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India's inadequate infrastructure has long been identified as a critical reason holding back the economy's growth. The high-powered Rakesh Mohan Committee had done an exhaustive study of infrastructure and made recommendations of a far-reaching nature. However, in the two years since the report was submitted, progress on its recommendations has been tardy, lending even greater urgency to the need to address the widening gaps between the demand and supply of infrastructure.
The Group focussed on identifying the key bottlenecks preventing much-needed investments and holding back improved efficiencies in the six selected sectors: Power, Communications, Roads, Ports, Pipelines and Urban Water and Sewerage. It’s understanding of the issues involved gained immensely from the report of the Rakesh Mohan Committee. This perspective was further enhanced by meetings with senior Government officials, in the Planning Commission and in the relevant Ministries.
This chapter summarises the Group’s recommendations in two sections. The first section contains sector specific recommendations, preceded by a brief overview of the critical issues in that sector. The second section lists the fundamental imperatives common to and underlying the Group's recommendations.
1. Sector Specific Recommendations
(a) Power
Background:
The country needs to add 60,000 MW by 2002, with private producers expected to contribute half of this capacity.
In contrast, 18,000 MW were added in the Eighth Plan (1992-97) and a bare 1070 MW from Independent Power Producers (IPPs) in the seven years since economic reforms began.
The bleak picture is largely because of a misplaced Government focus on improving generation through IPPs, expecting them to sell power to the SEBs, most of whom are financially unviable. This financial weakness, is a result of the SEBs’ low average tariffs, poor revenue collection and high distribution losses.
SEBs need to be made financially viable before private investment can flow in. The key to turning SEBs around is reforming distribution.
Recommendations:
Shift focus of reforms from generation to distribution.
Set up State Electricity Regulatory Commissions (SERCs)
Restructure the SEBs
Phase I: Corporatise the SEBs and separate generation from transmission and distribution.
Phase II: Privatise the unbundled companies.
Introduce competition by allowing large users to buy directly from generating companies.
Set up a Power Trading Corporation in each State.
Reduce T&D losses and theft, thus saving Rs. 8,000 crore per annum.
Promote restructuring of SEBs in every State by
- Providing matching Rupee funds to States that receive World Bank/ADB assistance for SEB reforms
- Developing model legislation for States to corporatise and privatise SEBs.
Take measures to attract investment and improve asset utilisation.
Reduce fuel supply risks for IPPs
Simplify the project clearance process by setting up SPVs, which obtain all clearances before projects are opened up for bidding.
Develop a national transmission network through the Powergrid Corporation.
Increase the availability of generating stations, which will release 4500 MW of capacity.
Reduce receivables of SEBs to 15 per cent of revenues, which will release Rs. 2,750 crore.
Restructure the Delhi Vidyut Board (DVB) as a Showcase Project
(b) Communications
BackgroundIndia's teledensity, around 2 fixed lines per 100 persons, is less than half that of China's (4.5) and one-fifth of the world's (10). Cellular telephony penetration is similarly abysmal, at 0.1 per cent compared to 1.1 per cent for China and 2 per cent for Malaysia.
Provided supply can keep pace, this demand could explode to 31 million lines by 2001 and 64 million by 2006 for basic services. Similarly, in the cellular sector, demand could touch 2 million lines by 2001, growing to 5 million lines by 2006. Further, the demand for Internet services could explode over 50 times in the next four years, from 150,000 connections today to over 8 million in 2002.
Improved communications are not just basic to industry, but are essential for attaining equally important social objectives like distance education and tele-medicine in rural and remote areas.
Digital technology has opened up unprecedented possibilities in achieving these objectives by creating a convergence between telecom and computers. Now the same infrastructure can carry both data and voice. Hence, Internet Service Providers (ISPs) can use digital technology to offer all telecom services.
The challenge for policy makers is to harness this emerging technology to spread teledensity at the lowest possible cost, and to make available a full array of value-added services.
The Government's far-sighted policy for ISPs will help India leapfrog into the cutting edge of convergent technology.
However, the Government's ISP policy has created an asymmetry between ISPs and telecom operators, due to the high license fees charged to the latter and none to the former.
Recommendations:
Develop a New Policy Framework.
Evolve an Integrated Communications Policy, addressing all the telecom services (eg., telephony, Internet, cable TV, etc.).
Permit competition
Allow free and unrestricted entry in all services.
Evolve a Spectrum Policy for all wireless applications.
Extend the total spectrum available to telecom operators.
Entrust TRAI with allocating spectrum in a transparent manner.
Determine spectrum fee through competitive bidding monitored by TRAI.
Modify the license regime from a flat fee to a service tax based approach.
Ensure a level playing field amongst all operators, including basic and ISPs.
Use service tax to generate revenue for the Government. Eliminate the existing fee structure.
Treat license fees already paid as an advance against future dues.
Meet Social Obligations through a collective initiative.
Ask all companies operating in urban areas to contribute towards a Rural Telecom Infrastructure Fund.
Utilise these funds to transparently finance rural connections.
Leverage existing cable networks in rural areas and small towns for telecom growth.
Evolve uniform interconnect guidelines
Corporatise and Privatise DoT.
Split DoT into four Zonal Operating Companies and one Long Distance Company.
Divest at least 26 per cent of equity in each of the five companies to introduce accountability and transparency.
Strengthen and enhance the role of TRAI.
Extend the role of TRAI to include licensing and standard setting.
Enhance TRAI's power to enforce recommendations.
(c) Roads
Background:
India faces severe, and worsening, strain on capacity as annual growth in road length (less than 5 per cent) has been less than half the growth in traffic (over 10 per cent). What is worse, National and State highways, which are just 10 per cent of the nation's roads but carry 75 per cent of the traffic, have grown at an even lower rate. The emphasis, so far, has been on providing connectivity rather than ensuring mobility on the high density corridors.
One reason for slow growth in road capacity is that access to funds is restricted to inadequate budgetary allocations. The Rakesh Mohan committee estimated a need for Rs. 90,000 crore for National and State Highways over 1996-2006. However, total expenditure (Centre and States) in the Eighth Plan period (1992-97) was just around Rs. 13,000 crore.
The Government must continue to play a dominant role in this sector since most road projects have low financial returns. Their viability depends on valuing externalities (such as all-round economic development of a region) which are captured only by the Government.
However, in projects which are financially viable, private sector participation is feasible and should be encouraged.
Recommendations
Shift focus from providing accessibility to enhancing mobility
Achieve this by four-laning/six-laning the Golden Quadrilateral.
Make a new expressway network a long term objective over a 10-15 year time frame.
Clearly segregate the roles of policy maker, regulator and developer
Define the role of the Roads Wing of the Ministry of Surface Transport (MOST) to include the development of a policy statement and allocation of budgetary support to the Centre and the States.
Make NHAI the sole regulatory and facilitating agency at the Centre.
Ask States to set-up regulatory authorities along the same lines as the NHAI to regulate State Highways and other roads.
NHAI should prioritize and award specific projects through a bidding process
Commission traffic studies to prioritise different stretches
Segregate feasible projects depending on the level of involvement of the Government.
Obtain land and provide environmental clearances.
Implement Projects through SPVs
Create separate companies.
Ensure that they are professionally managed and governed by an independent board of directors.
Ensure SPVs are of an optimal size to strike the right balance between scale and effectiveness.
Adopt World Class Practices in the Management of Road Projects
Adopt modern construction technology.
Facilitate and create incentives for timely execution.
Appoint project consultants for monitoring and providing technical solutions.
Raise Resources for kick-starting Development
Increase the existing tax holiday for this sector from 5 years to 10 years.
Provide guarantees to private sector participants against any changes in legislation.
Allow provident funds and insurance companies to invest in the sector so as to make 15 to 20 year funds available for investment.
Increase the dedicated funds for road development through a Re.1 surcharge on diesel.
Use dedicated funds exclusively to provide equity for SPVs implementing road projects.
Carry out the four-laning of the Delhi-Mumbai-Chennai corridors as a Showcase Project
(d) Ports
Background:
Currently, India's 11 major ports handle 227 million tonnes of cargo. This is projected to jump to 400 million tonnes by 2000-01 and 650 million tonnes by 2005-06.
Around Rs. 25,000 crore will be required to meet the expected increase in demand. However, the plan allocation for ports was only Rs. 4,240 crore between 1990-97. The need for attracting private sector funds has long been felt but Government policies have not been conducive enough to bring this about.
India's ports need to become far more efficient. The average ship turnaround time for Indian ports is 7 days: for Singapore it is 6 to 8 hours. The number of containers handled per ship per hour ranges between 7 to 15 at Indian ports: the comparable figure for Colombo is 25, for Singapore 30.
Recommendations:
Set-up a clear policy making and regulatory structure
Clearly segregate the roles of the policy maker, the regulator and the operators.
Make the Tariff Authority for Major Ports (TAMP) the sole regulatory agency for all major ports.
Reorganise the Port Trusts
Corporatise major ports over the next 3 years.
- Employ professionals in top management positions.
- Increase operational autonomy of the major ports.
- Make management accountable for the achievement of targets.
- Link performance evaluation and compensation to these goals.
Convert all major ports to Landlord Ports by 2005.
- Concession port services to the private sector.
- Divest some equity in the port trusts
Make labour reforms mandatory at all major ports
Provide incentives for improving productivity.
Set targets for the retraining and redeployment of labour.
Raise productivity benchmarks and incentives simultaneously.
Allow private operators to employ labour on less restrictive terms.
Develop supporting infrastructure at new ports
(e) Pipelines
Background:
Demand for transporting petroleum products over long distances is expected to total 54.6 million tonnes in 2001-2002 and around 87.3 million tonnes in 2006-07.
Pipeline transportation is the most efficient way of moving petroleum products across long distances. In India, barely 25 percent of long distance movement of petroleum products is by pipelines. In contrast, in the developed countries almost all such movement is through pipelines.
Around Rs. 30,000 crore is expected to be invested over the next decade in setting up pipeline networks.
Recommendations
Allow unrestricted entry under a well-defined policy framework for the setting up and operation of pipelines.
Set up new pipelines for products under the common carrier principle
Establish an autonomous Pipeline Development and Regulatory Authority to assist developers and to regulate the operation of the network.
(f) Urban Water and Sewerage
Background:
India's urban population is ill-served by urban water supply utilities. One out of five Indians has no access to safe drinking water. The situation regarding sewerage is worse: the coverage of organised sewerage systems ranges from 75 per cent in class I cities to a pathetic 35 per cent in class IV towns. Moreover, most of the sewerage is not treated before being discharged.
Most urban water utilities are in a poor state. Their assets are rapidly deteriorating; they have high leakage rates, suffer widespread tampering with meters and theft of water and achieve poor billing and collection rates. This state of affairs is caused mainly by a non-market ambience in water supply, in which the total revenues generated from user charges do not even cover operations and maintenance costs.
State Governments have tried to tackle these problems by focusing on augmenting the supply of water but have met with little success due to paucity of funds. The Planning commission estimates sectoral investment needs of about Rs. 15,000 crore per annum over the next 10 years. In contrast, the Eighth Plan provided a meagre Rs. 5,700 crore for this purpose.
Some State Governments have attempted Build Operate and Transfer (BOT) agreements with the private sector. But the inefficiencies in distribution have made these schemes unviable.
Recommendations:
Shift the focus of reforms from expanding the water supply to improving distribution
Privatise the distribution of water and sanitation services through Concession Agreements
Ensure internal augmentation of water resources
Ensure water conservation through an appropriate tariff structure.
Formulate Policies to attract and support Private sector participation
Develop water policy guidelines
Set up an Independent Regulatory Authority
Rationalise tariffs
Bundle water assets
Privatise the Bangalore Water Supply and Sewerage Board as a Showcase Project
2. Fundamental Imperatives
This report assumes that two principles will need to be accepted if the infrastructure sector is to be made more viable. One: Infrastructure services must be offered in the most efficient, low-cost manner to best meet the needs of the community it serves. Two: the user must pay the actual charge of the infrastructure services based on a reasonable return on investment.
To realise these twin principles, the Group has identified six major themes which cut across the action required in the infrastructure sectors covered in this report.
(a) Separation of the Regulator from the Operator(b) Corporatisation of Existing Government Operating EntitiesA regulatory framework needs to be defined for each sector. While the Government should continue to undertake policy making, it should define and establish regulatory bodies distinct from infrastructure operators. This will ensure a level playing field between existing operators (often Government entities) and new entrants (often private enterprises).
The regulator’s powers would need to be clearly defined. The regulatory body would need to be responsible for ensuring that all operators abide by regulations laid down by the Government. Accordingly, it should be provided with the powers to enforce its recommendations.
For instance, TRAI's powers have not been clearly defined. Similarly, the NHAI appears to be playing the role of both regulator and implementor.
In some sectors, the regulatory authority would be involved in setting tariffs for monopolistic services. For instance, in the power sector, it would set the tariff for distribution.
Corporatising existing entities would encourage greater operating efficiencies and transparency, bring about the requisite answerability and provide greater autonomy and independence from Government departments. Successful examples are the corporatisation of the Delhi and Mumbai telecommunications departments into the Mahanagar Telephone Nigam Limited (MTNL). Corporatisation has ensured higher penetration, better customer service and improved quality of network. Going forward, DoT, the SEBs and major port trusts should be corporatised.
(c) Selective Privatisation of Corporatised Units
Privatisation is essential to increase efficiency in each sector and bring in the resources to expand/upgrade existing infrastructure. However, it is feasible only in sectors in which the independent unit is likely to be viable and direct Government control is not necessary.
For example, in the power sector, the distribution arms of the SEBs need to be privatised. This would improve efficiency by reducing T&D losses and improving revenue collection. This has already happened in Noida. Privatising the Delhi Vidyut Board is the only way to turn the utility around.
On the other hand, major ports should remain Government owned since they are strategic assets. However, specific services provided in these ports can be privatised. In the roads sector too, though the private sector should have a greater role, its involvement is likely to remain limited. Primary responsibility for expanding and improving the roads network would lie with the Government.
(d) Promotion of Competition in Sectors that are not Natural Monopolies
Competition ensures that organisations work in an efficient and cost effective manner. It also ensures that customers are getting the best bargain. Introducing competition in regulated monopoly markets has led to a fall in tariff in many sectors the world over (for example, the power tariff in Argentina).
Competition should be introduced in all sectors, except those that are natural monopolies, like power transmission. New entrants should be provided access to existing networks at a specified fee. For instance, in the power sector, competition can be introduced by allowing generation companies access to consumers by paying access charges to the distribution companies. Similarly, in telecommunications, competition can be promoted by allowing players access to DoT’s distribution network.
(e) Provision of Enabling Regulation
Enabling regulation is required in many areas, e.g., for ‘right of way’ to build four-lane roads and pipelines. All possible delays for this reason can be reduced by regulation giving the operating company the right to acquire land and allowing only compensation related disputes. Another area for regulation reform is environmental clearances. Here as well, cumbersome and time-consuming procedures are holding up projects.
(f) Tariffs Charged should Reflect the Cost of Providing the Service
In most infrastructure services, consumers should pay in full for the service provided. However, currently tariffs are usually well below the cost of providing the service. Some examples are the tariff paid by the residential/agricultural consumer in the power sector, the tariff for local calls in the telecom sector and the water charges in cities. This has made it impossible for utilities to maintain and upgrade their assets.
It is therefore critical to revise tariffs so that they reflect the cost of providing the service. However, given the Government’s compulsions, such as providing services to weaker sections of the population, it may want to provide subsidies in certain sectors. In such cases, these subsidies should be explicitly accounted for in its budget and the equivalent amount paid to the utility.
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