Lessons From Global Experiences

                                                                      Dr Niranjan Sahoo and Rajendran Nair Karakulam*

Democracy costs a lot of money. To fight elections and to run routine political activities, parties and candidates seek donations from all possible sources including illegal and criminal money. As per available data in India, most open source donations of political parties are secured from private businesses. This ultimately has a net negative effect on governance as elected officials ought to return the favours. Besides, the expensive nature of elections acts as a huge barrier for a lot of aspiring candidates to enter politics, thus working as an “entry barrier”. In the absence of adequate funds, smaller and new parties particularly find it difficult to run decent election campaigns. To reduce the dependency on big money and encourage aspiring politicians to participate in the democratic process, a number of democracies have embraced the path of public subsidies and direct funding of political parties and political activities.

Many countries such as Germany, United Kingdom (UK), Brazil, Mexico, even the United States have introduced state funding of elections (in different ways) to address these issues. In fact, countries like Germany and UK have made impressive strides in reducing the role of big money in politics and bringing about modest degree of transparency back to their democratic processes through intelligent use of state subsidies. Yet, India cannot simply take a leaf out of Germany or UK's experience.

It is a vast and complicated country with a diverse and evolving democracy where many institutions are still a work in progress. Therefore, it is pertinent to understand the context of the reforms and the differences in the systems introduced in various countries. This paper will try to analyse these claims, identifying the variations in implementation. It will also try to identify other factors which can help India institute a more workable law with regard to public funding of elections.

Types of Public Funding

Public Funding can be divided into two types in which public resources are made available to parties or candidates. These are indirect and direct funding. Below is a brief description of their nature and key characteristics.

1.  Indirect Public Funding
    Under indirect public subsidies, the government provides resources with a monetary value to political parties or candidates. The most common forms of indirect subsidies are in the form of access to publically-  owned media, use of public infrastructure for meeting and rallies, free or subsidised public transportation for candidates and key party personnel for campaigning. Free printing and distribution of ballot papers,  subsidised office space for party functions, interest free loans to finance basic campaigning expenses and incentivising private donations by tax exemptions are also forms of indirect funding. As per the  International Institute for Democracy and Electoral Assistance (IDEA) statistics, more than 68 per cent countries around the world offer some form of indirect subsidies to political parties or candidates¹.
2. Direct Public Funding
   Under this scheme, state provides money directly to political parties or candidates to fully or partially meet their expenses. Direct funding system can differ in many forms. On the basis of the goals, the systems differ on the following aspects²:

1.  Recipient
   In most countries direct public subsidies are provided to political parties particularly to party central offices or headquarters, but there are many countries, like US, Australia, Canada, Denmark, Germany, Norway, Spain, Austria and Sweden, which provide direct subsidies to state or regional level party offices. It is only in handful of countries such as Ecuador, France, Uruguay and the US 2 where candidates receive direct subventions³.
2. Threshold for Eligibility to Access Public Funds
   Providing funds to all parties or candidates create the most competitive electoral system. However, the problem with such a system is the proliferation of non-serious parties or candidates who only seek to get funding. Alternatively, a very high threshold, like 10 per cent vote share as in Bhutan and Malawi, would largely favor incumbents and would be against the interests of competition as new parties and smaller parties would be ineligible for public funding⁴.
   Therefore, most countries have adopted an eligibility barrier based on performance in the previous election. This is usually based on parliamentary representation like Bolivia and Finland, or vote share as in the cases of Germany and Nicaragua. Some like Sweden and Costa Rica have used a combination of representation and vote share with mixed success⁵.
3. Criteria for Allocation Among Eligible Political Actors
   Equality in fund allocation is the hallmark of a sound public funding system. While it may seem that providing equal subventions to all eligible political players is the most democratic method, the idea of providing equal grants to a small party with minimal representation or minor vote share as that given to large parties is a disregard of the opinion of the voters and can cause wastage of public funds. It could also lead to party fragmentation⁶. Most countries, though, use a system of 6 proportional allocation according to vote share, as in Belgium and Greece or representation as in Finland and Sweden. Germany (along with funds based on votes received) and the US have implemented a system of matching funds that have been raised by the parties through small private donations⁷.
   A key feature of the German allocation criteria is that the amount of funds granted for the first four million votes received by parties, which is 0.85 euro per valid vote, is higher than the amount granted for votes received beyond that, which is 0.70 euro per valid vote⁸. This is crucial in 8 maintaining a balance between large established parties and smaller, usually regional, parties. In short, the determination of the allocation criteria is a critical factor to ensure the fulfilment of core objectives.
4. Method of Disbursement of Funds
   There are two elements involved in the methods of disbursement. These are the purpose and the timing of such disbursement. Based on their purpose, parties can be funded permanently or for election campaigns. Most countries have provisions for regular funding or both regular and campaign funding. Only a handful of countries restrict funds to fund electoral campaigns. Although the intended use may be different from the timing of the disbursement⁹.
   In terms of the purpose, there is a clear distinction between West European democracies and Latin and North American democracies. This is due to the difference in the way the political parties itself are viewed in these countries. While the former view political parties as permanent organisations with comprehensive non-electoral democratic functions, the latter view parties only as institutions with the sole function of running election campaigns and supporting candidates¹⁰.

Impact of Public Funding

As illustrated in the beginning, the key objectives behind instituting public funding are to cut the costs of elections, reduce the dependency on 'interested money', enhance political competition by providing a level playing field for smaller and newer political entrants and institutionalising transparency and accountability in the democratic processes. In the following pages, we do a quick fact checking of impacts that public financing of politics makes in different settings and contexts.

1. Effect of Public Funding on Reducing Costs of Elections
   The proponents of state funding of elections argue that it helps reduce and limits the enormous costs of campaigning. However, insights emerging from the global experiences provide mixed trends. Negative ones first. Despite direct subsidies given to political parties in Israel and the US, the electoral expenditure continues to grow with each election and parties in both countries continue their dependency on large private donors¹¹. This is due to the lack of spending ceilings and 11 the existence of catch-all parties¹². Of course, in the case of America, this is mostly due to 12 the effect of the 2010 Citizens United judgement¹³. The judgment allowed, what was called,
   'independent expenditure', whereby, instead of contributing to a candidate, corporate entities could directly spend on advertisements calling for election of a candidate or for the defeat of another¹⁴. The exponential increase in expenses in the 2012 presidential election has been attributed to the formation of super-PACs which were allowed by the judgment¹⁵.
   However, there are successful examples like Japan and Germany that have reduced the costs of elections and dependency from the private business. Japan has able to reduce its campaign costs ¹⁶ through a judicious mix of supporting reforms including imposing bans on corporate donations, imposing spending ceilings, improving transparency along with state funding.
2. Effect of Public Funding on Big Money
   One of the key arguments in favor of public funding is that it reduces the dependence of parties on big private donations. In terms of outcomes, the international experience gives a mixed bag. For instance, a close examination of a major case like South Africa saw the gross misuse of public funds especially by the wealthy candidates. One the one hand they continue receiving state subsidies and on the other same parties keep receiving private money through government contracts and other forms of preferment¹⁷. Even in the US, such funding has not reduced the dependency of 17 political parties on wealthy donors¹⁸.
   In terms of checking the growing plutocratic influence on party finance and corruption, the results are not all that encouraging either¹⁹. For instance, in Israel and US, as noted above, public subsidies 19 have not reduced the reliance on private donations. Similarly, in several Latin American countries particularly Brazil, Argentina, Colombia, Ecuador and Costa Rica, public subsidies have proved rather ineffective in limiting the role of business in the political financing. The easy availability of money from interest groups and business circles to typically catch-all parties also contributed to the failure in Israel and US.
   In Latin America, business ordinarily played a central role in campaign funding because there were no other sources available for parties. Political parties in Latin America are typically characterized by weak party organizations, scarcity of fee-paying party members and weakness of interested trade union contributions²⁰. Therefore, public subsidies in this case failed to replace the need to 20 attract private donations, but were merely an additional source of income for the parties.
   However, there are few successful examples as well. Take the case of Canada for instance. Canada introduced public subsidies as a part of a whole set of reforms, including spending
   ceilings, tax incentives for smaller contributions, which have been able to successfully reduce the role of interested money in party financing²¹. In Sweden, generous public subsidies, which far 21 exceeds private donations and minimal state intervention in party affairs have been successful in reducing temptation for parties to seek anonymous interested money²². In both these cases, it is 22 necessary to understand that other factors were also responsible for the resultant effect.

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3. Impact on Electoral Competition
   Does public funding of elections encourage new entrants and promote electoral competition? International experiences suggest that public subsidies fostering competition is a function of how public subsidies are distributed. In countries like Russia, it has been used to stifle political competition and promote authoritarianism. The 2001 law, apart from establishing heavy state subsidisation, introduced other regulations such as limiting private donations, imposing spending ceilings and strict disclosure requirement. This has led to a situation where it is almost impossible to challenge the ruling party²³.
   Thus, it has led to creation of a cartel party. However, there is modest evidence of the opposite too. Many new parties have emerged in countries like Canada and Finland, where public subsidies were introduced to reduce proliferation of parties²⁴. In some instances, particularly in the cases of Israel, 24 Italy and Mexico, introduction of public subsidies has brought greater competition by enabling entry of newer parties and providing smaller parties with the funds to compete with incumbents²⁵.
   There are also peculiar experiences particularly with regard to parties that have certain ideological preferences, like the left or socialist parties. It is well known that these parties find it increasingly difficult to compete with right-wing parties due to the fact that huge private funds are readily available to the latter. In some ways, the introduction of public subsidies is helping those political entities as evident in the case of Uruguay.
   The public subsidies can also be employed to promote competition within the party. As the global evidence suggests, this can be done by introducing public funding for determination of candidate at the intra-party level. One of the best examples of this is the United States, where candidates can seek public funding to contest intra-party elections for candidature. Another method of tackling this problem is by routing public subsidies directly to lower units of parties and thereby strengthening them and ensuring intra-party democracy.

4. Other Effects of Public Funding
   State funding of elections does serve many other purposes as well. One of them is that such a strategy promotes institutionalisation, thereby ensuring greater compliance of transparency norms. A quick survey of literature indicates that the consequences of institutionalisation largely depend on the purpose and method of disbursement of funds to parties/candidates. A comparative analysis of Latin America and Western Europe provides some broad understanding of how party institutionalisation works. In countries like Uruguay and Costa Rica, although generous subsidies are provided to party members, there is very little evidence of institutionalisation of parties. This can be understood from the fact that between elections; the financial turnovers, membership and party activities remain very low.
   Whereas it is the opposite in the case of most western European countries, where permanent subsidies have led to strong party organisations²⁶. The difference here can be attributed to the 26 different view of parties in both the regions. While in the former parties are merely considered election contesting bodies, the latter consider parties as institutions that are a part of the democratic process. Also, it is always argued that direct subsidies can provide parties with the bare minimum they need for organisational activities.
   Similarly, on the issue of whether direct subsidies replace small contributions and membership dues, results are at best mixed. It is argued that public funding could lead to parties' over dependence on state funds and therefore reduce their reliance on members and small contributors for finance²⁷. But this is countered by the argument that public funds are supposed to reduce parties' 27 reliance on wealthy donors and grant them non-interested money to reach out to the people. In fact, the result in many countries has shown that public funding has not reduced party memberships and small contributions to parties.
   For instance, in Sweden and Norway, although parties were generously funded, membership rates have grown. In Spain, which grants public subsidies through a system of reimbursement of campaign finances, a political party, Podemos, used a method of crowd funding on the promise of refunding once the reimbursements were received. This helped them to refuse any income from corporate donors²⁸. Others like Germany and the US have in fact imposed such regulations on 28 public funding that they encourage donations from small contributors and members by a fund matching scheme. The system of matching funds has incentivised parties to stay close to the electorate and generate funding from the people in small donations.

Conclusion

As seen from the global examples, public funding option at best provides mixed results and greatly varies from country to country. While it has shown plenty of positive hopes in some democracies, the same has failed in many instances. From the global insights, it is clear that in order to ensure effective public funding, a country has to have two-pronged approach - reduce the dependency on corporate/private money (by strict restrictions on limits, strong regulations, disclosures) and infusion of white money through state funding or incentivising various other funding options including tax free donations/loans.

However, seen from the American example, it is extremely difficult to persuade parties to not accept donations from corporate entities, therefore, the solution to the problem lies, not in dis-incentivising corporates, but, in reducing, if not removing, the need of it to parties. Here, public funding has a major role to play as it is an alternative source of finance which can cause parties to not feel the need to seek 'interested' corporate funds. The model of public funding, though, must not replace small contributions and membership fees as it will have the effect of distancing parties from the masses, rather than, the corporates.

For various factors, India has seen a huge proliferation of political parties, formed on ethnic, religious and other parochial grounds. But due to growing costs of elections, majority of them find it difficult to put up a decent campaign. It is here that public funding of elections especially if that is channelised through candidates can come very handy. It will promote competition for candidature and can bring internal democracy within these parties. Public funding, if implemented properly, can strengthen lower levels of party units to a situation where they can demand democratisation. It can therefore solve the problem of concentration of power in the hands of few and creating dynastic politics. Importantly, if public funding is used as a lever, it can help the state in securing compliance from parties on all these issues.

In short, public funding should not be seen as a magic bullet to solve all problems in electoral finances of any country, but if introduced as a part of a set of reforms, it can contribute greatly to incentivize good practices and disincentivise wrong and illegal ones. Yet, there ought to be in place, the strongest forms of regulations and compliance mechanisms along with restrictions on private donations and campaign expenditures.

1. Magnus Ohman, “Getting the Political Finance System Right,” in Funding of Political Parties and Election Campaigns: A Handbook on Political Finance, International IDEA, p. 53.

2. Kevin Casas-Zamora, “Political Finance and State Funding Systems: An Overview,” International Foundation for Electoral Systems, Washington, 2008, p. 12.

3. Kevin Casas-Zamora, “Political Finance and State Funding Systems: An Overview,” International Foundation for Electoral Systems, Washington, 2008, p. 12.
4. Magnus Ohman, “Getting the Political Finance System Right,” in Funding of Political Parties and Election Campaigns: A Handbook on Political Finance, International IDEA, p. 23.
5. Kevin Casas-Zamora, “Political Finance and State Funding Systems: An Overview,” International Foundation for Electoral Systems, Washington, 2008, p. 14.
6. Magnus Ohman, “Getting the Political Finance System Right,” in Funding of Political Parties and Election Campaigns: A Handbook on Political Finance, International IDEA, p. 24.
7. Kevin Casas-Zamora, “Political Finance and State Funding Systems: An Overview,” International Foundation for Electoral Systems, Washington, 2008, p. 14.
8. Section 18 (3), Act on Political Parties, 2004.
9. Magnus Ohman, “Political Finance Regulations around the World: An Overview of the International IDEA Database, “International Institute for Democratic and Electoral Assistance (2012), p. 24.
10. Kevin Casas-Zamora, “Political Finance and State Funding Systems: An Overview,” International Foundation for Electoral Systems, Washington, 2008, p. 13.
11. Kevin Casas-Zamora, “Political Finance and State Funding Systems: An Overview,” International Foundation for Electoral Systems, Washington, 2008, p. 18.
12. Catch-all parties are typically ones characterized by weakening of membership but expansion of target groups and the party opening to a growing number of interest groups. These parties are much less dependent, for financing, on membership dues and more on funding from such interest groups and business circles. Therefore, public funding without spending ceilings has only resulted increase in funds for the parties to spend.See Hrvoje Matakovic & Irena Cajner Mraovic, Development of Political Parties & Party Funding: Models and Characteristics, Centre for European Studies Working Papers, Vol 7, Issue 1, 2015, pp. 111-125 at 117.
13. Citizens United v. Federal Election Commission, 558 U.S. 310 (2010).
14. Confronting Corporate Money in Politics: A Guide for Individual & Institutional Investors, USSIF Foundation, p. 1 accessed at http://www.ussif.org/files/publications/corporate_money_in_politics.pdf&embedded=true.
15. Why American elections cost so much, The Economist, 9 Feb 2014.
16. See Matthew Carlson, “Japan” in Checkbook Elections: Political Finance in Comparative Perspective, ed. Pippa Norris, Andrea Abel van Es and Lisa Fennis, p. 28.
17. Richard Calland, “South Africa” in Checkbook Elections: Political Finance in Comparative Perspective, ed. Pippa Norris, Andrea Abel van Es and Lisa Fennis, p. 34.
18. Steven M. Levin, “Keeping it Clean: Public Financing in American Elections,” Centre for Governmental Studies (2006), p. 4.
19. According to well-known expert Michael Pinto-Duschinsky (2002), “there is ample evidence from around the world that public funding is not an effective cure for corruption.” See Marcin Walecki et al., “Public Funding Solutions for Political Parties in Muslim-Majority Societies”, IFES and USIP (2009), p. 32.
20. Kevin Casas-Zamora, “Political Finance and State Funding Systems: An Overview,” International Foundation for Electoral Systems, Washington, 2008, p.18.
21. Kevin Casas-Zamora, “Political Finance and State Funding Systems: An Overview,” International Foundation for Electoral Systems, Washington, 2008, p.19.
22. Magnus Ohman, “Sweden” in Checkbook Elections: Political Finance in Comparative Perspective, ed. Pippa Norris, Andrea Abel van Es and Lisa Fennis, p. 35.
23. Grigorii E. Golosov, “Russia” in Checkbook Elections: Political Finance in Comparative Perspective, ed. Pippa Norris, Andrea Abel van Es and Lisa Fennis, p. 32.
24. Kevin Casas-Zamora, “Political Finance and State Funding Systems: An Overview,” International Foundation for Electoral Systems, Washington, 2008, p.20.
25. Kevin Casas-Zamora, “Political Finance and State Funding Systems: An Overview,” International Foundation for Electoral Systems, Washington, 2008, p.20.
26. Kevin Casas-Zamora, “Political Finance and State Funding Systems: An Overview,” International Foundation for Electoral Systems, Washington, 2008, p.25.
27. Richard S. Katz and Peter Mair, "Changing Models of Party Organization and Party Democracy: The Emergence of the Cartel Party," Party Politics, 1 (January, 1995), 5-28; Susan E. Scarrow, “Political Finance in Comparative Perspective, Susan E Scarrow,” Annual Review of Political Science, 2007, p. 204.
28. Daniela R. Piccio, “Public funding to political parties: a forward-looking approach” Global Conference on Money in Politics (2015), p. 3.

*Dr. Niranjan Sahoo is a Senior Fellow, Observer Research Foundation, New Delhi and Expert Member, Carnegie Rising Democracies Network, Washington DC. Rajendran Nair Karakulam is currently a LAMP Fellow, PRS Legislative, New Delhi.?