government enterprise) buses, a few by private buses and fewer by Tamilnadu government(TNSTC) buses. This colleague pointed me to some facts.

1. The train fares on Bangalore - Chennai route were not increased for over 5 years by the Central Government (Indian Railways is a central subject) and there was no deterioration in the quality of service; absolutely no impact of economy inflation on the consumers.
2. KSRTC buses were plying at fares at least thirty percent lower than the corresponding classes in private buses. KSRTC is a success story and has been making enormous profits in every of recent years.
   
3. TNSTC buses were probably a little cheaper than KSRTC buses (owing to lower diesel price in the state of Tamil Nadu, whose capital is Chennai), but were less frequent and of a little lower quality compared to corresponding class of KSRTC buses.
4. KSRTC allowed online booking probably a little earlier than many private operators did; officials call out names of online-booked passengers on the public addressing system at the Bangalore Central bus terminus, if they have not boarded the buses before departure! No-smoking policy is strictly implemented. The level of service and freebies somewhat increase with the class of service.
   
5. Private buses do not have good terminus facilities, often a confusing exercise to board; so is seat allocation. As I have traveled on this route many times on private buses, I have found buses unsafely overloaded with cargo on top, frequent flat tyres / tires, no back-up, not even a spare tyre / tire for replacement. No-smoking policy is not uniformly enforced.

Overall, for a consumer, the government bus and train services (remember different governments - of the states and of the union) are far better than private transport.

2. The Louvre Museum, Paris and Paris Disneyland

A few months ago (end of 2010), my wife, our little daughter and I made a trip to Europe. Being first-time visitors to Europe, we made it a point to visit The Louvre Museum in Paris. It is said that this museum alone attracts more visitors in a year more than entire India does in the same period! We also included Paris Disneyland (was Euro Disney earlier, don't know why the name was changed), so that our little one could see her favourite cartoon characters and enjoy a few rides. The experiences in these two tourist points were starkly different and diametrically opposite.

The Louvre:

1. The entrance tickets were not very expensive (comparison soon below).
2. The loos were abundant, upkeep needed improvement
   
3. Visitors could deposit their bags / luggage and even coats, free of cost. The staff there were greatly courteous and even maintained a register for valuables deposited in the visitor bags. I did register my laptop that I had carried in my bag; while retrieving, the staff checked to ensure it was safe.
4. The ticket included entry to all sections of the museum

Compare these to Paris Disneyland:

1. The tickets were priced heavily - adults paid almost twice the price as compared to the Louvre's tickets.
2. We were there on a Sunday, waited for more than forty five minutes per ride / show. There's a queuing / booking system, but that's almost totally impractical to use, especially while visiting with kids. It was drizzling a bit and so we were told we were very lucky; the crowd was less due to the drizzle! Though the ticket covers every ride / show, the Disneyland, by low capacity of rides, ensures that a visitor cannot have more than 6-7 rides / shows of over thirty available on any day.
3. What about luggage / belongings? This is a service provider's dream! Every bag / luggage could be stored at the entrance for six Euros. Individual items could be stored at three Euros a piece. Needless to say, there as a queue for availing this service too! For visitors like us from India, the entire luggage and the contents could only cost a little over the cost of safe-keeping!
   
4. What about the amusement park? Lousier than one could imagine. There were more Disney merchandise stores than the eateries and those eateries far outnumbered the rides and shows! So it was a big sale / shandy more than a amusement park.
5. The loos were crowded, but were clean.

Summary: we came out happily after visiting the Louvre while we felt cheated by Paris Disneyland. To validate our Disneyland experience I spoke with two of my friends from the US. They told me that rides / shows in the US Disneyland parks had longer wait times (than in Europe) and weekends were worst. If Disneyland could provide such abysmal customer experience in Europe, anyone can imagine how worse it can be in the US. Decision - never again visit the Disneyland anywhere.

So what's the connection between the two above?

Comparing these two examples from different countries may be like comparing apples to oranges. Yet, the point to understand and analyze is that how did government excel and provides better service than private sector.

There's enough competition for the transport operators to improve and provide great quality services. One may argue that because private transporters incur bribe (the bribe regulatory authorities like transport department officials extort) that government transport is exempt from and consequently the quality of private transporters tends to be poor and tickets are priced high. The counter-argument, indeed the correct one, is that private transporters do illegal things such as carrying commercial cargo on passenger buses and many more, so they bribe; also, even government transport is not at an advantage; even in government enterprises, politicians take kick-backs and a government enterprise does not get the deal it truly deserves. So, in the above example, the government transport enterprise and the private transporters are on equal footing of disadvantage or on the Level Playing Field, to borrow from Thomas Friedman. Still, government transport quality is far superior to the private transport quality. If not for lower fares in Government buses and trains, the private operators would have charged consumers even more and fleeced thoroughly or even made it inaccessible to larger masses (akin to Healthcare in the US).

It is true that unlike the Louvre, Disneyland cannot afford to let kids in free because kids are the primary if not the sole reason for Disneyland visits. Yet, Paris Disneyland is also not so cramped for space or on personnel that it cannot safe-keep luggage for free; could the reason be that luggage-carrying customers could get tired and use fewer rides / see fewer shows thereby saving Disney's resources and accommodating more customers? If yes, then Disneyland has succeed in its profiteering pursuit. Upon a causal chat with a French lady on the Thalys, we got to know that Jardin de Clemenceau (hope I have spelled it correctly) was a much better amusement park for kids and a lot less expensive than Paris Disneyland.

In B-school, I was taught that Market is the best acid test platform, competition is panacea for weeding out the incompetent players, for offering best services to consumers and that the market corrects itself. The above experiences and data is dis-conforming to theory taught at B-schools.

Why is that so?

Governments need to play an active role in the market, not just that of a regulator. A good Government's role not only tries to keep the market consumer-friendly, but also avoids cartelization. One may cite conflict of interests if the government participates both as a regulator and as a player. In countries with good judicial system, government cannot abuse its position of regulator, even if it is a player. This is because, even if the government participates in dual role, other players in the market have a judicial recourse to rein in any conflict of interests of the government.

Stretching this thought a little more, one can notice the stark differences between the US, Europe and countries like India. In the US, government is more of a regulator and almost absent as a participant. So, with the lack of participation of the government in many sectors, many services including the basic ones, have become inaccessible to public in the US. In many European countries, governments are active participants and not just regulators.This has helped in good infrastructure, good regulation and healthy private sector participation. In countries like India, the story is heterogeneous. In some cases government has done far better than private sector (milk revolution by aiding of cooperatives, public transportation in Karnataka); in some cases, government is playing catch-up with private sector (BSNL landline phone service has improved after its monopoly was broken); in some cases, it is doing excellently a regulator (the Banking industry and the Information Technology) and there are many sectors where government is still lagging behind private sector. One can see that low corruption governments in Europe have provided better quality of life to their citizens and successive governments in India have plundered country's wealth to fill a few pockets.

I am not making a case for totalitarian benevolent womb-to-tomb welfare governments. The point is governments cannot be ringside regulators, they have to be active participants.

Strategy or economics?

The Indo-US nuclear deal is a hot topic for the intellectuals, the strategic thinkers, the green conservationists, the common man and even the bloggers. The deal is more of economics and less of strategy - the personal economics to be precise. With such deals, India is expected to spend a few trillions of US Dollars to construct tens of nuclear reactors. The construction of such reactors will be given away contracts to big industrial conglomerates from around the world.

Who benefits in the name of energy self-reliance? The politicians that get kickbacks in some countries and kickbacks disguised as dividends in other countries!!!

Corrupt political career is highly profitable, the politicians have shown.

State elections are scheduled for May 2008 in Karnataka, India. The laws in India make it compulsory for the candidates to declare their balance sheets (assets and liabilities) to the Election Commission, which then makes this data public.

The candidates have declared their assets and liabilities. It is well known that barring a handful, most of these have not disclosed their true worth, for they always want to hide their ill-gotten wealth. Most candidates have declared assets worth a few hundred million rupees. At 1US$=INR40, most of these are US$ Millionaires, by their own admissions, not to mention the hidden (called benami /ghost holdings) assets. When compared with their declarations in the previous election about 4 years ago, their assets have grown multi-fold, someone even had a growth rate of 2000%. Note that government salary for these elected public representatives (euphemistically called public servants) is just a few thousand rupees per month. So where did all the money come from? Have they paid income tax? What is their true worth? Does this all not prove my earlier point (in an earlier blog) that various listings of world's richest people may after all be meaningless?

Politicians in India (and world-wide) cut across party lines and collude (like in criminal cartels) to save themselves from investigations. The Vigilance Department in India, created by the governments that are run by the very same politicians, has not been given any power to investigate the elected legislators and members of the parliament, let alone punishing the guilty. Any upright vigilance officer or a judge is likely to be moved aside (transferred), if he / she dares to investigate these politicians.

It is likely that these politicians get away with their ill-gotten money, for they have all the power and are part of the cartel. One cannot hope to see the courts taking suo-moto action to investigate.

What do you get when you combine Nordic rates of taxation and third world corruption? A failed democratic country or a dictatorship.

K Venkatesh

The world's richest...

It is almost an annual ritual that many magazines publish the list of world's richest and wealthiest. Often the net worth of these people are calculated based on their assets such as holdings in their businesses, valuation and other parameters. Has anyone wondered whether these are really the richest? Many of us have.

In my opinion, wealth is not a function of nationality, but the means to become wealthy may somewhat be. The world of uber rich is a bunch of small networks indeed. In India, as in many countries, it is easy to become rich by questionable means and legitimize the wealth with good connections. Often, there is more wealth underground in India (and many other countries) than what is visible. I mean there is a lot of black money that is unaccounted and hence many of these rich do not show up (or at least like to show up) on the world's richest listings. One of the reports in 2008 mentions that of the estimated $2.1Trillion-$2.5Trillion black money, Indians hold an estimated $1.4Trillion, beating the trailers Russians, Britons and Ukranians combined hands-down... Here is the link to the article that mentions these facts.

There are politicians that have legitimized their earnings by owning large business empires ranging from retail chains, firms that only serve government contracts to film and every business conceivable, sometimes openly and sometimes as ghost investors...

So the richest lists represent only those with visible wealth (worth in white), though some of that wealth may have been acquired by dubious means.

Probably the true richest in the world can be easily found in the most corrupt countries (read Transparency International's research)

As (probably) Mario Puzo said, "behind every big wealth, there is a big crime".

K Venkatesh

Agriculture subsidy and black money

Individual income from agriculture is not taxable in India. This tax waiver is called "farm subsidy". Also, capital gains arising from the sale of agricultural land is not taxable. It is always funny to see economists debate that India should remove farm subsidy to compete with other countries on an "even" field. This is a constant topic in all trade talks.

Many of us know the reality. This subsidy means nothing to farmers in India. Actually agricultural income is only a smoke-screen for politicians, bureaucrats, business owners and people in private sector that earn money in kick-backs, bribes and any other unethical way. These (not usually farmers) own farm land, hide their dirty income. When they are raided by income tax officials (purely out of bad luck or vendetta), they approach courts, say the unaccounted income is from agriculture and hence was not taxable. If only all this unaccounted wealth were to be generated in agriculture, then agriculture would have been the most chosen profession.

Any economist who thinks the farmers in India are getting undue advantage against their peers elsewhere by farm subsidy must be crazy, for much of the land is owned (read encroached, squatted, etc) mostly by non-farmers and it is they that are getting benefited.

A reality check is definitely required...

More later,
K Venkatesh

Black money by invoicing...

As I had planned, I am continuing to blog about many ways how black money is made. Today I am writing about the invoicing route to black money. It is not that I am writing a new concept; many people have practised this and I am only taking an academic perspective to things...

Visit any stone shops in Bangalore (or any other place in India). By stone, I mean those stones that are used in construction of buildings - such as Marble or Granite (or Sandstone or anything similar). In Bangalore, you will find these shops concentrated on Bannerghatta road and Sarjapur road, though they are seen elsewhere too. You may buy any quantity, bargaining with often unrelenting dealers. These dealers are mostly non-native Bangaloreans. They hail mostly from the north western region of India where these stones are found in abundance. There are stone reserves in Andhra Pradesh that neighhours Karnataka (of which Bangalore is the state capital) but these are insignificant compared to the premium stones. In any of these shops, all transactions happen in cash only - absolutely no credit card or cheque. Though cheques may not be a safe instrument for the seller, because of the prolonged recourse if the cheque bounces, credit cards are perfectly safe. Why do these dealers not accept credit cards and expect the buyers to put all the cash, running often to the tune of a few hundred thousands, on the table? The answer is simple. The dealers do not wish to pay any tax to the governments; more so, they do not like to have a record of the transaction at all! However, they are even more crooked and crafty. They are happy if a customer asks them a receipt. This gives them opportunity to gain more. They give the customer a receipt and promptly add tax amount as well. This is because they pocket the "tax" money as well, destroying the copy of the receipts at the earliest. Some willing customers are smart and seek to under-invoice to reduce their tax (sales tax) liability. Do you think the dealers are smart, then note this. The receipt the dealers give the buyer is a "credit receipt" and not a cash receipt. This is because, even if an official (rarely honest) examines the books, the dealers say they sold goods on credit and never received the money. Most of these dealers own palatial houses and swanky cars. The also maintain accounts, mostly encrypted (such as a few missing trailing zeroes) in their languages such as Gujrati and Marwadi but not in English. This presents a barrier to a professional corporate auditor and the governments allow them to maintain account in any constitutionally recognized languages such as Gujrati. Hence, the auditor has to be a native and can work hand in glove with the dealer. Computerization can bring in some transparency in accounting, but then do they want to be transparent? Never! The would like to keep their business opaque and succeed in doing so by maintaining the books the old way.

Ditto with the dealers of timber, sand and other building materials, but are a small fry compared to the stone dealers.

If those are the cases of non-invoicing or under-invoicing, the story is incomplete. Last week, I discovered a new crooked behaviour. I went to a hotel with my family - this is Hotel A** on Gandhi Bazaar main road, Bangalore. The captain, unlike in other hotels, did not note our order on paper (slip), even when we insisted. The dishes were served, we had lunch and paid the receipt amount. In India, it is a common practice for hotels to take back the receipts (remember, they do not wish to have any record of a business transaction?). I was in a hurry, paid with cash but did not get the receipt. I insisted and got the receipt. Later I discovered that I was over-billed. I called up the hotel in the evening and after many calls, the cashier said he cannot reverse because it was a different cashier who had accepted the cash (though the shift had not changed and I knew he was lying). My wife went to the hotel the next day and asked for a reversal which the cashier vehemently refused. She insisted on meeting the hotel owner. The owner courteously reversed and refunded. So where's the catch? It works as follows. The captain and the cashier collude and over-invoice careless or unsuspecting patrons. If the patron pays by credit card, they do not gain (the hotel may, if the patron does not seek a refund). If the patron pays with cash, then after his / her departure, the cashier and captain reverse the transaction on the billing machine to the correct amount and shares the excess cash he / she got with the accomplice captain. E.g., if the patron had to be billed INR 500, they bill say INR 600. After the patron has paid by cash and left the hotel, the cashier and captain reverse the excess amount i.e, INR 100 and share the money amongst themselves, without the knowledge of the hotel owner. This incident reminded me of my colleagues narrating similar experiences they had had in other hotels in Bangalore. How do you trace such malpractices of over-invoicing? The hotel owner / manager has to use the statistical technique discussed in the book Freakonomics. A trend of "daily bill corrections / amount reversals" for lowering the amounts over a period of time (say, a month) will reveal the cheating pattern.

This makes me infer that the urge to cheat or get money in black is not specific to any class. It is all pervasive from a waiter to a quarry owner to the high earning government official. A friend said "you can't help it, corruption is in the blood of the people". Truth is something we realize after many others have.

So people have ingenious ways of making money either by under-invoicing or over-invoicing. Does it really make a difference whether it is black money (as in no tax paid) or money earned by cheating someone? After all, there is no victim-less crime.

Will write more on other ways of con/black/grey money soon.

K Venkatesh

Why money has colours (or at least, shades)?

It is somewhat popular saying that money has no colour. It is interesting to know that most often, the recipient or the owner of money is least bothered about the colour or shade of the money. It is only for the people that are curious or have a ring-side view that are interested in the colour of "that" money!

Yes, money does have colours or shades. It refers to how that money was acquired (not necessarily earned) by the owner. There's the white variety, there's the black and there's the other - the tainted money. In a way, you can consider that the tainted money is the subset of the black money.

So what's the difference between these monies? There are many, but most differentiators are relative. Relative to the owner, to the prospective owner, to the government, to the people and to anyone and everyone... Why everyone? That's because everyone is interested in money, theirs or others'.

In holistic terms, white money is earned through legitimate means and black money is either earned through illegitimate means (tainted) or has been hidden from taxation.

More on the origins of various monies later...

K Venkatesh