Air India’s Failure: Epitome of Bureaucratic Enterprises

Massive infusion of taxpayer money has failed to revive the viability of government owned airline carrier, Air India

From a Bloomberg report,

Indian taxpayers gave Air India Ltd. $1.7 billion as bailout funds in the past four years. The airline now says it lacks cash to purchase spare parts.

That’s grounded 16 aircraft for the nation’s oldest carrier. Without the funds, the airline is also unable to refurbish some of the idled planes before returning to lessors.

“Some are just empty shells standing,” Air India Chairman Rohit Nandan said about the grounded aircraft. “We are in the process of returning some leased planes.”

The grounded planes add to the struggles of the former monopoly carrier saddled with about $8 billion of debt and six straight years of losses. Air India has also lost market share as discount carriers that started flights less than a decade ago lure passengers with the latest fleet and cut-rate fares.

Inability to fully utilize the fleet means Air India, the nation’s largest by number of aircraft, will operate fewer local flights than smaller rivals. The flag carrier won approval to operate 1,788 departures a week in the six months through September compared with IndiGo’s 2,821 and SpiceJet Ltd.’s (SJET) 2,467, according to the Ministry of Civil Aviation.

“It’s a criminal waste of public money,” said Harsh Vardhan, chairman of Starair Consulting, a New Delhi-based company that advises airlines. “With all this funds pumped in, what’s stopping Air India from spending on aircraft? They have to deploy fleet, expand network, increase frequency and go for market share.”

Since the Indian government liberalized the airline industry via the repeal of the Air Corporation Act of 1953 in 1994, privately owned firms dominated the market share. Air India’s share, from a monopoly, had been reduced to an estimated 18% of the domestic market.

The merger between Air India and Indian airlines, hobbled by labor unions, have reportedly been a factor in Air India’s continued losses.

Another important variable has been high prices of jet fuel which emanates from high taxes, around 32% of aviation fuel comes from a combination of sales tax, excise tax and freight related costs, as well as, from the inefficiencies of state owned oil marketing companies. High fuel prices has made domestic airlines less competitive relative to international counterparts. As of 2011, 5 of the top 6 major airlines were in the red.

Air India’s case is a classic example of the difference between bureaucratic firms and private companies which boils down to economic calculation.

As the great Ludwig von Mises explained:

A bureau is not a profit-seeking enterprise; it cannot make use of any economic calculation; it has to solve problems which are unknown to business management. It is out of the question to improve its management by reshaping it according to the pattern of private business. It is a mistake to judge the efficiency of a government department by comparing it with the working of an enterprise subject to the interplay of market factors…

Like any kind of engineering, management engineering too is conditioned by the availability of a method of calculation. Such a method exists in profit-seeking business. Here the profit-and-loss statement is supreme. The problem of bureaucratic management is precisely the absence of such a method of calculation.

In short, political enterprises are operated mainly from political goals, whereas the free market runs under the discipline of profit and losses. 

One should also make a distinction between private companies operating under the influences of politics or rent seeking “crony” firms.

How Bureaucracy Tarnishes Forensic Science

TV series like the CSI romanticizes the effectiveness of forensic science in solving criminal cases.

In reality, as the following Washington Post article reports, this has not been the case (bold emphasis mine)

Justice Department officials have known for years that flawed forensic work might have led to the convictions of potentially innocent people, but prosecutors failed to notify defendants or their attorneys even in many cases they knew were troubled.

Officials started reviewing the cases in the 1990s after reports that sloppy work by examiners at the FBI lab was producing unreliable forensic evidence in court trials. Instead of releasing those findings, they made them available only to the prosecutors in the affected cases, according to documents and interviews with dozens of officials.

In addition, the Justice Department reviewed only a limited number of cases and focused on the work of one scientist at the FBI lab, despite warnings that problems were far more widespread and could affect potentially thousands of cases in federal, state and local courts.

As a result, hundreds of defendants nationwide remain in prison or on parole for crimes that might merit exoneration, a retrial or a retesting of evidence using DNA because FBI hair and fiber experts may have misidentified them as suspects….

A review of the task force documents, as well as Post interviews, found that the Justice Department struggled to balance its roles as a law enforcer defending convictions, a minister of justice protecting the innocent, and a patron and practitioner of forensic science.

By excluding defense lawyers from the process and leaving it to prosecutors to decide case by case what to disclose, authorities waded into a legal and ethical morass that left some prisoners locked away for years longer than necessary. By adopting a secret process that limited accountability, documents show, the task force left the scope and nature of scientific problems unreported, obscuring issues from further study and permitting similar breakdowns.

That’s because the incentives guiding the actions of bureaucrats have innately been centered on politically based parameters (such as rules, regulations, codes and degrees) than from the discipline of profit and losses.

The above case fits exactly the predicaments of bureaucratic management as described by the great Ludwig von Mises in Bureaucracy p.49 (bold emphasis added)

There are, of course, in every country's public administration manifest shortcomings which strike the eye of every observer. People are sometimes shocked by the degree of maladministration. But if one tries to go to their roots, one often learns that they are not simply the result of culpable negligence or lack of competence. They sometimes turn out to be the result of special political and institutional conditions or of an attempt to come to an arrangement with a problem for which a more satisfactory solution could not be found.

Where there has been less incentive to become solutions to the problem (think “limited accountability”), bureaucratic shortcomings, operating mostly on legal technicalities (note “struggling to balance…”), are magnified.

The unfortunate realization from the above report is that two wrongs don't solve the problem of criminal justice, where criminals run scot free while the accused innocent remain incarcerated. Or differently put, injustice has been amplified by the bureaucratic or government failure.

One Source of Wealth Inequality: Government Owned Or Controlled Corporations (GOCCs)

Those promoting class schism by presenting misleading arguments on wealth-tax inequalities deal with superficial analysis, instead they should rant about is this:

GOVERNMENT WASTAGE AND INEFFICIENCY THAT LEADS TO HIGHER TAXES.

Today’s news headlines provides a magnificent example.

This example from the Inquirer,

Another government-owned and -controlled corporation (GOCC) has been found to have granted its officers and employees millions of pesos in unauthorized allowances, bonuses and other benefits.

Despite owing the government over P7 billion in concession fees and other liabilities, Philippine National Construction Corp. (PNCC) last year gave its board of directors, officers and employees over P57 million in allowances that lacked legal basis, according to the Commission on Audit (COA).

PNCC whose president is Theresa Defensor also gave some P261.33 million in unauthorized cash advances to its employees, the audit agency said in its latest report on the GOCC.

The COA said the corporation should have first settled its obligations with the national government before improperly providing “huge” allowances to its personnel.

On Sept. 8, President Benigno Aquino III ordered the suspension until Dec. 31 of all allowances, bonuses and incentives of board members of GOCCs and government financial institutions (GFIs).

Here, media’s framing of government’s wastage seem to be angled only from the morality aspects.

Yet one noteworthy statement from the same article…

The COA said these disbursements had no authority from the DBM or the Office of the President.

My comments:

1. Legality seems to be determined according to the unilateral political discretion of the incumbent leadership, where arbitrary rules equate to subjective actions by the regulators or administrators.

As Ludwig von Mises pointed on the inherent weaknesses of bureaucratic organizations… (bold emphasis mine)

There are, of course, in every country’s public administration manifest shortcomings which strike the eye of every observer. People are sometimes shocked by the degree of maladministration. But if one tries to go to their roots, one often learns that they are not simply the result of culpable negligence or lack of competence. They sometimes turn out to be the result of special political and institutional conditions or of an attempt to come to an arrangement with a problem for which a more satisfactory solution could not be found. A detailed scrutiny of all the difficulties involved may convince an honest investigator that, given the general state of political forces, he himself would not have known how to deal with the matter in a less objectionable way.

This also means that since the administration of these organizations are mainly politically determined, management actions may be directed at the rewarding or dispensing of favors to political allies or adherents, or trying to attain high approval ratings by projecting control, or other non-market based actions.

2. Spending someone else’s money has always been the easiest thing to do. And that’s what bureaucracies essentially stand for.

This from GMA TV,

Government-owned and –controlled corporations (GOCCs) got P15.95 billion in subsidies in the 10 months to October, up by 54 percent from P10.36 billion a year earlier, the Bureau of Treasury (BTr) reported Wednesday

3. Bureaucracy isn’t concerned with profitability, but with fulfilling regulatory, or as stated above, specific political goals for the benefit of the political leadership.

This from ABS CBN

Goverment owned and controlled corporations (GOCCS) are bracing for a major shakeup as the state plans to abolish some of these agencies.

Budget Secretary Florencio Abad said on Monday that some of the 14 GOCCs being monitored by the goverment, may have to be folded up.

The abolishment of losing and redundant GOCCs is part of the government's overall strategy to trim the bureacracy and stop the bleeding of its coffers through huge subsidies to these agencies.

There seem to be little concerns, except for paying lip service, on the trimming the leviathan. Also there seems hardly any discussions on the justifications for the continued existence of these political enterprises, aside from looking at financial conditions.

In addition, there also seems hardly any reckoning on the adverse impact on the economy by, not only misallocation of resources, but as privileged competitor at the expense of the private sector (yes, some GOCCs are profitable. That’s because they are monopolies of strategic sectors, e.g. Bangko Sentral ng Pilipinas, Government Service Insurance System, Social Security System, Philippine Deposit Insurance and many more).

Yet these enterprises represent anti market or totalitarian tendencies by the state.

Again from the great Professor von Mises (bold emphasis mine)

Those who criticize bureaucracy make the mistake of directing their attacks against a symptom only and not against the seat of the evil. It makes no difference whether the innumerable decrees regimenting every aspect of the citizen’s economic activities are issued directly by a law, duly passed by Congress, or by a commission or government agency to which power has been given by a law and by the allocation of money. What people are really complaining about is the fact that the government has embarked upon such totalitarian policies, not the technical procedures applied in their establishment.

Bottom line: Finger pointing on the rich is one wrong way to address equality issues. Instead we should deal with the system that promotes on such inequality. The system where politics has been empowered at the expense of the markets, and a system that encourages waste, inefficiency, corruption and wealth redistribution from the economic-productive class to the power hungry political class.

Privatize Pag-Asa or Open Weather Forecasting To Competition

Weather forecasting personnel from the government institution are reportedly in mass exodus.

According to the Inquirer,

The Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) has lost 24 key personnel, most of them experienced weather forecasters, in the past 10 years to lucrative offers from abroad, the Inquirer has learned.

Brain drain is not the only disturbance beclouding the state agency, on whose forecasts depend the lives of countless Filipinos. The problem of outdated equipment has battered it for years.

According to PAGASA personnel who talked on condition of anonymity, most of the weather forecasters have accepted offers from the state weather agency in Dubai, which is strengthening its forecasting system in its bid to attract investors and tourists.”

This is to be anticipated for the following reasons:

One, PAGASA is just one of the many tentacles of government agencies and thus becomes the object of concern only when political expediency calls for it.

Two, because PAGASA’s priority is based on political whims, thus, her financing is also subject to political priorities.

[I’d like to add that “brain drain” is a non-sequitur here, brain drain is the result of government or bureaucratic failure.]

Evidence from the same article,

After 1998, PAGASA decided to chuck the master plan.

But Nilo said the Arroyo administration was more supportive of PAGASA’s plan calling for much-needed equipment improvement.

In 2005, Nilo and PAGASA embarked on a new plan that included the upgrading of PAGASA’s existing Doppler radars.

Unfortunately, the Arroyo administration toward the end of its term slashed PAGASA’s budget for 2010.

The agency had submitted a P1.7-billion budget covering personnel and maintenance expenses and including capital outlay for the purchase of new equipment. But it was told by the Palace to stay within the ceiling of P614 million.

For 2009, PAGASA got a P757-million budget that included some amount for capital outlay.

Three, because government bureaus are likewise subject to public opinion, PAGASA serves as a favorite whipping boy or “passing the hot potato” (blame) for political leaders. In politics, which essentially is a zero sum game, someone has to take blame, hence if it is not greedy entrepreneurs it is the small fry (bureaucrats). Never will the blame fall on themselves or the bureaucracy or the legal system that supports it.

From the same article,

PAGASA has been under a microscope after failing to accurately track Typhoon “Basyang” (international codename: Conson) and its officials were publicly reprimanded by no less than President Benigno Aquino III.

The agency has upgraded the capability of two of its Doppler radars to improve storm tracking. Aside from that, the new radars can now provide information on wind speed, wind direction and rainfall amount.

The agency is set to upgrade five more radars in the coming months.

As shown above, government always are almost always reactive in approaching social problems, and that’s because the primary concern of politicos have been to generate favorable public opinion, since the essence of the preservation of their politically privileged status is in the substance of a popularity contest . Hence, since social issues are fungible or concerns which varies on a fleeting day to day affair, so goes with the political priorities.

Finally what people don’t see is that weather forecasting services could be better offered by the private sector.

In the US private companies are reportedly much better or more accurate in weather forecasting.

This from the Fox,

Private companies with a lot at stake would often rather pay for private forecasts than rely on the “free” forecasts from the government. Hugh Connett, the president of Bridgeline, a gas pipeline company in Louisiana, claims that the government’s hurricane forecasts are too imprecise. He says that private companies such as AccuWeather do it better, because they give more accurate predictions and provide hour-by-hour forecasts of a storm’s path.

His position is not ideological – Connett’s firm monitors the past accuracy of hurricane forecasters to make sure paying extra for the private service is worth it.

It is not just for hurricanes that private forecasting comes out on top. A new study by Forecast Watch, a company that keeps track of past forecasts, found that from Oct. 1, 2006, through June 30, 2007, the government’s National Weather Service did very poorly in predicting the probability of rain or snow. Comparing the National Weather Service to The Weather Channel, CustomWeather, and DTN Meteorlogix, Forecast Watch found that the government’s next-day forecast had a 21 percent greater error rate between predicted probability of precipitation and the rate that precipitation actually occurred.

In looking at predicting snow fall from December 2006 through February 2007, the National Weather Service’s average error was 24 percent greater.

“All private forecasting companies did much better than the National Weather Service,” the report concludes.

The government doesn’t do any better with forecasting temperature. For the largest 50 cities in the U.S. over the last year, ForecastAdvisor.com ranks the National Weather Service’s overall predictions for high and low temperatures as well as precipitation as dead last among the six weather forecasting services they examined.

It has only been in the last several years that comparisons between government and private weather companies have been possible, as the National Weather Service has made its data more readily available. But none of this should be very surprising. Incentives matter. If the private companies don’t do a good job, they go out of business. Government agencies never even shrink.

The key difference? Private sector is subject to profit or losses, thereby are incented to produce accurate or precise forecasting or risk losing capital, whereas the public sector’s performance goes only on the spotlight, when problems emerges.

Thus, from motivational issues, the lack of incentive to serve consumers, scant funding to shifting public priorities by political leaders, the mass personnel exodus from the government agency should be expected. The alternate solution isn't for government to spend more but to open weather forecasting to competing private enterprises.

Ludwig von Mises laid out the premise why governments are no better in providing "public services" needed by the people (bold emphasis mine).

In public administration there is no connection between revenue and expenditure. The public services are spending money only; the insignificant income derived from special sources (for example, the sale of printed matter by the Government Printing Office) is more or less accidental. The revenue derived from customs and taxes is not “produced” by the administrative apparatus. Its source is the law, not the activities of customs officers and tax collectors. It is not the merit of a collector of internal revenue that the residents of his district are richer and pay higher taxes than those of another district. The time and effort required for the administrative handling of an income tax return are not in proportion to the amount of the taxable income it concerns.

In public administration there is no market price for achievements. This makes it indispensable to operate public offices according to principles entirely different from those applied under the profit motive.