CHAPTER 6 Infrastructure Development Introduction viable operations of utilities providing Growth of an economy can be constrained by the infrastructure. The strain on fiscal sector and the non-availability/inadequacy of infrastructure. fear of collapse of infrastructure utilities has Though the availability of infrastructure may be compelled a paradigm shift in provision of viewed as a necessary condition for growth, it need infrastructure in India, i.e., a shift in favour of not be treated as a sufficient one. Traditionally, private sector participation. Many of these new infrastructure services have been produced and experiments seem to be in the direction of provided through vertically integrated production replication of the successful examples witnessed in units by the ‘public sector’. This has been due to other countries. huge investment requirements, high upfront costs, In this chapter, we include the five basic uncertainty about returns and long payback periods. physical infrastructure services, viz., power, roads, These characteristics of infrastructure service ports and water transport, telecom and water supply provision also lead to emergence of natural to urban population. The scope of this chapter is monopolies. Combined with these features is the confined to the description of the present status generation of large positive and negative (availability and problems), reforms initiated and externalities, which make it difficult to translate the possible solutions for problems in efficient costs and benefits into the user levies for these provisioning of the above-mentioned infrastructure. services. Recent advancements in technology and The contents of this chapter are organised as management practices have made it possible to split follows. First, we provide the context and discuss the vertically integrated plants into various the general issues pertaining to growth of segments, i.e., by resorting to unbundling of these infrastructure. This is followed by the full-length utilities into production, transmission or/and discussions on each of the above-mentioned distribution units. The investment requirements and categories of infrastructure. Finally, the policy the risks associated with an unbundled sub-sector prescriptions and strategies for development of are fractions of those required for the vertically infrastructure sector as a whole constitute the integrated plants. Thus, unbundling makes it concluding part of the chapter. possible to replace monopolies by more competitive market structures, wherein private sector can also Backdrop: Context, Issues and Approaches participate. Kick-starting infrastructure projects at the national, Provision of infrastructure by the public sector state and sub-state levels is the priority of the policy in India has been due to two reasons. Huge makers. For this, co-ordination of policy decisions investment requirement, as explained above, is the of centre, states and local bodies is essential. With first reason. The second reason is that on the eve of the government funding becoming increasingly planning process, India accepted a ‘mixed economy’ scarce and inadequate investment in crucial path or a ‘socialistic pattern of society’ and infrastructures, attempts are being made to associated with such a system were the economic ‘commercialise’ this hitherto heavily subsidised and social responsibilities of the State. Even as of government dominated sector. The onset of rapid today, rural electrification is deemed to be a basic reforms since 1991 has led to considerable activity minimum service to be provided by the State under in terms of projects, policies, regulation and foreign the Prime Minister’s Gramodaya Yojana (PMGY). collaborations. However, the state of physical Attempts to run the infrastructure utilities on infrastructure in the country is far from adequate non-commercial principles have resulted in both in terms of availability and quality. subsidisation, cross-subsidisation and distorted The state of infrastructure in India and its pricing. Naturally, the end result is financial non- massive fund requirements have been clearly stated 122 Maharashtra State Development Report in Government of India (1996, GoI). This report Build-transfer-and-operate (BTO), Contract-add- had estimated annual requirements of funds for and–operate (CAO), Develop-operate-and-transfer infrastructure at US$ 26 billion during 1996-2001 (DOT), Rehabilitate-operate-and-transfer (ROT), etc. and higher at US$ 43 billion during 2002-2006. The In most of these cases, the ultimate ownership of report had further added that about 15 per cent of infrastructure projects is supposed to rest in the the investment could be financed externally and 85 hands of the government. per cent should be domestically raised. An The third issue is that of pricing of important reason given in favour of raising domestic infrastructure services. The distinction between finance was due to the fact that these projects will ‘ownership’ and ‘commercial principle’ is at the core generate revenues in local currency and hence, in of the pricing issue. The dilemma faced here is the long run it would be difficult to finance them whether infrastructure services should be priced on out of foreign savings. Having briefly underlined the the basis of commercial principles or according to context, we now turn to the issues debated with social objectives. Linked to this issue is the dilemma respect to provision of infrastructure. as to whether commercial principles should be The first issue is whether the infrastructure adhered to by the State or not. If the State also should come first rather than later (Morris, 2001). adheres to commercial principles in pricing, then the This pertains to the lead and lag relationship justification for State monopolies in these services is between infrastructure provision and production. nearly lost. Again various hybrids can be There are two views regarding whether experimented in this sphere as well. This is due to infrastructure should be planned and created before the fact that all infrastructure services need not be the demand for it arises (infrastructure first) or viewed as equally relevant from the point of view of whether demand for infrastructure should lead the social welfare, e.g., the case of water supply to poor production and provision of infrastructure cannot be equated with that of the provision of (infrastructure later). If the infrastructure is created telecom services. The State cannot altogether and the demand for it does not take off due to some absolve itself from the responsibility of provision of reason, there is a danger of infrastructure being all kinds of infrastructure. A proper allocation of underutilised, leading to a heavy cost of resources through budgets may have to be resorted infrastructure and financial losses. to if the State allows private sector to provide these The second issue is whether the infrastructure utilities. In this case, it will have to provide direct should be ‘provided’ by the public sector (with or subsidies to the targeted consumers, if the State without Private Sector Participation, (PSP) or by the positions itself as a guaranteer of social welfare of its private sector. Over the years, inefficiency in people. Yet another alternative is to leave provision operations of public utilities has led to escalation of of these services to the private sector and provide the cost of infrastructure services. The perceptions an enabling policy environment to the private sector about the role of public sector in economic activity in the form of State guarantees, cheaper loans (via are changing in response to the performance of the directives to financial institutions for infrastructure public sector. Provision of infrastructure includes financing), tax incentives for infrastructure bonds, generation, transmission or/and distribution etc). activities. As these services can be unbundled, it is The fourth issue is that of fairness to possible to get hybrid systems, wherein, some consumers. In order to combine commercial services can be provided by public sector and others principles and efficiency, independent regulatory by private sector. As mentioned earlier, unbundling commissions both at central and state levels have results in division of investment requirements and been established/are mooted so as to protect risks of provision of infrastructure. The various consumers’ interest and ensure that the services are alternatives which involve PSP are: Build-and- provided to consumers at ‘fair’ prices. The transfer (BT), Build-lease-and-transfer (BLT), Build- regulatory commissions are also expected to ensure operate-and-transfer (BOT), Build-own-and-operate that the rules and regulations applicable to various (BOO), Build-own-operate-and-transfer (BOOT), service providers are not discriminatory and unfair. Infrastructure Development 123 Power Sector years to come, it will be difficult to sustain the The Constitution of India has placed power in the growth of software segment of the IT sector and concurrent list, implying thereby, that the also to have it regionally dispersed. responsibility of taking and implementing decisions The main problems facing the power sector in has to be shared both by the central and state India are as follows. governments. However, the primary responsibility • Huge investment requirement to meet the at consumer end is that of the states. Thus, demand for power. development of power sector in a state has to be within the framework