Why Incentives matter? (1/8)
A few weeks back we picked up this book "Naked Economics" and stumbled upon something that completely blew our minds. The book talks about an Indian company Hindustan Fertilizer Corporation (HFC)
A few weeks back we picked up this book "Naked Economics" and stumbled upon something that completely blew our minds. The book talks about an Indian company Hindustan Fertilizer Corporation (HFC)
You could trace its genesis back to FCIL, a chemical fertilizer company incorporated in 1961 and fully owned by the govt. But HFC was spun off as a separate entity in 1978, and then it had a whole new identity.
And by 1991, the company had been up and running for 13 yrs. Every day, 1200 employees reported to work with the avowed goal of producing fertilizer. There was just one small complication
The plant had never actually produced any salable fertilizer. None. Government bureaucrats ran the plant using public funds; the machinery was shipped in from Germany, Czechoslovakia, Poland and a half dozen other countries. The equipment had looked like a great bargain.
Alas, the machinery did not fit together and the plant could not operate. Everyone just pretended that it was operating. All in all, 1200 workers came to work every day and the govt continued to pay their salaries.
The entire enterprise was an industrial charade. It limped along because there was no mechanism to force it to shut down. And the author argues that this was an incentive problem, since the govt bankrolled the business irrespective of the company's profitability
However, since reading this bit, we've had a chance to speak to former employees of HFCL who claim that this story is simply untrue. While they do confess that there were inefficiencies and redundancies across the company, they assured us that HFC did, in fact, produce fertilizer
Nonetheless, it's an incredible story of how incentives often drive outcomes. If the incentives are skewed, the output will suffer. On the other hand, if you offer people the right incentives, you can get them to do the most amazing things. The END!!!
