Penn Calendar Penn A-Z School of Arts and Sciences University of Pennsylvania

The Illusions of Infrastructure Policy

Partha Mukhopadhyay
March 22, 2009

Given the consensus that infrastructure is a key constraint for economic growth, one would expect infrastructure policy to receive a lot of attention. However, over the last five years, the record has little to show. Not only has this government continued some of the misplaced policies of its predecessor, almost all its interventions have contributed to worsening the situation.

Its early pronouncements emphasized the development of regulatory institutions. The National Common Minimum Programme stated that “regulatory institutions will be strengthened to ensure that competition is free and fair [and] will be run professionally.” Yet, the Competition Commission of India was finally constituted only last month, and will not function in this government’s tenure. The serving Secretary of Ministry of Road Transport and Highways is standing in for the chairperson of the Tariff Authority for Major Ports (TAMP). The Central Electricity Regulatory Commission (CERC) was without a chairperson for over a year and the functioning of the Petroleum and Natural Gas Regulatory Board (PNGRB) has been remarkably undistinguished. The Telecom Regulatory Authority of India (TRAI) and the government frequently disagree. Finally, while talk of a railway regulator has died quietly, the Airport Economic Regulatory Authority (AERA) Bill was enacted only late last year, with no regulator yet in place.

Added to this lackadaisical approach to regulation is a performance record in individual sectors that would be hilarious if it were not so serious. In power, policy ignored the fact that there is little money at the end of the line to pay for electricity. Fiscal buoyancy allowed states to provide direct support to distribution companies, against purportedly agricultural consumption.  Industrial growth boosted their revenues of distribution companies even as captive generation meant the loss of some incremental income. Now, as both industrial growth and states’ ability to subsidize slumps, its crunch time again. Regulators, who were to prevent this kind of retrogression, appear to have been subverted by the states.

Policy focused on private participation in Ultra Mega Power Projects (UMPPs), even as Powergrid retained its near-monopoly on transmission. It neglected fuel linkages: no coal, no gas and no hydroelectric sites. Many UMPPs were structured on imported coal, as were captive plants. Coal imports rose from 22 megatons (MT) in 2003-04 to 50 MT in 2007-08, representing about 20,000 megawatts (MW) of power. Pipeline networks to exploit encouraging gas finds were allowed to remain hostage to fraternal disputes within an uncertain regulatory framework. This delayed the growth of gas-fired plants near urban centers and its use in transportation.

Telecom, unlike energy, is seen as a success story, with urban teledensity at about 75 percent. However, while subscribers rose by 60 percent, revenues grew only by 30 percent. Does this reflect the addition of low-use subscribers as growth spreads deeper into urban India and farther into rural India, or distortions caused by spectrum allocation policy, which provides incentives to inflate subscriber numbers (i.e., “ghost” users) with valid but unused prepaid SIM cards?

Mobile telephones have transformed rural teledensity. After remaining below 2 percent for the first two years, it had jumped to 13 percent by last September. Concomitantly, though the surplus in the USO Fund – which was 100 billion rupees in 2006-07 – had grown, policy inaction neglected its extension to more services such as wireless broadband, which would also require a different policy for spectrum auctions.

Media has focused on disagreements over 3G spectrum auctions, but existing policy will, at best, replicate the pattern seen in voice (i.e., urban markets first and then the periphery). Longer times to recoup their 3G investment from urban areas will postpone the spread to rural India, delaying the considerable social and potential governance benefits of wireless broadband.

In ports, a decapitated regulator is just one symptom of the lack of policy attention.  Though there is significant potential for both intra-port and inter-port competition, new policy envisages an indexed tariff profile that will be fixed for the entire concession period, thereby ruling out price competition. It continues with revenue share bids, ignoring the clear evidence that reducing the government’s revenue extraction could both cut user fees and preserve the viability of capacity expansion.

In airports, which used the same revenue sharing model as ports, revenue shortfalls have led to contract renegotiations as inflated real estate valuations fell. Private operators, who were supposed to bear the risk of revenue changes, were allowed to shift the burden of their commercial mistakes to passengers by charging “airport development fees.” At 20 million users, 250 rupees per passenger generates an additional 5 billion rupees annually. The absence of a regulator helped facilitate this multi-billon bailout of badly structured modernization projects. Despite the concession agreement, the private sector, thus, actually did not bear the revenue risk.

It is this mirage of transferring revenue or traffic risk that has bogged down the highway sector from the heydays of the Golden Quadrilateral. The policy insistence on transferring traffic risk to the private bidder, when it has almost no influence over the traffic flow, turned them into high-risk ventures. Banks, which do not share in the upside, delay financial closure. Besides, as airport contracts demonstrate, this risk transfer is illusory. While the private sector will happily retain excess profits, it will rush to renegotiate and convince government to share their losses.

Thus far, the stasis at least prevented badly structured projects from being awarded. However, in a desperate last minute rush, the National Highways Authority of India (NHAI) has offered about sixty road projects – nearly half the number awarded in the entire five years – with bid closing dates in March and April. Proceeding with these will only result in more disputes and delay in the future.

After this litany of complaints, should this government not at least be commended for urban infrastructure? It initiated the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), which restarted investment in cities, but here too, most of the investment is in water supply, sewage, and drainage. This reinforces the old model, where infrastructure is built by state agencies interested in awarding construction contracts but maintenance and services provision is left to the city government.  This approach goes against JNNURM’s avowed goal of self-governing cities.

The way forward is well known. In energy, it lies in reforming the coal sector, making PNGRB a credible regulator, opening up transmission, and getting distribution reform back on track. Open access to distribution wires is but one aspect and this needs strong regulatory institutions. In Telecom, the Universal Services Obligation (USO) Fund Administrator needs independence, as the TRAI has suggested, and spectrum allocation policy needs change. An approach that divides spectrum into smaller geographical areas (e.g., districts rather than states) would limit scarcity premiums to the metros since spectrum is plentiful in other areas. Encouraging intra and inter-port competition by changing the concession agreement and improving road and rail connectivity and giving TAMP more powers is the way to go in ports. In highways, one needs to move to a concession agreement that either transfers traffic risk in a well structured manner (e.g. through least present value of revenue bids or not at all, as in BOT-Annuity). States using this method have seen success. An independent organization – call it a regulator, if you will – is needed to consolidate and expedite dispute resolution across the large number of road contracts. Last, in urban infrastructure, it means engaging with city level politicians; a necessary task that JNNURM appears to be trying to avoid or even worse, bypass.

In the final analysis, it may not be accurate to accuse this government of dropping the ball on infrastructure, for it never picked it up. It focused solely on generating user fee revenues and reducing fiscal costs to the detriment of providing cost-effective service to users. The next government, whether from the current political configuration or another, will have its work cut out redressing these deficiencies.

Partha Mukhopadhyay is a senior research fellow at the Centre for Policy Research, New Delhi. He has a Ph.D. in Economics from New York University and an M.A. and M.Phil from the Delhi School of Economics. Email: pmukhopadhyay@gmail.com

 


India in Transition (IiT) is published by the Center for the Advanced Study of India (CASI) of the University of Pennsylvania. All viewpoints, positions, and conclusions expressed in IiT are solely those of the author(s) and not specifically those of CASI.

© 2009 Center for the Advanced Study of India and the Trustees of the University of Pennsylvania. All rights reserved.