Bangalore's Public Record Of Operations and Finance (PROOF) campaign completed two years recently. Watching Mr Srihari, Bangalore Mahanagara Palike's Chief Financial Officer stand up and deliver the financial record of the city to the citizens, just like any firm in the private sector would, was a dream come true for me. I agree that there are areas for improvement: there were questions about some aspects of the data, or the quality of the responses, and so on, but these are matters that can get resolved over time. The key point is that we are seeing a new kind of space opening up, one where matters of performance and finance are being discussed.
And the citizens responded very well: there were no personal grievances being aired ("my area road has not been asphalted for the past seven years", or "can you please make sure that the garbage bins in front of my house are removed" etc). Over the past several PROOF sessions, citizens have understood that this space is about the performance of the BMP. And that meaningful discussions need to be held around information, and hard data. Not empty promises or rhetoric.
In the discussions about property taxes, many citizens asked for the list of tax payers to be made public, and persisted with getting definitive answers even when the initial response from the BMP was vague. There were also several questions about important issues like slum development, education, engineering works, but all had the core element of funds allocation and utilisation in them. The session on PROOF in education was very well attended by regular citizens, participating actively in the discussions on comparing the BMP's expenditure of Rs 10,000 per child, versus that of a private school Bethany's that spent the same amount but with substantially better services.
All of these indicate that PROOF is maturing.
One sign of this is that there were visitors from 5 other cities and towns. Imagine if we could compare Bangalore's education performance with Bombay, Hyderabad's healthcare delivery with Chennai, and rank the overall performance of these cities! Imagine if state governments could assess the performance of local governments within the state every quarter, and use this to determine the level of support these governments would receive from the state. Imagine if the media could cover city performance the same way that they cover Infosys and Wipro and Satyam, and the kind of healthy competition this could unleash.
I am sure that this will happen. Not only across India, but soon, in other parts of the world as well. It will take a lot of work on a variety of fronts, but it can be done. This brings us to one of the most important aspects of PROOF, that of it being an INSTRUMENT OF DISCLOSURE.
Today, we are in an environment where everyone is talking about "Right to information" with respect to getting information from the governments. Legislation has been passed in many states, and is in fact being considered at the national level. This will dramatically change the secrecy with which governments work, and allow citizens access to a variety of details that we could not get before.
The Right-to-Information wave has been an extraordinary development in India. It will have enormous significance in checking government excess, and exposing corruption. Successes will not be immediate, but eventual. Each such example would be an individual incident: a fodder scam in one place, or a college fee scandal in another, each being pried open with the crowbar of RTI law.
However, we need to think about how RTI could be used to ensure more "systemic" solutions, where the performance of our government institutions are discussed in a regular, predictable manner. This is what good "disclosure" is about, this is how institutions can be governed properly. Good governance will arise not out of individual exposes of scams, but out of institutionalised disclosure practices that are constantly being improved.
PROOF is an example of this kind of disclosure, a quarterly report from the local government.
Let us look at the private sector. I don't want to sound like everything is right about how our private companies are run, but we can take lessons from the ones that we respect, especially on their disclosure practices. In any event, an examination of how disclosure practices have evolved in the private sector gives us a sense of the road we have to traverse with respect to disclosure in our public institutions.
Understanding the evolution of financial statements and disclosure in the private sector is critical to seeing the remarkable similarity between the evolution of "Right to Information" issues in the private sector and the current debates on the same topic in our public institutions. While the history of private enterprise is thousands of years old, a relevant launchpad to understand the modern corporation, and its associated concepts of limited liability and disclosure etc. can be with the corporations of the 17th century.
Of special interest to India is that no institution offers a better case study here than the East India Company:
- Between 1600 and 1617
the company sponsored 113 voyages,
each supplied with newly subscribed capital
and treated as a separate venture.
- At the end of each voyage, assets as
well as earnings were subject to divisions among the shareholders. Profit was
easily measured by the individual investor: he gained to the extent that he got
back more than he had paid in.
- One of the first attempts to deny
stockholders access to the records of their company occurred during 1633. After
a decline in the fortunes of the East India Company, some stockholders moved for
the appointment of a committee of inspectors. The Governor (Chairman) refused to
put the motion to the meeting and the governing committee decided that no-one
should be permitted to read or copy, or to 'ravel and dive' into the accounts
without its consent.
- A Select Committee published its First Report during
1844, including the following recommendations:
"The periodical holding of meetings, the periodical balancing, audit and publication of accounts, (would make) the Directors and officers more immediately responsible to the shareholders."
"Periodical accounts, if honestly made and fairly audited, cannot fail to excite attention to the real state of a concern; and by means of improved remedies, parties to mismanagement may be made more amenable for acts of fraud and illegality."
"It is expedient that the accounts of every such Company be open to the inspection of the shareholders: and that the annual balance-sheet, together with the reports of the auditors thereon, be registered."
This report heralded the beginning of the never ending attempts to enforce proper disclosure of the affairs of corporations, the birth of the modern accountancy and audit professions and the eventual supervision by entities such as Stock Exchanges, Central Banks and Securities Commissions. The Limited Liability Act was subsequently passed in 1855. This introduced the concept of general limited liability for shareholders i.e. their liability for the company's debts, if it became bankrupt, was limited to the amount of share capital which they had invested. It was felt important that the company's creditors should be aware of the limited liability status of the company, and the requirement for companies to have "limited" or "ltd" in their name dates from this time.
- It was this 1855 Act which finally established companies
as the major instrument in economic development.
- After this legislation,
businesses mostly fell into two categories: incorporated companies and
conventional partnerships. The numbers of incorporated companies increased
steadily, in particular towards the end of the nineteenth century.
- By 1914 around 65,000 were registered; by 1945 about 200,000.
- In the United States,
progress on corporate disclosure followed the standards set in England, until
the early 1900s. As late as the 1920s many corporations still kept sales figures
secret, some did not depreciate assets, failed to treat non-operating income
consistently, did not separate retained earnings from paid-in capital and did
not disclose asset write-ups.
- It was after the Great Depression of 1929 that
substantial changes were brought in. The English Companies Act of 1929 served
as the foundation for Felix Frankfurter and his team in drafting the Securities
Act of 1933.
- President Roosevelt's policy championed full disclosure as the
preferable remedy to the malaise of American financial markets, and made the
famous statement, "Sunlight is said to be the best of disinfectants."
- A seminal document in the evolution of the universalisation of accounting principles was Paton and Littleton's "An Introduction to Corporate Accounting Standards" (1940), the most coherent statement of principles to emerge from this period. This document set the tone for much of the subsequent evolution of corporate financial disclosure practices in the ensuing decades.
Over the past fifty years, these practices of disclosure have been strengthened, each time because of some new scandal that erupted. For example, with the recent Enron and Anderson scandals in the US, there has been a new law called Sarbanes-Oxley Act, which requires CEOs of companies to take personal liability for the disclosures being made. Hence, disclosure practices are not a static set of tools, but constantly evolving. The fundamental principles behind the creation of these standards have been the guiding lights of all material and legislation: creating a level-playing field for all stakeholders by providing regular, detailed, and standardised information about the state of an institution.
We can now see the comparison of what has happened in the private sector to our governments: the Right-to-Information laws are only the first step. We have a choice, either to continue to use this tool to extract information on a case-by-case basis, or to take the learnings of the private sector that evolved over 300-odd years, and telescope the timeline to focus on disclosure from our government institutions. What disclosure does is give "information" three important characteristics:
1. Timeliness : The information being provided relates to the immediate present, not something that happened three or five years ago. Hence, people are interested, and the information is not like reading yesterday's newspaper.
2. Predictability : A shareholder of a company KNOWS that she can expect information every quarter. This knowledge that information will come allows all concerned to expect, and analyse the data. Today, information from government comes out unpredictably, in selective bunches, so that there is no context for the average citizen. As a result, the information disappears into a black hole.
3. Standardisation : The information is packaged in a manner that is understandable.
When information has these 3 characteristics, it unleashes the creative forces of all concerned with that particular institution. For a private company, it could be a research analyst, or a shareholder or a rating agency or a lender. For a government, it will be a citizen or an elected representative or an administrator or an NGO.
I believe that we need to have both, the rhythm of regular disclosure documents that present the performance of our government institutions to various stakeholders as a matter of course, as well as the scalpel of right-to-information to cut open specific issues that require transparency.
PROOF has set us on the journey of creating the basis for regular performance disclosure from our governments. Its success over the past two years should give us heart; its adoption by other cities over the coming year should give us joy.