Revamping Planning Commission
Please do not throw baby with bath water
(This article was written before NITI - National Institution for Transforming India - Aayog replaced Planning Commission)
According to a news item in the Economic Times (26/11/2014), the new institution that will replace the Planning Commission (PC) will be a combination of three key divisions: (a) Inter-look at that to carry out the development agenda of the estates; (b) Planning and Monitoring Division to work on a long-term plan for the government and evaluate the flagship sector schemes; and (c) UIDI-DBT to cooperate with the states for generation of Aadhaar.
The outsiders have no idea what input Prime Minister has received from his advisers about the role to be assigned to the new body. However, what is known is that several persons have suggested that the new body should not waste time and energy on micro-issues like project appraisal. I strongly feel that such persons are either ignorant of the subject and its importance or have some personal reasons. An important role played by the existing Planning Commission appears to have been ignored.
Certainly, being a seasoned administrator PM must be aware that that macro objectives are achieved though projects and schemes and administrative measure and that the quality of investment decisions very much depends on the quality of ex-ante appraisal. Nevertheless, I am mustering courage to give my comments and suggestions because I have worked for nearly 20 years in the field: more than 10 years in Project Appraisal Division (PAD) of PC (from Deputy Secretary to head of the Division), 7 years as head of Project Monitoring Division in the Department of Programme Implementation (5 years as JS and 2 years as Additional Secretary), one year at Oxford University and two years of sabbatical to study project appraisal. During the period, I have appraised/supervised appraisal of nearly 1000 projects, monitored implementation of more than 1000 projects and carried out concurrent and ex-post evaluation of large number of projects pertaining to different sectors of the economy. In addition, I have written several papers on different aspects of project management.
The PAD was set up the PC in 1972 to institutionalise the system of project appraisal in the Government of India. The division carries out techno-economic appraisal of Central projects/schemes (presently costing Rs. 50 crore or above) which are considered by the Expenditure Finance Committee/Public Investment Board for recommendation for approval or rejection by the Union Cabinet.
Techno-economic project appraisal involves ex-ante examination of the feasibility report. Apart from the examination of options leading to project identification, aspects normally examined are commercial, technical, financial and economic viability (using tools and techniques of cost-benefit analysis, CBA for brief, cost-effectiveness analysis for both and domestic resource cost for economic), availability of infrastructure, environmental aspects, employment generation, impact on the target group, uncertainties/risks involved, organisational structure and the state of preparedness for implementation.
Project appraisal is a multi-disciplinary task requiring knowledge of tools and techniques of appraisal, knowledge of the sector to which the project belongs (for example, for appraising a coal project, knowledge of different types of coal mines, different grades of coal, different technologies of mining, etc.) and analytical ability to thoroughly examine all aspects. Obviously, one person cannot have all the knowledge required for appraisal of projects of different sectors but every appraisal must have sound knowledge of tools and techniques. Moreover, an appraiser is effective only when he has ability to understand and analyse all the issues objectively, without yielding to any pressure or temptation.
Since unviable and unnecessary projects/schemes are often pushed under political pressure, appraisal cannot be left to the Ministry that has submitted the proposal. There must be an independent organisation with requisite expertise to carry out proper appraisal and give free and frank advice to the government on specific policies, projects and schemes.
One advantage of its location in the PC is that appraisers are able to get necessary inputs from subject divisions of the Commission. Such an advantage would not be available elsewhere, not even in the Finance Ministry. There could be suggestion to outsource the work to outside appraising agencies but there are several disadvantages in doing so.
Most of the banks and private organisations do not have the requested expertise.
If the task is assigned to a bank or to a private agency, lobbyists have all the opportunities to influence appraisal. High burden of NPAs is ample proof of that.
No single appraising agency, outside a body like PC, can have expertise from different sectors for proper information about the sector to which the project pertains.
Centralisation of appraisal of Central projects helps build institutional memory which is of great help in appraisal.
I would like to give just three examples of advantage of a centralised appraisal agency.
(a) The Eighth Report of the COPU (1985-86) contains scathing criticism of the Central government organisations, particularly PAD and PIB, created for appraisal and approval of investment projects. At that time large PSUs like ONGC did not have much autonomy for investment decisions. The then Chairman, ONGC, had told the COPU: ‘It is just a waste of time to go through the various processes of clearance. I have not seen a single proposal having been modified drastically because of the clearance by the government agencies. The proposals remain identically the same.’ Based on his evidence, the COPU passed strictures against the appraisal agency and clearance procedure. Subsequently, when records were produced before a Committee of Secretaries (COS) to show that out of a dozen and half projects appraised by the PAD during the preceding two years, the ONGC withdrew 2 or 3 projects, made important changes in more than a dozen projects and that only two or three had been cleared without any amendment, the COS (on September 30, 1986) recorded that the ONGC had misled the COPU. It was a very serious offence but there was no follow-up action.
(b) In 1987, Petroleum Ministry submitted a proposal for approval of revised cost estimates (RCE) of a multi-crore offshore pipeline project. The proposal, approved by Petroleum Secretary, had claimed that the cost had gone up on account of, among others, drastic change in specifications of pipeline (leading to higher diameter, thickness of wall, etc.). I discovered that what the Ministry had mentioned as revised specifications were actually the approved specifications and what had been mentioned as approved specifications were one of the options considered and rejected earlier. It proved the advantage of institutional memory.
(c) In 1998, some Indian and American academics submitted a proposal based on World Bank analysis of over 1600 projects that attributed delay in implementation to outdated methodology of CBA. The academics offered to provide what they called “state-of-the-art” methodology. I noticed great enthusiasm in different ministries that at long last the World Bank had discovered the root cause and that a solution was available! On examination of the proposal submitted, I found that the World Bank had not studied a single case from India and there was nothing like "state-of-the-art" methodology the so-called experts were talking about. On the other hand, after carrying out concurrent and ex-post evaluation of hundreds of projects over a long period of time, our finding was that there was nothing wrong with our methodology; mistakes in appraisal, if any, occurred due to wrong data or wrong application of methodology. Post-approval, projects go wrong because of several reasons such as pressure to sanction without adequate availability of fund, land and infrastructure facilities (happening on a large scale in the Railways.), delay in award of contracts and/or in supply of equipment, non-availability of adequate number of skilled workers, etc.
Moreover, a central appraisal agency builds a databank to suggest intra-se ranking when there are different projects competing for limited resources and also to suggest common problems faced by projects pertaining to a particular sector or across the sectors.
One serious problem I experienced is the lack of adequate number of project appraisal experts. Degree in economics or any branch of engineering or management does not automatically make one expert. It requires years of self-study and practice. Even the so-called experts called to select an appraiser may be ignorant. When I was being interviewed by the UPSC for the post of Joint Adviser (PAD) in 1982, I discovered that the external experts brought by the UPSC were totally ignorant. More than 15 years later, when an officer who was to face the Selection Committee (headed by a member of the Planning Commission) for interview for the post of Adviser (PAD) asked me to explain the methodology of CBA (a very efficient officer but totally ignorant of CBA), I assured him that since no member of the Selection Committee knew anything about the subject, they would not ask any question on CBA. The officer was selected without being asked a single question about CBA
Such a problem is not insurmountable and could not be reason for outsourcing appraisal work. What is important is, in the words of Sant Kabir, “निन्दक नियरे राखिये, आंगन कुटी छवाय, बिन पानी-साबुनबिना, निर्मल करे सुभाय” (To put it in simple word: 'keep your critic in the courtyard to tell you your mistakes.)
I would suggest that before taking final decision, cost-benefit analysis of the two options should be carried out: (a) keeping appraisal work within an organisation that would replace the Planning Commission and (b) outsourcing the task to some other organisation, whether in the government or outside.
Devendra Narain, IRS (R)October 02, 2015