Overview 1

 OVERVIEW
Sebastian Morris

In India Infrastructure Report 2003, we discussed public sector—as a quest for value in government
government expenditure allocation and accountability and expenditure. It becomes an issue of value for money more
made many suggestions on how governments could have generally, when the more intimate and specific sectoral
better control and accountability, and derive efficiency issues are brought into the discussion. That is the focus
gains. We expressed the need for reform in the process of India Infrastructure Report 2004. We go somewhat
of budgeting, especially at the state level, and highlighted beyond the idea of ‘value for money’ as understood in the
that the spending of and budgeting for Planning Commission UK with reference to government expenditures in their
funds, especially those related to its many programmes, privatization and especially ‘private finance initiatives’.
lead to perversities in state governments. We had argued Both aspects—the complementary and the competitive—
for hardening budgets and also for performance budgets. would be important, in India the latter because it takes
We also brought out the relationship between policy, time for the government to exit from sectors and activities
allocation, priorities, and efficiency of expenditure. We where it does not have the comparative advantage, so that
argued that while there is much scope for internal change, a phase of competition with state enterprise, before these
internal instruments need the external environment of are privatized/commercialized is inevitable. While the
strong pressures for change. These have typically come arguments in this report cover the entire gamut of the
when budgets tighten. While the hardening of budgets has conceptual, a priori, and empirical, the latter perhaps is
been going on, despite the sideways movements imposed the most important. There is nothing better than the
by off-budget borrowing and spending, we made a strong empirical evidence which shows that where shake up has
case for performance budgets under which the finance taken place much gain has been made—ports, roads,
ministries and the central ministers, and allocating agencies posts, airlines, telecom (Box 1.1). And where the status
like the Planning Commission can allocate funds based on quo prevails—railways, irrigation, and water and sewerage
performance and actively monitor the use of the money to name just a few—opportunities are being missed and
to ensure better efficacy. But, most important of all, we there is no improvement. In electricity the effort had been
argued that the pressures for change, and the earnestness messed up in the early 1990s and the penalty is being paid
about efficiency within government, would be incomparably even today. The recently enacted Electricity Act 2003 and
greater if there were competition and alternative mode for its intended companion, the Draft Tariff Policy, will hopefully
the spending and when the parastatal organizations of the take the sector in the right direction.
government have to compete for the same market space In other sectors like manufacturing where the entry of
with private firms. the private sector was forceful, but the public sector
enterprises could not be divested on any substantial scale,
Major Gains in Privatization the question is no longer one of adding value to the
consumer. That has already happened through a phenomenal
We, therefore, saw the task of bringing in the private
expansion of the private corporate sector that includes the
sector—both as a competitor and as complementary to the
operations of multinationals both old and new. Privatization
2 India Infrastructure Report 2004

Box 1.1
The ‘Ramp Up’ of the Private Sector Under the Inefficiencies of the Public Sector

Public sector inefficiencies have provided large price umbrellas for the private sector to show its differential performance. And
in some instances even to make very good returns. These are not necessarily bad as long as the surpluses are ploughed back for
expansion to bring about competition, or to lead to a phase where further growth implies price cuts. Price cuts happen when
the private sector firms reach a significant share of the market and their growth is then linked to overall growth of the market.
This ‘ramping up’ of the private sector especially when the sectors are competitive and/or contestable has provided great consumer
benefit and have probably been one of the biggest and most durable changes in the 1990s in our economy, and society as a
whole. The competition or ensuing market structures may not be ideal and with appropriate policy and regulation could become
better. But there is no gainsaying the enormous value that consumers have derived from the commercialization of the sector. In
some cases the old incumbent SOE has itself been forced to respond in kind to create value for the consumer.
Postal Services
Today the vast array of parcel and courier services have brought down the price of courier (next day) delivery service of letters,
documents, and parcels. The private sector prices are below half that of the Department of Posts (DoP) prices for the same
reliability. There is product differentiation and the emergence of new markets—local letter couriers at the price of the ordinary
post in most commercially-oriented cities; parcel services which were almost non-existent, mailing services, desk collection, and
letter tracking. The low prices of the private sector have exposed the hollowness of the argument that postal services are necessarily
loss-making. The vast asymmetric price of labour for such mundane jobs as those of postal peons, clerks, etc., besides the slack
control over the labour, are the root causes of high costs in the public sector. The bout of industry consolidation that is most
likely as the quality of service gets better valued, would result in the avoidance of the currently large duplication costs in the
private sector—too many delivery and collection boys and centres—to give even better service as the reputational effects are able
to feed back into pricing. It is a moot point if Speed-post, the DoP’s service, could have survived without the monopoly of
government businessa! The public postal delivery services need to change; they could be overhauled with franchise of current
postal office employees. Post offices could compete if the appropriate contracts and share in surpluses can be worked out for
franchisees. Indeed, new offices could go on such privatized models! Similarly, the value derived from the sunk costs in the form
of a vast number of offices can easily be realized if the idea of internal contracting, contracting out, and privatization including
employee privatization of certain offices are not excluded in the design of reform. Far-flung areas may still need some subsidization
but far less than the current losses of the DoP would lead us to believe.
Airlines, Railways, and Buses
The ramp up of the private airlines, especially Jet Airways, under the price umbrella provided by an extremely inefficient Indian
Airlines (IA) has been significant. In less than 10 years starting with a few aircraft, and with much reliance on internal generation
presumablyb, the company is today larger than the IA and is now keen on price competition especially in segments and routes
where it sees much price elasticity of demand. That has suddenly allowed the much exploited Indian consumer to taste the
benefits of low faresc. With a better income distribution the price reductions would have been much more significant. It has
also exposed the hollowness of the Indian Railways’ passenger transport costs. Most certainly the upper class fares are far above
what actual competitive costs at market prices for inputs (labour) and with standard work norms need be; and, most important
of all, even the second class fares which we think are highly subsidized may not actually be so if passengers did not have to
pay for the vast over-manning, slack work norms and higher than market price of labour. That myth would soon be exposed
as stage carriages and long-distance private buses on a well-developed and speedy highway system can now come about. The
privatization of the state road transport undertakings (SRTUs) could greatly speed up the process. With this ensuing competition
from below and above would the share of the Indian Railways in the passenger market shrink? That would be most unfortunate,
since the comparative advantage of railways (when efficiently and commercially oriented) in long distance passenger and in
commuter movementd to give appropriable values is very high.
Telecom
In telecom, the ramp up of the private sector has been at a stupendous pace as cellular and WLL have resulted in vast increase
in usage. Herein the incumbents has also responded in kind and rightfully hopes to grow out of its ovemanning. Unfortunately
a There may well be a restrictive trade practice angle here since private courier delivery boys are not allowed to enter government offices in
Delhi!
b Jet Airways is a closely held private company so that its accounts are not available to the public.
c This has happened despite the fact that the airline industry has been kept incontestable; and foreign airline companies are not allowed.
d The appropriability here may be lower than in long distance, but even here there is scope for an integrated (or coordinated operations)
operations of a bus-rail company to enhance values by route segmentation and interlinkage, which can considerably improve appropriability,
especially in the metros like Kolkata, Mumbai, and Chennai where a large network of surface lines exist. Some subsidization may still be required
but this is likely to be much smaller than what is generally believed.
 Overview 3

With the millstone of state ownership they have not been quick enough to respond to such vital new markets as cellular and
value added services especially internet and broadband with their unique capacity to swamp the market. Conservative pricing
has held back their ability to compete against the private sector. Their response egged on by the DoT has been more to attempt
to influence the regulator and stall reform. In any case from the point of view of the consumer, now the developments are not
of great interest since network expansion to all those who can afford, (and some more out of network externality) is assured.
For BSNL /MTNL, the issue is of losing leadership. For the private operators who were not able to ramp up, all they can hope
for is to get a good price to be taken over.
Ports
The quick achievement of global levels of throughput by the private Nava Sheva International Container Terminal (NSICT) and
the attempt by the state-owned Jawaharlal Nehru Port Trust (JNPT) which had hived off some of its berths as the NSICT, to
close the productivity gap between itself and the NSICT, have paid rich dividends. Indeed so large were the gains of reduced
berthing times that ship turnaround times fell dramatically. Mumbai’s preference as a port of call improved, and Mumbai has
significant and increasing chance of becoming a hub port taking some business away from the Singapore and Jebel Ali ports.
Most gratifying of all the plan projections of the required investments in ports to add capacity had to be scaled down since the
efficiency gain meant a massive release in effective capacity. International trade is no longer constrained at the ports the way it
was in the early 1990s.
Roads
The NHAI’s superior contracting for the NHDPe and the annuity-based segments (PFIs) are exemplary in ensuring value and
in lifting road construction and management out of the morass of the public works departments (PWDs), and provide a new
paradigm for imitative developments at the state level. Some states have even gone ahead and created road funds. Simple but
powerful ideas of linking maintenance to construction, independent supervision, providing for access roads, construction only
after all land acquisition is over, annuity-based funding have now become part of the lingo of activist agencies within the
government and industry more generally. The social savings in timely construction and quality are evident for all despite some
expected delays. Again the key to the success has been the marshalling of the private sector rather than departmental construction
and management. The earlier forms of contracting were not incentive compatible and it is interesting what simple correction could
do to set the markets right. A new breed of contractors have come on to the scene displacing the old construction mafia that
hung around PWD offices and cheated on quantity and quality to overcome the problems of ‘winners curse’ in a badly structured
bid processf. No doubt in the initial contracts signed there was much margin which may have covered the risks in dealing within
a new paradigm and the lack of credibility of the government to be business like (given its prior poor reputation and working).
With some bids having gone through these margins have apparently come down significantly and the business of dealing with
the NHAI on the NHDP has become quite competitiveg. From 20+percentage returns on the early NHDP projects the returns
have apparently become more normal now.
e Discussed in some detail in Rastogi (2002, 2003), and in this Report, Rastogi, Chapter 2.
f See Pandey (2003) for a contextualized conceptual discussion of private procurement.
g Discussions with contractors and financers of several road projects in India.

is important to the well being of the state and for right the state to public services. In earlier issues we had argued
structuring its portfolio of activities so that the state too that attempts to cut the fiscal deficit, when a recession is
has a chance of delivering its best, in areas where its on can only exacerbate the deficit keeping it much the
comparative advantage is largest. Today privatization is same while introducing a downward pressure on demand
necessary to allow the public enterprise a chance to invest, to slow the growth of the economy (Box 1.2). We had also
reorganize, and reform in order to catch up with the argued that further activist axing of the fiscal deficit (by
private sector, to allow the private sector to keep the expenditure reduction), on structural considerations,
investment rates up in sectors where the barriers to entry requires the simultaneous pursuit of privatization, so that
are large, and to bring about even more competition and private (investment) expenditures compensate for the loss
overall economy-wide efficiency. of public expenditure, thereby keeping the demand pressure
As the growth this year and, in all probability, next year up. The economy has been demand-constrained ever since
is going to be high, the opportunity to reform is high the recession of the late 1990s. That understanding continues
because the pain of reorganization is so much less. The to be valid, the high growth rate that will be registered this
time is, therefore, right to set in motion the initiatives year notwithstanding. It would suggest that it is important
required for a new paradigm for government expenditures, to keep infrastructural expenditures up but through the
one that combines the efficiency and low costs of the opening up of the efficient channels that we discuss in this
private sector with the responsibility and commitment of report.
4 India Infrastructure Report 2004

Box 1.2
GQ, Rainfall, and Exports Drive Growth in India

The high growth this year is due to the spending on the GQ, the PMGSY, and in the electricity sector. This year we have 3
positives—higher export growth (now slowed down), good monsoon, and continued public spending on GQ and Golden Cross
(GC), which should together keep the industrial growth rates up, the fiscal deficit at the same level or marginally lower, since
taxes have an elasticity greater than one with respect to industrial growth. Next year exports are likely to plateau off, if they have
not already, since the lagged effect of an appreciating rupee would hit exports hard. Unless this is corrected through expansionary
monetary policy (even if foreign exchange reserves rise further), that positive effect would go. But the government spending and
good agriculture’s delayed effect would continue, unless these are checked by highly restrictive monetary policy. The government’s
implicit commitment to buy up agricultural surpluses means that the spending power of rural India enhanced agricultural
production would not (even in part) be nullified by falling prices. There is, therefore, much merit to the argument to use buffer
stocks for infrastructure construction.
Now the RBI and the government again face the challenge of vast portfolio and FDI inflows, that have large speculative and
bandwagon components, which may have been fuelled by large and steady ‘fischer-open’ in the past. Deciding on the right
portion of these inflows to sterilize is no easy task. An inflexible adherence to the (low) money growth targets would damage
the prospects of high real sector growth, because domestic credit would get affected and that can once more bite domestic industry.
Money supply would have to go up faster than 10–12 per cent (month over month of previous year) than they have over the
last several months. The higher growth of M1 over M3 since April has of course created a cushion. The effect of that may wear
off soon. But we would go by the fact that the RBI has indeed tried to keep M1 at 13+percentage, that perhaps the stance
of the RBI has shifted away from monetary conservatism. The dollar’s fall relative to other currencies and the denomination of
quotation of much of Indian exports in dollars has to some extent mitigated the impact of the rising rupee on the real effective
exchange rate. But that cushion too may not be there anymore, despite the expectations that the dollar would fall further. It
has complicated the conduct of exchange rate policy due to time varying pass-through effects. In the longer run as a transforming
economy with vast idle capacity we simply have to accept that the average US$ 12–16 billion dollars of inflow every year on
account of private remittances, as also speculative capital inflows, should not be allowed to determine the exchange rate. This
would mean a far lower value of the rupee, higher exports and even faster rise in the reserves, but very high growth.
If further low rates of interest promote a spurt in private investment so much the better. But lack of regulatory clarity, huge
distortions, inadequate frameworks and models inhibit much private resource flow, especially into sectors like real estate, water,
and urban infrastructure, through mechanisms like PFIs. If EA 2003 and the Draft Tariff Policy can work, commercially-oriented
investments in this sector can begin to have positive demand side effects in about a year and half. The situation would soon
bring back the need for public investments, and it is far better to recast the process for privatization of PSUs, and work towards
mechanisms to take PFIs and more efficient forms of government expenditure in public services further.

The Themes for This Report We also take up two related themes. Privatization of
Empirically we know that state failure has been endemic and enterprises and the evolution of development finance
particularly large in areas where the state had to contend institutions (DFIs). The discussion is focused around the
with human management tasks rather than ‘technical’ central public enterprises, because there had been some
organizations. In activities like postal services where the task action therein but now a killing uncertainty. We complete
is labour-intensive, its comparative disadvantage has been the argument begun in earlier IIRs that the government
too yawning. More than state failure, the nature of the same is not the right body to carry out privatization, certainly
creates a vast opportunity and space for another form of not in the contested democracy that is India. Privatization
economic activity that can be considered as an extended needs to be distanced from the state. The failure of public
form of procurement where a contract is necessary, and enterprise arose because governments could not distance
direct services rather than the means of services are supplied their creations from themselves. Privatization too, for
by the private sector. These forms have come to mean Public similar and even more weighty reasons, would fail if not
Finance Initiatives (PFIs). Additionally the ‘schism’ in the distanced and made independent of government (Box 1.3).
labour market which makes it very expensive for the DFIs are like dinosaurs facing a suddenly changed
government to employ skilled and unskilled labour but environment brought about by the reform of the financial
cheaper for the competitive private sector to use labour sector. They need either to adapt give up their traditional
efficiently and also buy cheaper, makes the space for such developmental roles, and in many cases pick up new
PFIs very large in India. We explore PFIs and how they developmental roles which are of furthering the development
can be used to serve the poor and those waiting for the of markets: both for the demand and supply of long-term
service but receiving little or no service because the public bonds and related instruments. This involves much more
systems have failed. than finance—policy advisory, pioneering frameworks for
 Overview 5

Box 1.3
State Failure in Privatization

State failure is perhaps the strongest reason for privatization and the need for the state to step aside to allow a market even with
its inefficiencies and biases to take over. Indeed, the logic of public economics that brings in the state when markets fail, can
be turned around to argue that the time has come for the state to contract much so that it can focus on just those areas where
its comparative advantage is overwhelming. And, hopefully, with that focus its efficacy and efficiency can improve. Right
structuring the state’s basket of activities began in the early 1990s, but is proceeding very slowly today. There is little doubt
that the overwhelming majority of the central public enterprises (CPSUs) are not in areas where the state has any advantage over
the market. In the manufacturing sectors, where there is no market failure, disinvestment proceeds at a snail’s pace. When are
these CPSUs going to become free participants in the market without being worried by the state?
Privatization which seemed to have begun in earnestness has come to a virtual standstill after being in a stop–start mode for
nearly 10 years now! The failure to grant public enterprises the operational autonomy that any enterprise requires is itself a state
failure. It makes the enterprises perform poorly, and cut a sorry figure in the marketa. Similarly, the failure to have a credible
and legally enshrined institutional mechanism for privatization is also a state failure. That the government cannot itself carry out
disinvestment was never revealed better than by the Supreme Court’s decision asking it to go back to Parliament. And this was
further confirmed by the government coming up with the ‘idea’ of disembering Indian Oil to sell its distribution business!b The
current dispensation with regard to disinvestment ignores the company and the managements even of professionally managed
enterprises. That is most ill advised since the best values and much success can be had with their involvement. This fiasco ensures
that disinvestment doesn’t in any seriousness begin till the current boom is over, and one more business cycle would have been
lost.
Distancing Privatization
Privatization also needs to be die-cast in a process that makes it independent of the pulls and pressures on government and allows
learning to take place, expertise to be built up, and strategy to be exercised to maximize the value to society in disinvestment.
Nothing short of an independent expert commission that has a tenure of at least 5 years deriving its authority, and mandate
and objectives from the law would do. It’s the Commissioner’s independence enshrined in law. There is no other way that the
stock of holdings of around Rs 500,000 crore can be divested over a reasonable time frame of about 8 years or so.
Moral Hazard in the Current Process
The moral hazards in retaining privatization within government are large and are amplified in the Indian context. There are of
course even more weighty reasons which are developed in right constituting the organizational and institutional mechanism for
privatization (Morris, in Chapter 4.4). Barua, in Chapter 4.3 shows that the public sector stocks’ volatility imposed by
contradictory announcements by officials and politicians could have easily been exploited for gains through insider trading like
opportunity. There is no way for an independent scholar to establish that actually such opportunities were used—only that the
possibilities were there and have gone uncommented by the regulator and the mediac. The possibility of fraud ought to result
in a mechanism that in its process and design reduces the possibility of perverse behaviour, rather than assuming that moral suasion
on the part of ministers and officials is adequate enough.
The detractors of privatization and commercialization can be well reminded that much of the public enterprise are in areas
where there is no market failure, and even if there was failure earlier there is none today! The key inability of public enterprise
to do well under competitive conditions, and when the required efficient organization is more ‘social than technical’ stands
exposed. When the operations are also labour-intensive then the failure is almost total. These facts ought to convince all about
the futility of public enterprise, and to explore the possibilities in other modes for state involvement when required on account
of market failure. Being valued too poorly, many public enterprises cannot go to the market, and even when some can, they
are not allowed to. They are trapped and have nowhere to go for their vitally required investments. Now with an absurd dividend
pressure even the few with cash surpluses are being sucked dry without recourse to other options. That market performance has
suffered is not in the least doubt. Morris, in Chapter 4.4 brings out the dimensions of performance of public enterprise, and
shows that the rate of investment is too small—small enough to kill any largish enterprise. Barua in Chapter 4.1 reviews the
privatization process from 1991 onwards bringing out the mistakes that were made in the past, before the Ministry of
Disinvestment was set up.
a Until the recent spurt in PSU stocks following expectations of disinvestment, the P/E ratios of Indian PSUs have been very low in comparison
to either private firms or even public enterprises in other LDCs in similar product markets (GOI 2003).
b See Morris, S., Dec. 2001.
c That indeed such possibilities may have been exploited is more than likely. The ‘Bank Stock Scam’ as it is now being called, wherein certain
officials of the Ministry of Finance are under investigation by the Securities and Exchange Board of India (SEBI) for trading on policy and other
announcements related to these banks is indicative. See Economic Times, ‘Bank Boom: SEBI finds Finmin Broker Nexus’ by B. Kararsu and Rajeev
Nagpal, 10 October 2003. Source: http://economictimes.indiatimes.com/cms.dll/html/uncomp/articleshow?msid=227229
6 India Infrastructure Report 2004

contracts and public private partnerships (PPPs), new When PFIs?

instruments, credit enhancements, residual risk-taking,
When are PFIs more appropriate than other modes of
leveraging large funds from the market into long duration
financing or direct provision by governments? It is first
infrastructural projects, etc.
of all necessary to recognize that there is no fundamental
limitation to the PFI mode, if the right kind of contracts
THE CHALLENGE OF PUBLIC SERVICES AND PFIS can be written. And the process of leading to right structuring
and defining the financial limits for PFIs, given state
Roads in India, until recently, were a veritable museum revenues and the expected growth therein, can itself be a
of obstacle courses, railways overcrowded, our children highly rewarding process. This is so because such an
out of school, or attending schools that had no classrooms exercise helps to clarify the dimensions of the outputs and
or no teachers! Surely we cannot have the facilities which the service quality in the activities under consideration.
rich countries have but, even relative to our income, our Risks and their sources and the mitigation measures tend
failure in water, roads, sanitation, schooling, and electricity to be identified and understood so that even if after the
is woeful. This condemns the state and the current paradigm exercise the state decides to go ahead with direct provision
of investment and provisioning, and the need to search for there are gains in terms of what to expect and the possible
alternatives is beyond doubt. pitfalls. And there is enough clarity to assign risks and
Efficient governments in areas with vast external effects, responsibilities within the various arms of the government.
which could also add to demand, are vital today since the The danger in PFIs arises out of risk shifting, and the
productive efficiency of the manufacturing sector and the possibility that PFIs are preferred over privatization due
economy has gone up, with a greater role of the private to vested interests who may still like to have a major say
sector in investments. Sewerage and sanitation, education, in the allocative process. Thus, when tourism development
city and village roads, and water supply are important goes PFI and the private sector cannot compete either
sectors that await large-scale public and private investments, because activities are not opened to them or land and site
and a necessary shift in the paradigm for public expenditure. access or restrictions apply asymmetrically, then the better
There is little merit in merely increasing expenditures, option of a competitive private sector may not be taken
without the initiatives for efficient spending whether through up. The best way out is really to first check that, irrespective
PFIs, or reform within government, or privatization. of appropriability limitations, the sector is legally open to
the private enterprise with the most minimal regulation to
The New Paradigm of PFIs cover compositional and other negative externalities and
that there are no discriminations against private investment.
Nothing encourages innovation and change within
In spite of this if the private sector is unwilling to come
government more than hardening budgets. Now that avenues
forth because of appropriability limitations arising from
for piling up contingent liabilities (a phase that most state
the nature of the good or the limitations of endowments,
governments went through) are beginning to close (thanks
then PFIs can be actively considered. The argument that
to the RBI’s and the central government’s effort to correctly
there must be a public sector comparator certainly applies,
measure off-budget borrowings and expenditures) there is
especially when the state sector is also successfully
a better understanding of what constitutes reform.
overcoming its limitations. But the argument can be expected
Performance budgets and embedded incentives in the
to have less value when state failure is rife. Recall that ex
Accelerated Power Development and Reforms Programme
post the extent of state failure was forcefully revealed by
(ADPDRP) and the PMSGY are far better than in the
the entry of the private sector in such areas as ports,
Rural Infrastructure Development Fund ((RIDF) or the
airlines, posts, and telecom (Box 1.1).
umpteen Intergrated Rural Development Programme
(IRDP) type of programmes.
PFIs and The Poor
The easier fiscal situation should not be a reason to
reduce the pressure on state governments. The framework When appropriability is weak because there is endowment’s
for PFI programmes that defines (a) the quantum and failure, then the problem is basic. This has been perhaps
ceiling for funds that can go the PFI route as a function the most important reason for the failure of public services.
of government revenues and other revenue commitments, Mukhopadhyay (in Chapter 3) makes a strong case that
and GDP and growth; (b) the borrowings from the central even the very poor, that is, those below the poverty line,
government and in relation to the contingent liabilities have some money to lay out on basic infrastructural services.
already incurred; (c) the conditions for guarantee; (d) the And, more importantly, to reach the really poor with basic
interest rates, is desirable and long overdue. services, the amounts required are far smaller than what
 Overview 7

the government currently spends on the sectors in Our task is not merely a first principles-based delineation
subsidization and in forgone revenues, etc. This clearly of the boundary between the state and markets, relying on
implies that the inefficiency in targeting/subsidization and static economic considerations, as is routinely done. Neither
the resulting mess up of the public sector are the real does it start from the ideological position that states always
barriers to sectoral growth and coverage. The poor cannot fail. We usefully bring into the discussion the tasks and
be held as an excuse for not having private finance or conditions under which the state is prone to failure: (a)
public–private partnership (PPPs) even in public services. complex tasks involving judgement; (b) making repetitive
Indeed, a major change in the paradigm for the poor is investment decisions; (c) holding on to commercial
necessary. ‘There are approximately 60 million poor families orientation in enterprises, while keeping a certain defined
in India today. If each of them were able to set aside space for a non-commercial purpose such as universal
Rs 8.6 per day (or Rs 1.70 per person), that would have access or subsidization, or under a dysfunctional agenda
enough to provide this purchasing power’. This is just for political expediency. But the state’s comparative advantage
Rs 18,834 crore, say Rs 20,000 crore which is incomparably and role in governance and defining the rules of the game
smaller than the 14–15 per cent of GDP (Rs 336,000 remain. This completely exposes the hollowness of using
crore) that is the total subsidy burden in country. Even if the poor to justify the mess in sectors like irrigation, water,
an estimates are doubled the really poors’ infrastructural sewerage and electricity.
needs can be taken care of completely. Similarly, a more dynamic consideration of markets—
frontally bringing into the discussion the aspect of growth
Scaling Up Social Innovations and technological change—gives far greater scope for
markets than is conventionally understood (Morris 2001;
Our country with its enormous variety and with thousands Varma 2002). The boundary between the state and the
of initiatives from concerned individuals and organizations market cannot be seen as being rigid since that boundary,
has spawned a vast number of social inventions to better over some margin, is expected to depend upon the nature
serve the people. Many of these inventions have arisen to of society, the kind of state and its limitations, the stage
‘compensate’ for state failure, but many others have in the developmental process, and technology.
indicated a new leverage point for change as, for instance, As industrialization proceeds successfully, the role of
the Amul model in milk or the SEWA model of micro- markets necessarily increases. And technological and other
banking. There are other successful models in watershed developments—for example, writing out better contracts—
development such as Samaj Pragati Sahayog, Rogi Kalyan have extended the domain of markets more generally. The
Samiti, Sulabh that have become household names. Many role of semi-market forms such as PFIs have also arisen
of these models have the potential to be scaled up with as part of this evolving boundary between the state and
or without minor modifications to benefit, incomparably, markets and as a form in their own right. In Box 1.4 we
more people. PFIs can be designed to carry out this task. present the roles of markets, networks, hierarchies, state
Operation Flood was the success story of the scaling up and intermediate forms on the two dimensions of
of the Amul model. Mukhopadhayay (Chapter 3) and appropriability, and the structure of efficient production
Mavlankar and Shankar (Chapter 13.1) mention similar or task performance as exist today. The schema is valid
stories of success to highlight the need for social and only in a contingent sense since both dimensions change
organizational innovations in the form of well-structured with the developments in technology and the law.
PPPs which can be instrumental in scaling up these and
similar innovations. The Space for PFIs1

Economic Coordination Modes Change with Technology PFIs, or more correctly, private finance for public
infrastructure involves the use of privately-raised capital to
Box 1.4 brings out the relevance for PFIs in the economy build facilities and offer services which are procured by
as one of the modes of coordination given supply and the mediation of the state, with or without the users
consumption side characteristics. It is important to realize paying, necessitating a contract between the private party
that the modes of coordination have actually been plural, and the state. (Varma 2003; George 2003; Barua and
and the idealized world of markets and hierarchies (Anglo- Gujarathi 2003 and Mukhopadhyay, Chapter 3; Agrawal,
Saxon) is a very incomplete picture even in societies as
the only two modes that have abhorred other forms of 1 I have benefited much in my understanding on PFIs through
coordination. Interfirm networks (which has become my discussions with Varma, Mukhopadhyay, Barua, Burman,
inevitable in IT industries) today have emerged as inevitable Raghuram, and the students/participants of the IDF courses at
in IT clusters in the US. IIMA.
8 India Infrastructure Report 2004

Box 1.4
Economic Coordination Matrix in Society

Appropriablity problems; (No large externalities); No large Appropriability problems; What is appropriable
Appropriation can be larger than appropriability problems is less than the social value created
social value due to negative
externalities/ natural monopoly
(IV) Markets with Controls and (I) Domain of Markets: In mature (V) Partial Market Failure Requiring
Instrumental Regulation of Activity/ economies no regulation as such Coordination/Imposed Strategy and Subsidies:
Market Creation: Problems include required. Only sound macro Where size does not improve
environmental pollution and related policies and good governance. In appropriability. Activities and sectors
negative externalities and the late industrializing economies include education archtypically, but also
solutions have been in terms of with efficient states financial expensive inoculations, sanitation; solid
control orders, liability rules, repression and public enterprise waste services, museums, public
tradable rights to pollute and in ‘leading sectors’ can help. information. The methods of coordination
extract; other monitoring Tariffs have been used have been principally provision by the state
mechanisms, common property universally to spark off industrial and direct subsidy/support; governmental
Competitive

approaches to check short-term over activity. oversight of industry associations and

appropriation; licenses. regulation (scope for contracting out and
PFIs are now large with the new
paradigm).
(III) Domain of Large Hierarchies and
Networks: Where size can improve
appropriability. Example would be of
experience goods, research and development,
product development; (clearer IPR definition;
No particular regulation is called for but
certain orientations in the policy that
recognize the need for large companies/
interfirm linkages and dialogue between
firms can help; no artificial restrictions on
firm size or on mergers and acquisitions/
vehicles for cooperative R&D; allowing and
making feasible networks collaborative efforts
for technology developments; tolerating
kiertsu like structures as long as they
compete in the goods and services market).
(VI) Regulated Industries and Growing (II) Domain of Markets with (VII) Public Service: Sewerage systems; road
Monopolies: Electricity distribution; gas Some Market Intervention networks in a city; dense road networks;
and telecom distribution; airline Operations: Problems include low street lighting; drainage systems and storm
services; maintaining market places; price elasticity combined with sewers; land shaping in cities; watershed
irrigation main networks from large delayed supply response; quality– development; some aspects of primary
Non-competitive

dams; railway especially long distance; quantity trade off with little or health care where coordination aspects are
cellular telecom; last-mile loop of no competition (solutions include large. (Traditionally were local government
networks; gas distribution networks; standards, buffer stocking; and public-owned or regulated private
oil/gas transmission networks (light/ allowing reputational effects to entities on the concession mode. Areas with
incentive regulation; public ownership take root; market/trade maximum scope for PFIs, and PPPs more
only when state failure is out of interventions). generally; in situations with little state
question; enhancement of failure the public sector comparator could
contestability; better interconnect; be useful; distinction between access and
open access; promotion of consumer usage and subsidization of the former in
groups; recognition of dynamic most cases can improve the appropriability/
aspects mean light regulation that reduce the subsidy required in many cases).
eschews the creation of barriers against
the un-foldment of technology; light
regulation in high growth situation).
 Overview 9

Chapter 5.3; Bardhan and Barua, Chapter 5.2; Parashar project but for the sector as such it is. In such conditions
and Thomas, Chapter 5.4; Baig and Jaikishan, Chapter there could be distortions if one project is charged for but
11.5 in this Report, have covered various aspects of PFIs.) other similar projects are not. An example would be tolling
They have potentially large advantages since private of roads. If some roads at a certain heirarchy in the
management and enterprise can be brought in to increase network of roads are tolled but some others at the same
design efficiency (when the contract correctly specificies level are not, then there is distortion, to correct which PFI
the output), besides, of course, operational efficiency. options could be used. Indeed it is first best to use PFI
They can have the additional benefit of market valuation with partial tolling (shadow tolling) across all roads or even
of risks if risks other than operational are also borne by to completely privatize with all revenues coming through
the private party, and the party goes to the market for annuities but preferably linked in some manner to the
financing/participation. The latter though may not always usage. Such choices between first and second best are
be possible in situations where it is government decision lesser issues than the overriding consideration that roads
that creates the demand—prisons, for example. In the need to be built and used in the first place, in an economy
Indian context the benefits, as also the risks in large-scale that is still transforming. See Morris 2003 for a listing
PFIs, are high. together of benefits and potential risks and contingencies
We had, in the previous IIRs, looked at the experience in PFI and the interlinkages between PFIs, governance,
of PFIs globally and had highlighted some of the cautions and budgets.
necessary (Varma 2003; and Barua and Gujarathi 2003).
There is nothing like a few early bad cases to spoil a good ROADS, TOLLS, ANNUITIES, AND MARKETS
idea. Luckily, in India, the first few visible PFIs, viz., the
road projects on the annuity model, have gone on well, On the NHDP, more roads need to go on the PFI route
so that a positive environment for PFIs has opened up not rather than through pure construction contracts. The current
only in village and city roads but in many other areas high expected returns in PFIs are falling as the sector
including sanitation and sewerage, education, water supply, becomes competitive, risks decline, and there is
irrigation distribution, minor irrigation, and public health. accumulation of experience on both sides—the government
laying out the cash flows and the private sector putting up
Lack of Appropriability and PFIs the investment. The road fund is not as yet completely ring-
When the costs of providing a service are greater than the fenced. Rastogi (Chapter 2) argues that ring-fencing has
revenues that can be generated from the project user fees, to take place quickly if the major highways beyond the
charges, etc., then PFIs/PPPs need to be considered actively. Golden Quadrilateral (GQ) have to see improvement.
The inequality may be fundamental as when they arise out Similarly, as the government goes beyond the busy GQ
of excludability, additivity, avoided subtractibility but the and the Golden Cross (GC) to other national highways it
benefits are not appropriable. In such situations an imposed is important that traffic risk be correctly addressed. It then
appropriability, as when primary schooling is allowed to becomes important to go shadow tolling since that would
be non-universal, can reduce greatly the positive mean that the traffic risk is on the BOT/annuity party.
externalities, thereby foreclosing the option of appro- Even where there is no tolling, and no payment other than
priation. A PFI then is an important method to bring annuity is intended, or where there is no payment at all
in the inefficacies of the private sector when the state it is important that the traffic be measured so that a strong
agrees to provide the additional revenue enshrined in a database emerges for understanding traffic flow and its
contract to a private party which invests to provide the composition as growth takes place and as road conditions
service. improve! Raghuram (Chapter 11.1) makes a case for point
Therefore segment VII (Box 1.4) is the principal arena to point sections for private management and maintainence.
for PFIs in the full blown sense of requiring long period
Origin–Destination Studies
contracts; but that does not exclude PFIs in segments such
as V, where they are much easy and need not involve long- Periodic origin–destination (OD) investigations are a must
term individual contracts as much as policy and systems to commercially orient roads to bring about optimality in
of performance and quality measurement. In this segment the division of traffic between road and other means, and
the specificities of the particular project are less important for pricing/tolling/toll period decisions, and more generally
and standardized ways of dealing with private service to move to a shadow-tolling regime that is least distortionary.
provider at a sectoral level are possible. These would also be of great use in the understanding of
Governments could also choose to use PFIs even when regions, the relationships of cities with each other and with
the condition above is not met; with regard to the particular their regions, and in planning of networks and their
10 India Infrastructure Report 2004

upgradation and, most importantly, in the locational choices The MPRRDA remains an island of efficiency and task
made by industry. Such a situation, however, does not exist orientation but that, while necessary to the process of
at present. Most regional studies are constrained to use change, is difficult to hold on to in the long run, as the
only railway traffic and freight movement data when on general governmental processes catch up with the
both dimensions the road movement is already dominant. organization. Institutionalization needs to happen. In today’s
That need would become urgent action as states realize context that can only mean commercialization and PFIs.
(once the tax differences between states go) that they are
competing on the basis of the infrastructure they directly PFIs for Institutionalization
provide, the natural endowments, and on the city-serving
The MPRRDA can go further than efficient procurement
and city-forming functions of their important cities. That
of roads to procurement of road services through PFIs
process has already begun even if states are not acutely
with smaller maintenance companies locally embedded and
aware of the shift2.
with stakes in the local economy, with village panchayats
and other semi-commercial/cooperative bodies willing to
Improvements in Government Decision-Making
take on road maintenance on PFI basis. Since road
State governments need to improve their institutional and maintenance is labour-intensive and in a low-income state
organizational framework for the moneys they plan to like Madhya Pradesh the food/wage goods need of
spend. The grants and contributions under the PMSGY are construction labour are large relative to their incomes,
large and it makes sense to derive all the social and payment to such road maintenance organizations in the
economic value in the construction of rural roads. The form of food coupons ought to be made possible. Entities
example of Madhya Pradesh which created the Madhya with natural incentives to monitor maintenance—local bus
Pradesh Rural Roads Development Authority (MPRRDA) and trucking companies, village panchayats, and local traders
to distance the activity from the traditional process driven and farmers—could be mobilized to perform the monitoring
Public Works Department (PWD) is crucial. Major gains mechanism that links the annuities to the road maintenance
in efficiency and efficacy were possible. Under the old entity. That model would, of course, have relevance not
PWD system it would hardly have been possible to put only to roads but also for construction of water storage,
out so many contracts in such a short time, leave aside watershed management, rural drainage and sanitation
the fact of the poor quality of the construction that PWD systems, construction and maintenance of small-scale
processes result. irrigation and distributories of major irrigation systems.
Agarwal and Agrawal (Chapter 11.3) bring out this
interesting story of a change in a small part of the Problems with Tolling
government being able to bring forth much change and
Raghuram in Chapter 11.2 raises fundamental issues
good roads without having to tussle (with a low probability
regarding tolling. When some roads are tolled and others
of success) with changing the PWD. Political support,
are not the distortions are severe and appropriability could
while crucial to the success of the MPRRDA, was not
be affected. The impact of the new road may be to
everything. More appropriate processes for decision-making,
completely overcome congestion in the old road, thereby
decentralization, empowering the officers of the MPRRDA,
greatly improving service quality even with a small shift
almost entire reliance on outsourcing with adequate
in the traffic to the new road. If the old road is not tolled
safeguards, better design of bids through appropriate
then there is ‘value loss’ which could have been anticipated
bundling and allowing choices to the bidders to ensure
earlier. The point is if congestion was reducing the capacity
their best are some of the innovations that were made. But
of the old road then the relaxation of that congestion
the point is that in an organization like the PWD where
sometimes by as simple a measure as clearing some key
processes rule to completely make the primary task
slow down points, can add much to the capacity.
subservient (even to the extent of its non-performance), the
changes and the approach would have been unthinkable3.
Feedback Effects in Road Development
2 Thus it is Chennai, Bangalore, Pune, Hyderabad, and Ernakulam In the case of the Vadodara–Halol toll road the initial
that compete in the southern region. projections underestimated the role of mutli-axle vehicles.
3 Reform of some organizations may be very difficult. It may be
Interestingly the increased share of multi-axle vehicles is
worthwhile to bypass and neutralize such organizations. An all-or-
none approach is sometimes necessary but not with regard to
change within government. We have always argued that any change be good and competent for a while has the best chance of success.
that requires all of government to be good and competent all the This is the great merit of privatization and such measures as PFIs
time is doomed, that which only requires a part of government to that require a necessary distancing (Morris 2002).
 Overview 11

itself the result of improvements in road conditions—typically, while having the competence to maintain a road, may not
the building of broader roads with smoother surfaces allowing be particularly good at estimating traffic and taking on
multi-axles their space. The Halol project lost much revenue those risks, but that particular section may have been put
to multi-axles which were underpriced and carried more up on toll basis subjecting the company to traffic risk. In
than twice the load of a truck but were charged barely 20 contrast, there could be a company that has an annuity
per cent more and had a large share in traffic. Similarly, contract but would like to take on traffic risk. Similarly,
removal of government sales tax concessions destroyed the much reduction in traffic risk is possible with pooling, the
value of locating in Halol which considerably diminished the same way that a portfolio can reduce risk. In other words,
traffic on the toll road. These possibilities had not been prima facie, there is the possibility of a market which can
envisaged. Currently a Devas bypass road is being built in trade in traffic risk to give options to road managers and
Madhya Pradesh which can add considerable value by others. Tilotia and Pawar in Chapter 11.7 discuss this idea
removing congestion around the city for north–south and and the tasks ahead for bringing about such a market. This
east–west traffic. But again multi-axles are not considered is an area for new style DFIs to worry about.
as a significant load since the surveys did not show much
role for the same. But road conditions are improving in Capitalizing on Removing Urban Constraints
Madhya Pradesh with the Agra–Mumbai road, the Burhanpur– The huge values that lie waiting to be unlocked in the
Indore road, and others being upgraded. That could make construction of good roads from the pheriphery of a
the Agra–Mumbai road a feasible alternative to the road via congested city are estimated by a simple model of a
Ahmedabad, from Mumbai to the north, and bring about sprawling city without much investment in quick roads so
much traffic by multi-axles. A tariff structure from archaic that congestion has subtracted from the value of central
NHAI rules had not anticipated the possibility in multi-axles. places. (Pawar and Tilotia Chapter 11.6) A road about
But a good toll review mechanism in the case of the Vadodara– twice as fast radiating out from the pheriphery of a city
Halol toll road saved the day for the company. like Pune can attract settlements along it instead of just
outside the pheriphery as a sprawl. The social value that
PFIs for Urban Roads
it creates is of the order of Rs 200 crore per year, and
Baig and Jayakishan in Chapter 11.5 discuss an idea which the extractable value is enough to construct not merely the
can greatly help in improving city roads through PFIs. road but half way to another city about 100 km away. This
PFIs for city road funds can work best if there is also is merely another way of saying that the optimal location
accompanying privatization of the road, since the issue is of activity around a large city is in radials with activity-
not typically of building new roads but of expanding, rich radials being interspersed with activity-poor radials,
maintaining, and ensuring quality of service. Since flow long discovered by Lösch the great location theorist. To
on city roads have loop flow characteristics it is important us with congested urban sprawls, rather than organic cities,
to demarcate the areas for PFIs correctly. For durable long- it tells us that there are huge values to be unlocked as we
term interest, ownership may be important or long period move to more rationally-structured cities with their speedy
renovate, operate, maintain and transfer (ROMT). Similarly highways and railways that increase the amount of land
service levels and their measurement can be carefully which has the same time of access to the central place.
specified, not just in terms of lane availability but also in When linked to fast metropolitan transport rail/massed
terms of traffic carried and travel times at peak hours so buses the land that such roads use up can be minimized.
that there are strong incentives for road companies to
manage traffic, avoid bottleneck situations and prevent OTHER PFIS
squatting and illegal use of roads and unauthorized and
poor parking. These, together rather than inadequate road Real estate development in the US and China is indicative
surface actually, congest Indian cities. Suitable shadow of its potential in India if private real estate and land
tolling and independence of the measurement of service development can take off. The topic of land, location, and
levels and carriage, should be the basis of payment. That regional development merits a much deeper examination
would imply that the traffic regulating function is no longer since constraints that arise as, for instance, in land
the exclusive preserve of the police. acquisition and use, are major contributors to risk in
infrastructural projects.
A Market for Trading Risk
Real Estate and Land
If some roads are tolled, others are on annuity (fixed
payments), then a market to trade the revenues out of Bardhan and Barua in Chapter 5.2 argue that the scope
various contracts would be well received. A company, is large in India and can ultimately constitute as much as
12 India Infrastructure Report 2004

a third, if not more, of all infrastructural activities. private higher education, private hospitals, state-level
Developments herein, especially the entry of large private highways and roads, water supply in Vizag for industrial
players, can do much to the capital market and its depth and related purposes have found the support of financial
since it is in land and real estate development that much institutions.
of the savings of ordinary people are expected to be Vasudevan, Chapter 5.1, reviews the Draft Infrastructure
invested. Securitization and market support to inter- Policy of the Government of Karnataka which is an
mediation have much potential. Similarly, the potential of overarching framework for inter alia the development of
reverse mortages and such other mechanisms remain to PPPs including PFIs. It has the potential to take Karnataka
be exploited. Current constraints emanate from the difficulty to the forefront of private infrastructure development if the
of ensuring clear titles, problems in protecting title, high requisite and focused training of government officials at
transaction costs, and low floor space indices (FSIs) that multiple levels can begin with earnestness. The key elements
promote urban sprawl rather than efficient cities and raise of the Draft Infrastructure Policy are its explicit mention
the cost of real estate, all serving to keep the real estate of important principles that can actually serve as a guide-
markets thin. Despite these problems, the beginnings of post to whet and structure projects. They include: efficient
private land development are seen. The sector can have and equitable contractual structures; transparent process
large spillover and demand multiplier effects. of procurement which go beyond the typical L1 to allow
Kothari (Box 5.3.2 of Chapter 5.3) reports the case of a variety of measures depending upon the project and
Lucknow where the fiscal problems of the municipality situation; bidding efficiency; commitment to clearances;
allowed a private sector to carry out land development. The and a fair and transparent regulatory process including the
clarification of the tasks for the private sector and the good independence of regulation.
values the private players were able to give to buyers of
developed plots through quicker development are important. SLPEs, Privatization, and PFIs at the State Level
These experiences have helped the municipality to learn State governments, as much as the central government, are
and to repose greater confidence in the private sector. Real likely to benefit much from the higher growth in this fiscal
estate development has recently been drawing the attention year, and in all probability the next as well. Rather than go
of bigger players who, since they have reputations to hold easy on fiscal reform this is the right time for state
on to, have reduced the risks to the otherwise hapless governments to work on the framework for PPP and PFIs,
house buyer in India. That process should continue with force through privatization/winding up of state-level public
competition reducing the premium that reputed players enterprises and use the increased resources to commit to
are currently able to extract. The development of the mass local projects in such high positive externalities projects as
market in most cities, possible with lower FSIs, needs sewerage and sanitation in cities, arterial roads, upgradation
serious consideration. of the infrastructure of crucial cities. The temptation to
make budgetary support for sick state-level public enterprises
State PFIs (SLPEs), and for the status quo in the electricity sector to
There is no doubt that PFIs/PPPs are here to stay and can continue is large but must be resisted if they have to come
become a flood in the ensuing years as the legal, fiscal, out on top at the end of this cycle of high growth. We see
policy, and contractual standardizations come about. that effort beginning in some states (Kerala, Karnataka,
Current efforts must be seen as pioneering and leading to Gujarat, Andhra Pradesh, and Madhya Pradesh in a stop–
the development of frameworks. As such they are likely start manner), but nowhere is this strong enough.
to be cautious and involve much effort on the legal and
contract-writing side. With time, as these aspects are Tourism in Kerala
understood, the costs and efforts would go down. That Parashar and Cherian, in Chapter 5.4, discuss the Renovate,
effort can be considerably speeded up and extended to Operate, and Maintain agreement of private players with
smaller and more local projects, and mistakes avoided with the government of Kerala for its tourist infrastructure. That
institutional mechanisms for training and teaching linked again has much potential to unlock the value of government
to research. Such efforts underlay the success of PFI in facilities which were underutilized. Measures to include
the UK. the private sector by allowing it to access land and sites
Besides the PFIs in roads there are efforts to privatize in a transparent and fair manner is the key to the
tourist guest houses and facilities by the state governments development of private infrastructure in the tourism sector.
in Kerala and Karnataka with the framework being evolved Rate regulation may not be necessary but overseeing of the
by the IDFC/PriceWaterHouseCoopers and iDeCK (an quality of the services especially in mass facilties may be
IDFC and Government of Karnataka initiative). Similarly, called for. As the state goes through a boom in tourism
 Overview 13

with the effects of 9/11 wearing off, a major private level to be supported. Majumder in Chapter 13.2 brings out
expansion into tourism is likely. The success in Kerala has the dimensions of the campaign, its organization, the role
been very encouraging. This has belied the contention of of NGOs and others, and the level of success achieved thus
the detractors that dysfunctional politics is too deep-rooted far. The programme was simple—involving the distribution
in Kerala for anything good to happen4. at some cost of a slab-toilet seat and encouraging people
to construct their own toilets. The prior role of Operation
SANITATION AND PFIS Banga in the rise of incomes of the very poor over the
last couple of decades provided a conducive macroeconomic
Even after half a century of development not too many basis for the campaign to take root among the poor.
homes in India have toilets. Sanitation and sewerage services
have had no ‘private parties involved in provisioning. It Priorities Must Change
has been almost exclusively a preserve of the state’
Mavlankar and Shankar (Chapter 13.1) make a strong case
(Mavlankar and Shankar, Chapter 13.1). Indeed, in all
for large expenditure and investments in sanitation. They
aspects of health and disease which have a public dimension
also argue for newer organizational initiatives including
our record is pitiable. Our rank in sanitation is lower than
private participation, stakeholder involvement, as well as
our rank in income. The failure of the state despite its large
that of NGOs and community organizations.
comparative advantage virtually, doom the prospect of a
What are awaited are campaigns, the initial push, the
state-led infrastructure development, a priori arguments
physical models for toilets and sewerage that are cheap and
notwithstanding. Our very high morbidity rates point to
hygienic. The linkage of toilets with water, and limitations
the masking effect of the powerful technologies of permanent
in the supply of water and sewerage mains can be a deterrent
immunity inoculations, antibiotics, and cheap therapeutics.
to the process. With sufficient resources, it ought to be
Without them the failure of our public aspect would have
possible for the government to attract much private
been even more starkly revealed, by significantly higher
death and infant mortality rates. investment and innovative projects, and the scope for
Ghosh, in Chapter 13.3, brings out the dimensions of innovation is large as exemplified by the toilet-seat revolution
the critical public infrastructure in rural West Bengal. The in rural West Bengal, and the Sulabh movement in urban
focus is on Nadia district. People’s participation is more India. The Sulabh movement can be scaled up with public
formal than real. The role of the panchayats in infrastructure funds with appropriate PFI models. Similarly, smaller towns
development is limited although the panchayat samiti has urgently await the developmental and coordination role of
some role through Employment Assurance Scheme (EAS), DFIs and governments, including the municipalities, for
Jawahar Rojgar Yojna (JRY), and Border Area Development PFIs with user contributions.
Project (BADP) (for the border blocks). However, in rural
water supply, the panchayats bear complete responsibility ‘Lifestyle’ Economies
for drinking water, and have ensured good coverage. The The moneys currently being wastefully spent on umpteen
opinion of the local women in the location of water taps poverty-alleviation and other target-oriented schemes5 can
and handpumps continue to be ignored. There is much be pooled and leveraged through PFIs that involve revenue
avoidable ad hocism in the decision-making by panchayats payments (annuities) by governments, and user charges
and more involvement of the people is possible. wherever feasible to create a crash programme in sanitation.
A war footing is justified since the benefits of sanitation
Campaigns are social and there are critical minimum coverage below
‘Total Sanitation Programme’ in the Burdwan district of which the benefits are not durable. But above that level they
West Bengal has been eminently successful and within a could cumulate rapidly due to inherent indivisibilities, and
couple of years the Burdwan countryside should see a to the additive nature of the consumption of sanitation. The
significant decline in morbidity of the people. As the cultural gestalt shift to a preference to use sanitation services
coverage reaches a critical level the social attitudes against can suddenly emerge above a certain critical level of usage.
the toilets would take a gestalt shift in favour of household The potential expenditure which people would be willing
toilets and then that factor would carry through to almost to lay out on sanitation could, as a result, increase much
total coverage, except perhaps the poorest who may have faster than GDP. Then the consumer side scale or ‘lifestyle’

4 We are tempted to suggest that very rarely has there been so 5 Many of the Planning Commission programmes that are
dominant a politics which in itself was not an aspect and a result redistributive in nature have been plagued by the malaise of leakage,
of the economic, and which was immune from powerful economic little effectiveness or positive spillovers, and dependence on enormous
forces of change. administrative energies for their management (Morris 2003).
14 India Infrastructure Report 2004

economies can come into play as ‘people imitate each other situations, such as during The Great Depression to bring
and not having a household toilet becomes a situation of forth markets for long-term investments and savings.
shame’. This can happen so rapidly that the willingness to In countries such as India which were not too successful
pay can go up suddenly to solve the problem. As ‘per head’ in using financial repression to engineer high growth, the
incomes rise in both rural and urban areas the basis for intermediaries played the role of lending out of their own
such a transformation to an immeasurably better hygienic funds when the markets did not have such long-tenure funds.
situation exists today. The basis of such intervention was government monopoly
PFIs have yet to begin in this sector. The framework over the savings of the people. In late industrialization the
and the design of the model contract and legal arrangement very success meant that increasingly many of their industries
are not ready. Urgent collaboration of the Ministry of Urban (dram chips or computer pheripherals, for example, in the
Development with developers, financers, and stakeholders case of Korea) would face fundamental uncertainty as they
is necessary to develop the overarching framework for came out of the catching up phase.
sanitation. One hopes that these would be ready soon so Markets too develop and repression comes at an
that a large investment programme in the sector can be part increasing cost, since as the growth rate of incomes fall
of the next ‘new deal’ to keep the economy from slipping the value of rate of return to the savings (rather than to
into recession. the rise in savings through the rise in incomes per se) rises.
With capital mobility (especially outward) the existence of
CHALLENGES FOR DFIS TODAY financial repression is an invitation to disaster, and this
is exactly what underlay the Korean crisis. In countries like
Industrialization itself and, most certainly, late industrialization India where, as the markets develop and financial repression
has spawned the need for financial intermediaries since is removed through financial sector reform, there is little
markets, especially financial markets, may be late to develop. space for DFIs in their traditional roles. Since the
Moreover, in late industrialization there may be a certain government has no spare resources, and its own comes at
merit to forced savings that is possible through domination market cost, the access to ‘cheap’6 deposits can come only
of financial intermediation. The functionality of financial with a banking arm.
repression, for a country with an efficient state that is able
to bring forth other economies—of coordination, of scale New Roles for DFIs
and scope, besides dynamic comparative advantage—can be Varma in Chapter 6.1 examines the historical role and
significant for the speed of industrial transformation. need for DFIs. In all cases conscious effort has to be made
Thus all successful late-industrialized nations have used by the DFIs to move away from their traditional roles. In
financial intermediaries and repression to raise the rate of some cases as when the markets are well developed this
investments. As economies, they face less uncertainity in may simply mean that they fold into ordinary institutions,
the industrial sectors, hence, bankruptcy risk is low which that is, either give up their developmental roles. Or they
may be lowered further by kieretsu-like structures or by keep their developmental role not as a direct fund allocator,
state-owned intermediaries with management control of the but as an agent that is able to create the conditions and
enterprises they support. Such economies show high debt/ itself contribute to leveraging large funds to risky and long-
equity ratio or, more correctly, outside-to-inside funds. duration projects which are most difficult to fund. This
Their ability to keep the growth rates high shields such new role is discussed at length, which ought to be of
risky financing, and in a way they are able to continuously interest to the ex-DFIs especially those that seem unable
grow out of possible bad debts. Late industrialization also to move forward. Specifically they now have the roles of
generates a much larger share of the rising income in the ‘(a) development of financial markets; (b) assumption of
hands of workers so that a resource flow from the rest of residual credit risk to facilitate bond issuance; (c) remedying
the economy to the investing modern private large industry sectoral financing gaps; (d) being an instrument for improved
and the (efficient) state enterprise becomes necessary. People governance; and (e) think tank for new policy frameworks’.
with low (but growing) incomes are averse to save with the These are far more difficult to play than being an old style
market, trusting the fixed income of banks and such other DFI which meant allocating credit out of resources that
intermediaries with implicit government guarantees. This it was allowed to mobilize at favourable terms. It is also
lends an added functionality to the intermediary. to be noted that even the traditional role was not played
6 These are cheap in the absence of competition, because the
DFIs in Developed Market Economies
Indian Banks Association acts as a cartel, and the RBI as the ‘owner’
Even early industrializers like the US have used financial of the banks has little incentive to impose competition; and
intermediaries with a developmental orientation in trying government policies have kept alive a large spread.
 Overview 15

as well by the Indian DFIs as the Korean ones. The Korean DEVELOPMENTS IN ELECTRICITY
DFIs’ roles were well integrated with Korean development
strategy at least till the early 1990s. The newer DFIs have With the passage of the Electricity Act 2003 a major step
had good success especially in the think-tank role and forward in the electricity sector has been taken. Open
possibly in the assumption of residual credit risks. access is almost inevitable. The imposition of the open
access can make even the most recalcitrant entrenched
natural monopoly wake up. It is, however, a moot point
MUNICIPAL FINANCE AND DEVELOPMENTS if the diktat to reduce cross-subsidies could not have
worked much better with a non-distortionary mode of
Jha in Chapter 6.2 discusses the problems in obtaining
subsidy delivery being incorporated in the Act itself. As
funds at the municipal level. The situation in the US,
it stands today, while cross-subsidy may go it would be very
Germany, and elsewhere are cryptically reviewed. The
difficult to actually get rid of farmer subsidies because
principal challenges lie in: (a) strengthening the credit-
electricity using farmers are discriminated against when
worthiness of local bodies; (b) removing the huge distortions
compared to farmers who use canal water for irrigation.
in the inter-governmental fiscal transfer framework;
There are other reasons why farmers may have to be
(c) more than per se accessing of the capital markets. The
subsidized. But that does not mean distortionary modes
need is for a market-based system of access wherein the
of subsidization that create moral hazard in the distribution
monitoring and other risk measurement and management
entity. Unfortunately, the ‘direct subsidy’ now being mooted
functions of the market can be brought to bear on the
and accepted as the best solution in most discussions is
municipality and its projects. Without the first measure
not direct enough. Giving the subsidy through the budget
‘no amount of credit enhancement or financial engineering
to the distribution entities does not avoid the root problem
can be a substitute’ for legal, organizational and structural
of moral hazard which provided sustenance to perversities
reforms of municipalities.
in the sector—inability to account for revenues, unrecorded
Besides these, strengthening municipal bond issuance,
sales to the high tariff consumer, leakage, collusion with
securitization of future flows, more innovative use of
theft, incentive not to meter, etc.
government and multilateral guarantees, promoting infra-
structure financing by banks and housing finance institutions
Draft Tariff Policy
are ways to overcome the problem of municipal financing.
Ghodke in Chapter 6.4 addresses the same issue and, The recent Draft Tariff Policy (DTP) is a major departure
specifically, the conditions for bond financing versus credit from the past. Among other things it goes some way to
financing, and argues that both markets need to develop provide the much-needed regulatory clarity. It lays the
with support including tax concessions, pooling, and other framework for transmission pricing through a 3 part tariff
risk-management arrangements which DFIs could bring that could do much to make open access a reality. The
about. The scope for credit through banks too is large even proposals, on the whole are progressive especially a
when bond markets are vibrant. Competition between the transmission tariff which lays the basis for non-
two systems can lower costs to the borrowers. discriminatory open access. Further developments to lead
Vaidya and Vaidya in Chapter 14.1 bring out the to markets could have come had the DTP not insisted on
experience of local bodies in raising funds from the markets. long-term contracts but on time of the day pricing and gone
Joshi in Chapter 14.2 brings out the need for appropriate ahead to define the mechanism for spot pricing. This is
reporting to citizens, users, and upper levels of government, eminently feasible for all entities that connect on the grid
and the models for the same. The Canadian example is with the installation of meters that register the drawl of
reviewed, and the blueprint of a model for Indian power by the instant to compute the Unscheduled Interchange
municipalities that can be usefully considered by munici- (UI) charges under the Availability Based Tariff (ABT).
palities, is presented, certainly by those who have announced ‘Once the idea of a national grid and national level
publicly their charter of commitments to people. In Chapter optimality is accepted, the requirements of integrated
14.3 he surveys the experience of all stakeholders in the planning which is optimal not only regionally but also
accounting reforms that the Chennai and other Tamil across the nation would mean that the framework for
Nadu municipalities went through. The gains made in tariffs could not vary much across states and regions. What
terms of information availability, transparency, aid to can vary are the actual tariffs and perhaps the norms. The
managerial decision-making, and critical assessment of the state-level regulators thus may have to support “stranded
municipalities’ functioning are very significant. He decries assets”, a possibility which is likely to arise in the not-so-
the slowness in the process of institutionalization of new distant future when the national market actually comes
accounting systems. about.’ Caps on taxes and such other measures will be
16 India Infrastructure Report 2004

necessary as state governments face the problem of lower government with a short time horizon, reform may inform
costs of generation outside their states. These major risk cash outflow and other fiscal difficulties. This is Sagar’s
mitigants should have been part of the Draft or even the argument in Chapter 7.3. In Delhi the need to make
Electricity Act 2003. political capital out of the disenchantment with the power
supply situation was the key. The government wanted to
Why Not Drive Towards Markets? be seen to be doing something to improve the situation
and that was the reason for the reform; since reform meant
The drive towards markets can be quicker than what is
privatization and reigning in the leakages in the popular
envisaged. The proposals do not link up the competition
perception. It also makes the prospect for reform in other
for supply of power (given existing assets) that is likely
cities, even if after some time, real, as the Delhi government
because of open access to the competition to enter the
is able to cash in on the goodwill that its management of
market. For this to come about a framework for the
reform would have created. That should restore our faith
construction of the national market for electricity is necessary.
in democracy, despite the detours that populism imposes.
Since the open access envisaged as of now stresses long
But the fiscal aspect may be stronger than is generally
term contracts to bring about choice, the right way to move
accepted. It is not a coincidence that among the states
would be to create a market for differences. These are some
seriously pursuing electricity reform, Andhra Pradesh,
of the tasks that lie ahead in the electricity sector. Only
Madhya Pradesh, and Delhi, two clearly had strong
when the time of the day tariffs allow for peak tariffs to
budgetary reasons. Both Delhi and Madhya Pradesh (since
be high enough would the true value of a competitive, but
the separation of Chattisgarh) buy a significant part of
integrated market-based-system be revealed.
their electricity from outside their own state systems and
against whom they could no longer build up payables. In
Performance Budgets
other words having to pay cash at full-cost prices (including
The combination of the EA 2003 and the Draft Tariff depreciation) they perforce make larger cash losses, and
Policy is certainly the first set of steps in the right direction. that is a situation when governments wake up. In most
For once, after nearly 10 years one is sure that reform other states having recourse to large amounts of electricity,
efforts mean what they should—moving closer to markets, generating capacity, as long as the leakages and losses are
to fewer distortions, and to regulatory clarity. The earlier such as to cover cash costs and there is no cash outflow
Independent Power Purchases (IPPs)/Power Purchase from the state’s budget, or when they are non-rising there
Agreement (PPA) were unmitigated policy disasters. is no fiscal pressure. But when that ‘happy situation’ changes
Although we have not looked critically at the Accelerated as in the case of Madhya Pradesh there is significant
Power Development and Reforms Programme (APDRP), pressure to reform.
it seems that through the performance budget7 that it
brings, it has supported change even if it has not been a The Madhya Pradesh Story
harbinger of change. Perhaps that role as expected has been
Pandey and Morris in Chapter 7.5 bring out the interesting
played by the hardening budgets of state governments. The
and inspiring story of leadership and action in the Madhya
process which had started in the early 1990s with the
Pradesh Paschim Kendra Vidyut Vitran Ltd (MPPKVVL),
reform and expenditure reduction policies of the government
which brought about a dramatic change in the organization.
was allowed some leeway. States using contingent liabilities,
Now there is major competition within the MPPKVVL
off-budget borrowings, borrowings from the central
to take the changes to all divisions of the company. All
government, and access to new windows such as the Rural
this was made possible by the organization being shielded
Infrastructure Development Fund (RIDF) were able to
from the enormous pressure of vested interests who stood
shift their budget constraints for a while. Now that would
to lose heavily in the clamp down on leakages. Officers
be extremely difficult, but that does not mean that the
are out in the field ensuring that meters are installed,
states would rush for reform.
catching thieves, filing and appearing in court cases,
Pressures for Reform fighting adverse reports, and persuading illegal colonies
to pay up within the organization they have been fighting
It was not on fiscal considerations alone that governments for change, transferring trouble makers, creating
such as Delhi’s initiated electricity reform. In fact for a ‘foolproof ’ systems to ensure correct reading of meters
7
and instituting processes to counter the moral hazard
We have been arguing for performance in the electricity sector,
inherent in varying consumer prices, and in improving
and more generally for all of Planning Commission funds to be
based on clearly laid out performance and fiscal criteria (Morris the service levels for consumers. Revenue realizations
1996 and 1998). have gone up sharply. The change first pioneered by
 Overview 17

Sharma in Burhanpur has become a model for the rest anticipated since there would be hidden losses or leakages,
of Western Madhya Pradesh. urgently required maintenance and renovation expenditures,
and hidden liabilities that are revealed only after due
Making it Easy for Reform diligence exercises, subsidies during the phase of tariff
convergence and in the continuing phase of reform when
How much easier the task would have been if the moral
subsidies are ‘direct’, funds to provide for depreciation
hazard of consumer price mix arbitrage which the company
which may have been inadequately assessed in the past, or
struggles against is removed at one stroke through uniform
the need to depreciate at higher rates following privatization
prices direct subsidization of farmers. This would have
and hike in the transfer price of assets over book value.
ensured that the vast organizational energies, political
There is little point in reform being dashed because of
commitment currently spent, could be used to greatly
unanticipated or wrongly anticipated funds requirements.
speed up the process of recovery. Reform can pay, and the
paying consumer has benefited much since now there is
a direct line to a courteous and committed staff with very REGULATION IN ELECTRICTY
quick response to complaints. A groundswell of goodwill
towards the reform is possible as the rates to the paying The movement to deregulation involves light and incentive
consumer can actually fall with better recovery. regulation where there is pathological market failure—
Currently the farmers, most certainly the larger farmers, distribution and transmission. Supply, generation, and
are in opposition to reform since they stand to lose. The auxiliary services could not go to the markets. Even then
reform efforts have been completely sustained if these the joint optimality of generation and transmission asset
farmers were given the option of direct subsidization (that siting and choice has to be ensured by the regulator.
follows an unbundled process of identification). Then their
political support to reform, would be forceful enough to Ensuring Optimal Capacity Addition
break any other vested interests. That would also allow the Principally, optimal planning would fall on the shoulders
regulatory task to be much simpler, since now the regulator of the regulator. For regulation itself to be light, models
and the government would necessarily not have to worry of transmission pricing that give due recognition of its
with the issue of consumer mix arbitrage. Today the regulator competition creating effects on generation are important.
has to virtually duplicate the consumer information base This would mean that transmission pricing is such as to
of the distribution company to be sure that consumer mix allow much access even if the usage charges are somewhat
arbitrage is not exploited. higher. Clearly in the context of a national grid the postage-
stamp approach is out of question. Kalra, Bichpuriya, and
Delhi and Andhra Pradesh Singh (Chapter 8.1) lay out the framework for an appropriate
Singh and Sinha in Chapter 7.4 bring out the story of reform transmission pricing that gives due recognition to all
in Delhi and Andhra Pradesh. In both the states, technology transmission costs. The preference is for the megawatt-
and equipment (metering at all points of the distribution mile method. They illustrate the working with an example
network, pole mapping, complete measurement, electronic that would be of interest to the regulator and others.
metering) were used to ‘bypass’ or, more correctly, go a little
slower on organizational reform to improve recovery and Norms for Better Regulation
accountability. Value to the consumer too went up. Support Shekhar and Kalra in Chapter 8.2 develop the norms that
of the administration and the politician, as also that of the can be used to regulate thermal generation in a near cost-
regulator, were crucial. Looking at the Andhra Pradesh and plus regime. Cost-plus regulation is likely to continue for
Delhi situations they conclude that recovery is an ‘easier’ quite some time and, rather than do the same tasks every
task for a state-owned enterprise (SOE) since the application time a tariff application is made with only formal reference
of the sovereign functions that the task involves—arrest and to the details of other plants, a benchmarking process
investigation, charge sheeting, etc.—implies that governments would be far superior and would result in immediate
or their parastatals have a better chance, though perhaps benefits since the process is transparent, reliable, and leads
lesser motivation in carrying out reform. to better understanding of the causal factors that underlie
efficiency and cost build up. And over a period the
Funding Reforms accumulated data and analysis can lead to the development
Kohli, in Chapter 7.2, draws attention to the need for of a ‘relevant’ price index-based incentive regulatory formula.
clearly laying out the sources and requirements of funds Sinha, in Chapter 8.3, reviews the experience of
in reform. The requirements can be higher than is typically electricity supply to agriculture, the distortions therein,
18 India Infrastructure Report 2004

and the measures suggested for improvements. He argues stocks, and this has happened since the profits of oil
that innovations in the organizational form of distribution companies this year, as prices rose, have been on oil stocks
companies in rural areas—for example, cooperatives, and arbitrage. This is quite unacceptable when there are largish
organizations under the supervision of village committees, private players and stocks of oil PSUs already trade in the
physical separation of the village networks8, and compre- market. An exit from APM should mean precisely that,
hensive metering—are necessary before any real gain is with the oil companies doing the job without having to
possible in distribution reform in the rural/agricultural share information with the ministry. Expectedly, follow the
areas. leader or price cuts to increase market share type of
behaviour, common in oligopolistic industries, is likely.
These issues need careful treatment.
STRATEGY IN OIL AND NATURAL GAS
The oil and natural gas sectors play a crucial role in any Equity Oil Overseas
economy and more so in India where there is both large Mahalingam, in Chapter 9.1, brings out the strategic
import dependence of the sector and also a dangerous aspect of oil, and commercial energy more generally, arguing
dependence of government revenues on the sector. Both that strategy and security demand that the Indian oil
are undergoing privatization and reform—at least in the players foray globally to acquire oil fields which can provide
sense of a movement away from the ‘administered price the hedge against arbitrary price rises in the thin spot
mechanism’. But several perversities, not generally markets, and possibly against the large political risk of
recognized, continue and may have even been introduced having to depend upon the Gulf as our principal source.
by the reform. This sector bears a huge tax burden which China has fast diversified its sources and has been an
would have distorted demand immeasurably, and a important acquirer of oil fields in the 1990s. Actually,
movement to rational taxation, even to revenue maximization since it is easy to estimate with near certainty the lower
taxes, could be accompanied by a huge jump in demand bound of India’s import requirements, there is an excellent
not anticipated at the moment. The adverse effect on opportunity to take an open position on oil purchases into
India’s competitiveness imposed by high taxes in these the future which would inter alia amount to buying oil
sectors is large, and it stands to reason that, at least in fields, signing long-term contracts, etc. now that the foreign
export industries, full MODVAT-type deduction of taxes exchange constraints are beyond us. Indeed it makes sense
paid on fuels and electricity should post-haste be made to pre-commit a part of foreign exchange earnings to oil
available to Indian industry. because that can give greater stability and lower oil prices.

Huge Distortions Continue Vertical Integration

The movement to APM does not really mean market Ramganesh and Pawar, in Chapter 9.2, bring out the
determination of prices. It means that instead of the vertical integration economies in oil that make stand-alone
market responding to international crude and product refineries vulnerable especially when integrated refineries
prices, the government with a lag specifies the price changes. have the ability to hold on to lower variation in the price
Without a substantial oil pool account this brings no value of the final product. The control over sources with vastly
to the consumer because there is no inter-temporal varying extraction costs mean that the ability of different
smoothing. Then one can under or over stocking to make players to bear falling oil prices is different or, in other
money. These are ‘returns’ to administrative decisions. It words, the ability to control or influence prices depends
merely replaces the ‘random’ price movements with a step not just on total output but on rents. So flexible rents which
function with the heights approximately predictable but large integrated oil companies could use can threaten the
not the timing. That creates huge perversities to arbitrage existence of stand-alone and weakly integrated firms, unless
refineries in turn forward integrate into distribution and
8The provisions in the EA 2003, would permit this and also into petrochemicals. The options for the Indian major are
stand-alone companies for rural distribution, and as such Sinha’s
explored, and it is unlikely that there are any first best
suggestions to separate the two networks is consistent and necessary
given the different prices, and is in keeping with the Act. But this strategic options beyond backward and forward integration
can never be an optimal solution. It also makes necessary other in a situation where they have to compete with world giants.
inferior methods (such as administrative control over hours of
supply, and power quality generally) and does not remove the vast Regulation
distortions that price subsidies bring in the agricultural sector. Only
uniform (cost of supply based pricing) can remove the need for such Barua in Chapter 9.3 reviews the Draft Petroleum Regulatory
measures and the distortions. Bill and notes that it has several excellent features such as
 Overview 19

open access to oil pipelines with some preference of first ignored. Was the data supplied by the BSNL free of biases?
use to the owner, and a transparent tariff mechanism. But USO is a far better mechanism than ADC to fund universal
there are dangers too in certain provisions. ‘Two of the access which is all that the government should be bothered
functions specified in the Bill are that the Board would about. And there is no logic in defining, as basic and lines
“ensure adequate availability” of products and also “monitor especially since mobile (both GSM and WLL) threaten to
prices and take corrective measures to prevent profiteering”’. be cheaper and are seen as having superior value for the
Fulfilment of these objectives would essentially call for consumer. There was not the desired level of disaggregation
micro-management of the sector, on lines similar to the and accounts separation in the data supplied. The episode
manner in which the erstwhile Oil Coordination Committee brings out the large and confidence shattering bias in
(OCC) used to function’, and allow the government a favour of the incumbent. The reaction of the GSM operators
backdoor control over the operative and market decisions to opening full mobile to CDMA and to land line operators
in the sector. is an unproductive reaction to biases which the government
Chakraborty in Chapter 9.4 anticipating the need for and the regulator are unable to shed. With full mobility
regulation of gas pipelines on open access common carrier on WLL, perhaps brought about by equalizing the licensing
principles lays out the details of the regulatory approach conditions, growth can be even faster than what it has
that has much potential to reduce risks and crowd in been. So large the ‘consumer side network’ economies.
investments and at the same time be fair to the users,
buyers and sellers, and traders of gas. Virtual pipeline and WATER, PFIS, AND CONSERVATION
cluster methods are possible options for pricing of
transmission networks which, while promoting competition Goyal, in Chapter 12.1, takes a comprehensive look at the
in the market for gas, also create sufficiently strong water situation in urban India to argue that price reform
incentives for investment in the network. is important to enable better access of the poor. Being pro-
poor means smaller access charges than at present, even
if usage charges are high. There are many interlinked
TELECOM AND ADC options for improving supply that involve the private sector,
especially small local firms, users associations, besides the
The telecom sector after appearing to move so strongly in
more regular large private participant. With tariff reform
the direction of uniform licence conditions for all players,
there is much to be gained in moving towards PPPs and
mobile or fixed line, WLL—or mobile, now seems to have
PFIs. Recovery of waste, values gained in the avoidance
come to a standstill. The force of technology ought not to
of mispricing, and of avoided negative externalities, are
be nullified especially when the technology promises to
all available and should be able to cover the cost of the
bring so much for the consumer and the society. To an
additional investment that the private sector could bring
outsider the strong resistance of the mobile cellular
in. In the maintenance of the system the comparative
companies is difficult to understand. But perhaps there is
advantage of the private sector, when users are brought in
a history that is being missed. The ‘access deficit charge’
the monitoring and conservation roles, can be very large10.
(ADC) which all cellular and other operators have to give
The global experience and economic theory, given the
to the basic service (land line) providers in reaching
characteristics of water as a use good, are additionally
customers on their network, comes as a bolt from the blue
marshalled in support of the suggestions made. As water
to other operators.
contracts and PFIs take root it is important to recognize
The arbitrary basis for this argument and what could
the potential as also the limitations of PFIs and, more
instead have been done are brought out by Jain in Chapter
importantly, the appropriate forms for the same that lead
10.1. She argues that the exercise of ADC computation
to better incentive compatibility.
can be questioned firstly because the assumed extent of
tariff rebalancing is far greater than what is really required. Conservation
The segmentation framework assumed is also perhaps
faulty. That the incumbent could have used alternative Ruet, in Chapter 12.4, examines the performance of water
tariff packages to considerably enhance revenue9 was entirely organizations in the metros bringing out the organizational

9 Today the BSNL/MTNL have bundled the cost of laying new of voice from data packets at the exchange end, which is possible
lines with that of providing massive redundancy. Everybody knows with most currently available exchanges. The regulator should have
that the BSNL/MTNL have laid 5 pair cables to every largish house allowed/encouraged the incumbent to factor in such revenues before
and fibre in many cities to buildings. The current usage levels are considering the access deficit.
10 Being a labour intensive activity the state has great difficulty
only for voice. The potential of these for Internet and virtual private
networks is enormous with the correct pricing and the separation in controlling labour and its costs.
20 India Infrastructure Report 2004

differences in the same, and how these have affected sound legal basis to distance the operation of disinvestment
pricing and supply. He also makes a case for recyling of from government. An independent and expert commission
first level waste water which constitutes 40 per cent of the operating under the framework of an act and policy would
secondary (toilet flushing) usage which can make the same be most appropriate.
water go around far more effectively in a situation of Government expenditures on vital social services with
limited supply. Narayanmoorthy, in Chapter 12.3, brings vast positive external effects need to be stepped up, but doing
out the economics of drip irrigation based on actual field this the old way would be wasteful and pointless even if they
studies. While drip irrigation (even with the current have some positive demand-side effects. The need of the
distortions emanating from the horse-power-based electricity hour is to create the policy, the frameworks, and the enabling
pricing that makes the marginal price of water close to zero legislation and models for PFIs and PPPs that can capitalize
for the farmer) is economic especially in water-intensive on private enterprise. Among the innumerable experi-
crops, it is under-promoted and needs to be brought to mentation and experiences of non-governmental delivery of
the forefront of government extension. The large initial social and public services all over the country, there are many
costs are a deterrent. All current subsidies to the agricultural worthwhile and proven (social) inventions which need to be
sector could be made available as a general input subsidy scaled up. PFIs inter alia have the potential to address the
which the farmer can then use to choose drip irrigation problem. Vast gains are possible not only in efficiency. In
given its strong economics. This would lead to its spread the Indian system, the gains arising out of better allocation
especially among water using crops and in the drier parts, including better and efficient supply that can be built into
to make Indian agriculture not only more efficient but also the frameworks for PFIs and PPPs, can be enormous.
far more ecologically sound. This is, of course, urgently The poor have too long been used as an excuse to create
due and one more reason for directly subsidizing the rents and to result in system and organizational failure.
farmer. That stands exposed since denial in the most public and
basic of services is large despite the intentions to the
Access and User Charges contrary and the vast sums being lost in rents, inefficiency,
Bajpai and Bhandari in Chapter 12.2 use National Sample and misdirection. The new paradigm of mobilizing the
Survey Organization’s (NSSO) data on water access and private sector and society, in competition and in
usage at the household level to show that significant rise collaboration with the state can set in motion the processes
in user fees would have to be accompanied by increased for the state itself to change and improve its efficiency.
and better (inside home) access to water. Thus the first The macroeconomic environment for such change is also
stage of water reform that hopes to build on increased and conducive today. In some sectors like road building and
efficient user charges are well advised to improve the management, the change has begun as increased role of
network access of many as part of the reform. This again the private sector takes root.
points to the gain (here in improving appropriability) of The challenges faced by the DFIs are many as the
spending more on access even if access costs are not fully financial sector reform progresses. While some, especially
recovered to improve overall recovery. Access to a tap is those with a large exposure to the manufacturing sector,
typically overpriced, since it is linked to a place to stay, would have to become ordinary financial intermediaries,
and the poor typically stay in huts, jhopris, and footpaths. others could continue to play a developmental role that is
very different from the sectoral sanction of concessional
CONCLUSION finance of the past. Upon them falls the challenge of
leverage funds, credit support, residual risk taking, project
The time has come for a paradigm shift in the role of the structuring, and framework development for better
state in providing economic and social services. Post-haste regulation and sectoral markets, besides financial markets
disinvestment of public enterprise needs to be given a development.
 Overview 21

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