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The Infrastructure Sector in India, 20001

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3
HIGHLIGHTS

THE INFRASTRUCTURE SECTOR IN INDIA, 20001

3.1 A REVIEW OF SECTORS


Anupam B. Rastogi
In the year 2001, infrastructure sector grew less than expected. There was much discussion about the failures and half achievements, but there were some successes, too. Bill seeks to replace the Indian Electricity Act 1910, the Electricity (Supply) Act 1948 and the Electricity Regulatory Commission Act 1998. The governments own Draft Bill 2001 is slated to be introduced soon in Parliament. The objective is to bring about comprehensive reforms in the power sector.

The Deepak Parekh Committee Report on Escrow Cover (Government of Karnataka, 2000) unequivocally raised the question of unsustainability of escrow accounts and brought out the importance of privatization of distribution in power sector. One could hardly disagree with the prognosis of Jack Welch that India cannot be a software superpower if she does not produce enough power. Everyone thinks the internet shows up here, on the computer, and it doesnt use power. Its a wonderful new industry. But the fact is every basis bit of information uses electronics. And if you dont have power, nothing happen. (Singhal et al. 2000). The Enron saga came to full boil and has spurred many tumultuous changes in the sector which will bear fruit in the years to come. Villages continue to suffer incessant power cuts. The failure of the northern grid which plunged a large part of northern India into darkness for a couple of days, brought home the importance of the transmission business.

Whither Convergence
The only sector that seems to be attracting private capital is telecommunications, where large projects are being implemented. However, there are problems here, as well. The government continues to drag its feet on the issue of convergence. It has taken too long to draft the convergence bill and its passage. The continuous changes in technology further challenge the boundaries of many departments. This hindered the provision of a legal framework for the development of the telecom sector in India. Industry, however, is going ahead with consolidation through mergers and acquisitions. It is entirely possible that basic operators will formally join hands with cellular operators to fight the government!

NHDP Goes Ahead


The transportation sector has a few successes in its bag and a few failures too. Ports witnessed the beginnings of corporatization and serious efforts at privatization of portrelated services. In Roads, the National Highways Development Plan (NHDP) is progressing on schedule and many states are spending fair sums of money to improve their state highways and district roads. But the battle against short-termism

Draft Bill
Undoubtedly, the precarious financial health of the state electricity boards (SEBs) can hardly be conducive for any investment. Promoters and investors have shied away from the sector. Policy risks continue to be high. The Electricity Bill drafted by the NCAER (National Council of Applied Economic Research) had gone through eight drafts. The

38 India Infrastructure Report 2002 needs to continue. The focus is on construction rather than providing good road service to people on a sustainable basis. Cratered surfaces of newly refurbished roads and highways are expensive witnesses of this folly. The government has further emphatically reiterated that road building in rural India would be a fully sponsored by the Central government. However, there are no visible developments on the ground. Cross nodal connectivity is the new mantra, but other than the Planning Commissions Draft Integrated Transport Policy (GOI, 2000b), there is no big blue print to make it happen. Much has occurred in the approach of most state governments. The competition to attract private capital to provide all types of economic infrastructure is discernible. However, the bureaucracy in many ways continues to be suspicious of the profit motive and finds it difficult to accept that there are risks involved in private provision of services, which need to priced.

Investments in Infrastructure
Reflecting the general slowdown in the economy, the infrastructure index of the Ministry of Industry and Commerce registered a dismal one per cent growth during April-June 2001, compared to 9.3 per cent during the corresponding period of the previous year. The growth rate of infrastructure-related industrieselectricity, coal, steel, crude petroleum, petroleum refinery products, and cement accounting for a weight of 26.68 per cent in the index of industrial production (IIP), was much lower at 5.3 per cent during 20011 compared to 9.1 per cent in the previous year. The slowdown was particularly pronounced for electricity, steel and cement, reflecting basically the paucity of investment demand. Obviously the severe recession in the industrial sector has had its effect on the infrastructure sector. The cumulative industrial growth for July 2000 to June 2001 was also much lower at 1.5 per cent against 5.9 per cent in the previous period.

Railways and NHAI


The much awaited Rakesh Mohan Committee Report on Railways (GOI, 2001d) was submitted to the Railway Minister. The major reorganization of the Railways suggested in the report is being studied by an internal committee of the Railways! Severely strapped for resources, the Railways have started courting state governments and private sector organizations to get resources for developing interconnectivity with ports and other bulk cargo facilities. The NHAI (National Highways Authority of India) too has a ground plan ready to connect major ports with the Golden Quadrilateral.

Some Southern Cities Move Ahead


Urban infrastructure remained in doldrums. But there is much talk about providing better servicesdrinking water, sewerage system, district roadsin cities. Finances of urban local bodies have been stretched to their limits and user charges are so low that they cannot even support operation and maintenance costs of these services. However, some metropolitan cities such as Bangalore, Chennai and Hyderabad, have taken certain steps in the right direction. Some states such as Haryana and Uttar Pradesh have been encouraging the private sector in providing civic services in new cities such as Gurgaon and the NOIDA area. Rajasthan has introduced a comprehensive bill which aims to promote private-public partnership in providing many civic amenities in all its cities.

Sanctions and Disbursement


The sluggishness in investment demand from the private sector is reflected in the performance of domestic financial institutions (DFIs) in a major way. The total sanctions of the three top ranking DFIsIDBI, ICICI and IDFC grew only at a rate of 21 per cent during 20001 as against a robust 44 per cent last year. More disturbingly, the total disbursements of the three DFIs had slided to 15 per cent growth compared to 42 per cent growth during the previous year. Power and Telecom continued to rely on traditional project financing methods. The Transport sector witnessed new

Table 3.1.1 Sanctions and Disbursement of Major DFIs (in Rs. crore) Disbursements 19989 IDFC ICICI IDBI Total Percentage growth over previous year 374 15807 14470 30651 19992000 642 25092 17059 43537 42 20001 762 31965 17500 50225 15 19989 1682 24717 23745 50144 Sanctions 19992000 1866 43523 26966 72349 44 20001 2467 56092 28711 87270 21

The Infrastructure Sector in India, 20001 initiatives. Work on the Golden Quadrilateral is almost on schedule. Success achieved in execution of the Moradabadby-pass using an SPV (special purpose vehicle) has emboldened NHAI to try some more projects using the same method. It was rail-port interconnectivity that saw long-term concession awarded to the private sector by the Railways. The Railways would construct the fixed infrastructure and maintain and operate it, the private sector would assure a certain fixed amount of traffic and raise funds to build the facilities. The urban infrastructure witnessed the use of many forms of financial initiatives. Despite all the jugglery, if the urban bodies cannot pay, these initiatives are likely to remain non-starters. Fiscal Incentives for Infrastructure: The Union Budget of 20012 proposed certain measures to provide a boost to infrastructure investments and industrial growth. But the decision-making process and governance of the country came to a standstill because of the series of unexpected political developments. PMs Task Force on Infrastructure: This Committee after designing detailed framework and implementation of the NHDP and the North-South and East-West corridors considered issues related to ports, aviation and integrated transport policy. PMs Economic Advisory Council: It was probably the first time that the report of the Council was forthright in detailing all that ails in the sector. It pointed out that inadequate user charges (and the states inability to compensate the private sector), and regulatory uncertainty, are the two main causes for the poor response of the private sectors participation in the sector. There are enormous risks in the current scenario which have held back the private sector from enthusiastic participation. The main recommendations of the Council are delineated in Box 3.1.1.

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operation and maintenance of infrastructure projects. The basic reason for this is that contracts can be specified, and the profit motive used to create incentives for its delivery. The government is preparing a comprehensive legislation for reducing administrative and procedural delays, identifying generic project risks, detailing various incentives, detailing the project delivery process and procedures for reconciliation of disputes.

Andhra Pradesh
The state enacted the Infrastructure Development Enabling Act 2001 (Draft Bill) to provide for the rapid development of physical and social infrastructure in the state and to attract private sector participation. The bill provides comprehensive legislation. It also lays down procedures for reconciliation of disputes and provides for other ancillary and incidental matters with a view to present bankable projects to the private sector and improve the level of infrastructure in the state.

Rajasthan
To attract private investment in urban infrastructure, Rajasthan is introducing freer, market-friendly policies and legislations. Policy changes and legislative amendments include the New Rajasthan Town and Country Planning Act, nearly three hundred amendments to the Rajasthan Municipal Act 1959, abolition of the Urban Land Ceiling and Regulation Act, and amendments to the Rajasthan Urban Improvement Act 1959, Jaipur Development Act 1982 and Urban Land Allotment Rules 1974. Rajasthan is the third state, after Haryana and Uttar Pradesh to invite private sector to liberally invest in joint sector townships on BOT basis. While the latter offered townships (such as Gurgaon, Greater NOIDA) on standalone basis, Rajasthan is offering majority of its urban centres to prospective developers.

INITIATIVES
West Bengal

AT THE

STATE LEVEL

POWER

AND

ENERGY

The West Bengal government is in the process of framing a policy for allowing private participation in infrastructure like roads, flyovers and water distribution. The policy is going to be introduced through a government resolution rather than through legislationa weak initiative since the government of the day can change the rule of the game later. Private parties will be allowed to exploit adjoining lands for commercial exploitation. Open bidding is to be the basis of private participation.

Karnataka
The government has recognized the importance of private sector participation in the designing, financing, construction,

True reform is awaited in the power sector. The single buyer model of private generation of electricity could never have taken off with the SEBs in near bankrupt conditions. The process was started with the Deepak Parekh Committee Report which questioned the suitability of escrow account of SEB receivable and escrow capacity of KSEB (Karnataka State Electricity Board). The Committee also suggested that funding should be done on the strength and viability of the project itself. Important suggestions were made in the expert group reports (GOI, 2001a and 2001b), the energy review committee reports (GOM, 2001a and 2001b) popularly known as the Godbole Committee Report. Finally, the Electricity Act 2001 is ready. If passed by Parliament and implemented, it will be

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Box 3.1.1 Infrastructure Sector in the Report of the PMs Economic Advisory Council The councils report on economy laid emphasis on investments in economic infrastructure if India is to achieve a growth target of 8 per cent during the Tenth Five Year Plan. Private sector investments were muted because the pre-conditions for successful large scale entry of the private sector were not yet met. Two main reasons provided in the report were inadequate user charges and regulatory uncertainty. While infrastructure remains an exclusive public sector monopoly, the rationalization of user charges in infrastructure is abso lutely vital. A regulatory regime that is seen to be fair to consumers and also sensitive to the legitimate needs of investors, is abs olutely essential.

POWER
The flaw in the policy with regard to electricity was the failure to recognize that the root of the problem lies in the financial unviability of the state electricity boards. This has made independent power projects (IPPs) look for temporary solutions such as escrow arrangements and central government guarantees which simply do not address the core problem. It suggested that the huge transmission and distribution losses could be brought down through privatization of distribution as the privatized areas would help achieve better efficiency from the distribution system. The central government should play a pivotal role in the reform of SEBs (State Electricity Boards) as large parts of these dues are to the central government organizations, such as NTPC, Coal India, Railways, and NHPC. In view of the rapid convergence of telecom, IT and media, a new comprehensive statute, which creates the framework of single license for multiple services, needs to replace the Indian Telegraph Act of 1885. The government must levy fees to meet administration and regulatory costs, along with universal service obligation charges, through revenue sharing, and not as an avenue to raise resources for the government. Increasing competition within the sector will ensure benefits of reduction in license fees is passed on to consumers. The only area where government should collect rent is in the allocation of spectrum, which is a scarce resource.

ROADS
The council suggested that the private sector be encouraged to participate in road projects through the BOT (build, operate, transfer)/ Annuity system as EPC (engineering, procurement and construction), and O&M (operations and maintenance) contracts be merged and given to the same contractor who would be responsible for construction and maintenance of the road during the concession period. According to the committee, private sector made little progress for so long because the government found it more attractive to raise money cheaply through riskless gilt-edged debt, rather than paying the private sectors capital costs with their risk-premium.

PORTS
The existing port trusts should be corporatized and turned into landlord ports that would then invite different operators, both public and private, to invest in cargo handling and port infrastructure services. The ports as such should concentrate on the development of common user general cargo facilities. Rather than fresh ports it suggested existing ports be optimally utilized through efficiency enhancing investments. Tariff fixing is no longer necessary as intra-port and inter-port competition will ensure competitive pricing of services.

RAILWAYS
The council strongly recommended depoliticization of Railways, rationalization of user charges and corporatization of production units. Railways have a key role in initiating development of the key inter- and trans-modal facilities.

CIVIL AVIATION
The council recommended leasing the major airports (Delhi, Mumbai, Chennai and Calcutta), and inviting private sector management of airports. An independent regulatory framework for ensuring economic regulation in the sector was suggested as there are many operators. The inland air travel tax and foreign travel tax should be converted into a common civil aviation cess to ensure sufficient flow of funds to develop civil aviation facilities in other parts of the country.

the harbinger of a new market structure for the power sector in the country (see a review of the Draft Bill 2001 in Section 10.3).

Little progress has been made in bringing new investment to the power sector. During the past year no major IPP has achieved financial closure. The main reason for this is the

The Infrastructure Sector in India, 20001 non-resolution of a bankable security package for lenders; finalization of the escrow agreement and its operationalization1. The power ministry has firmed up an action plan to double the electricity generation capacity in the country to over 2 lakh MW by the end of the Eleventh Five Year Plan (200812). Projects aggregating 1,07,000 MW generation capacity had been identified by the ministry for completion during the Tenth and the Eleventh Five Year Plans. While 43,000 MW additional power generation capacity has been planned for the Tenth Plan, 64,000 MW target has been fixed for the Eleventh Plan. The institutional and policy changes to realize even half of these are challenging. We are doubtful, about the achievement of these targets, but need not presume failure that would be inevitable. Under the action plan, the power ministry has envisaged large-sized thermal units such as 3 660 MW Sipat (NTPC) and 6 660 Hirma (IPP) to reap economies of scale. The Plan would target 35,000 MW additional generation capacity in the hydel sector as against the existing capacity of 25,000 MW! The likely problems in land acquisition and in management of environmental problems, and rehabilitation and resettlement, do not find adequate mention. Under the Tenth Five Year Plan, the Power Ministry hopes to operationalize the mega power policy with a set of fiscal and other incentives (such as customs duty exemption and ten year tax holiday) extended to large-sized inter-state projects of over 1,000 MW for thermal, and 750 MW for hydro. The ministry hopes that these steps would ensure offtake of power from identified mega projects to beneficiary states and bulk consumers on the basis of long-term power purchase agreements. It has proposed a five-point strategy to convert lossmaking SEBs into viable profit-making concerns. The strategy was chalked out after taking into account the recommendations of the Ahluwalia Committee (GOI 2001b), established to suggest remedial measures on sick power utilities. The strategy includes working out statespecific revival packages as part of the SEBs restructuring exercise, preparation of district-wise distribution plan across the country, converting all distribution feeders into proper profit-centres, ensuring metering of all consumer connections, and bringing the accounting procedures of all SEBs in line with the international standards for greater transparency2.
1 [To continue viewing the problems of the power sector as arising out of escrow is itself a fallacy. The source of disease is thereby not addressed (see Chapter 2).] 2 These are really operational decisions of any electricity company. That at a policy level the government has to lay down 100 per cent metering is indicative of the deepseated problems to SEBs, wherein, even operational decisions have to be taken by the government.

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Settlement of SEB Dues


The chief ministers conference, held on 3 March 2001 under the chairmanship of the Prime Minister deliberated on the Power sector. They agreed to meet the challenge of restructuring head-on. The Union Minister of Power constituted an expert group under the chairmanship of Montek Singh Ahluwalia to recommend measures for onetime settlement of outstanding dues of SEBs to the central public sector undertaking (CPSUs) and the dues from CPSUs to SEBs. The group was also entrusted to suggest a strategy for capital restructuring of SEBs to make them operationally viable. The expert groups recommendation includes a package of incentives and disincentives linked to commercial discipline and initiation of a process of reforms. The group emphasized that the recommendations have to be accepted in toto. For the states participating in the scheme, the group recommended 50 percent waiver of the surcharge/interest on delayed payments. The rest of the dues, including the full principal payment amounting to Rs 33,600 crore was to be securitized through tax-free bonds bearing an interest rate of 8.5 per cent and issued by the respective state governments. The group recommended that if a state defaults in current payments for power/fuel, there should be a graded reduction in the supply of power from central power stations and coal supplies to the state. Further, SEBs should accept reform-based performance milestones such as setting up of SERCs (State Electricity Regulatory Commissions), metering of distribution feeders and improvement in revenue realization. Several states including MP, Orissa and West Bengal have objected to the severe penalties proposed by the panel against defaults. The government has accepted the first part of the report.

SEB Restructuring
In the second part of the report (GOI, 2001b), the group has proposed a comprehensive restructuring of the sector to make it viable. The causes of failures are in line with other reports. The committee has suggested that market borrowings and private investments should be tapped to finance expansion and modernization plans in the sector. It has also recommended waiver of loans provided by the states to the SEBs and central assistance for bridging the revenue gap, meeting the costs of the work force rationalization and adjustment costs for shifting to open access. The group has recommended that the adjustment costs of the transition would have to be funded out of the budgetary support. Further, it has recommended central assistance equal to 5 per cent of the total sale revenue of an SEB in 20001, subject to a ceiling of Rs 100 crore per year for allowing open access of electricity. It has also suggested that the

42 India Infrastructure Report 2002 assistance should be provided to the SEB or its successor entities for a period of three years after open access is guaranteed. The group has recommended that during the first year of direct sale by any private generator to bulk consumers, the SEB or the transmission company should receive central assistance of 50 paise per unit of power wheeled, subject to a ceiling of Rs 250 crore. The panel has recommended that this assistance should be reduced to 25 paise per unit during the second and third years, the ceiling remaining unchanged. It has estimated that the central assistance on this count would not exceed Rs 10,000 crore during the Tenth Plan. The second part of the report has not yet been accepted by the government. collect charges to entities as close as possible to each user group possible. It has suggested trifurcation of the MSEB. There is to be a set of independent generation companies formed by clubbing the existing facilities into sets of six. Some are to be open to privatization, others not. Likewise, there will be a set of independent distribution companies which may be offered for private ownership. In keeping with the natural monopoly characteristics of this activity, the transmission company will continue to be under a single operator. The company will be kept under public ownership, with wheeling charges to be determined by the states power regulator. Over time, it may be handed over to a private operator, but private ownership of the transmission company is not envisaged by the report. The committee has rationalized that the overriding aim of power sector reforms is getting people to pay for the power they use at the rates which are set for that particular category. If the provision of power at below cost to specific categories of users, for example farmers, is deemed socially desirable, then it is incumbent on the government to reimburse the distribution company the difference between the price charged and the cost incurred. So far, this subsidization has been done by underwriting the losses of the SEBs, but under the reform blueprint, it now needs to be done by an overt transfer from the government to the private distributor who will then buy power at the regulated rate from the generators5. For the system as a whole to be viable, the distributor needs to know precisely who is to be thus favoured and how much this group collectively consumes. Without an accurate estimate of consumption, rates cannot be set with any degree of precision. Distribution companies making plans based on erroneous estimates of paid-for consumption run grave risks of financial nonviability. Interestingly, the committee has recommended that the proceeds of privatization be deposited in the Power Sector Reform Fund, a state level fund. According to the report, the essential feature of the model (defined as the Maharashtra model) is to avoid the problems of persisting with government ownership, mixed zones, the single buyer approach and an annual regulatory process, while at the same time phasing in the transition to a full-fledged market system, as envisaged in the proposed Electricity Bill, in an orderly manner. (GOM 2001b, p. 88)

The Electricity Bill 20013


The salient features of the bill are: No techno-economic clearance for generating stations and no state licencing Non-discriminatory and open access to the transmission system Major role for the regulators, SERCs and CERC (Central Electricity Regulatory Commission) in licencing, tariff, grid rules, and access rules Provides for power trading, and the eventual creation of a spot market Graduated reduction of subsidies; and Mandate for the regulator to cover tariff in all segments.

DPC Report4
The Energy Review Committee headed by Madhav Godbole found a complete failure of governance of various governments at the state as well as the central government level in their dealings with DPC (GOM, 2001a). In the report (part I) the committee found that the Enron power purchase agreement (PPA) had built in excessive payments to Enron from the Maharashtra State Electricity Board (MSEB) as a result of undue burden of the regasification facility, high recovery charges of shipping and harbour and O&M, and inflated claims of fuel consumption. Based on these findings the committee recommended a reduction in tariff. The committee drew up a blueprint for restructuring the Maharashtra State Electricity Board (MSEB). The committee emphasized two elements essential to the success of the reforms: a reliable estimate of how much power is consumed by each user group; and an organizational structure, which devolves the responsibility to measure consumption and
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POWER SECTOR REFORMS

AND

STATES

Reforms at the state level have been moving slowly. Administrative changes have not been easy to bring about.
Even this would not work, since the incentives to over report consumption by the subsidized sector would remain. Only direct subsidization would work. See Chapter 1.
5

See a critical review of the Bill in Section 9.4.

4 Section 6.6 draws the governance implications from the findings

of the Godbole Committee Report.

The Infrastructure Sector in India, 20001


Table 3.1.2 Power Sector Reforms: A Score Card for Statesa Parameter SEB Restructuring Constitution of SERC Commercialization of Distribution MoU with Central Government *

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Andhra Pradesh Assam Bihar Chattisgarh Delhi Goa Gujarat Haryana Himachal Pradesh J&K Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh Uttaranchal West Bengal North East States
a

Strategy being finalized Committedproposal to be done during 2001 Reform law approved Strategy being by GOI finalized Strategy being finalized * To be completed by Dec 2002 The state has proposed to reorganize SEB into three profit centres Reform Law passed in the Assembly Notified; yet to be constituted Committed Strategy being finalized Willing to constitute joint Electricity Regulatory Commission

These constitute reforms in a formal sense. In content restructuring is not uniform across SEBs. Gujarat has trifurcated on paper, the GEB, purely to meet certain targets set by the ADB (Asian Development Bank) while the sector continues as before. It is hoped that the Reform Law would make a difference. Source: CII (2001), Press Release.

Some state regulatory authorities have also passed tariff orders but restructuring and corporatization of the SEBs is proving difficult. Internal changes due to corporatization has been even more difficult. Table 3.1.2 succinctly captures the progress of reforms in various states.

Karnataka
The expansion of the generation capacity at the Raichur Thermal Power Station (RTPS, Unit 7) by the Karnataka Power Corporation Limited (KPCL) became the first project where financial closure is subject to reforms. The government of Karnataka, KPCL, Karnataka Power Transmission Corporation Limited (KPTCL) and IDFC signed a multipartite agreement which specifies milestones for reforms

to be met by the state government and KPTCL such as privatization of distribution within a specified period, commitment to financial discipline and creation of a dedicated power fund. Encouraged by this development, the Union Finance Minister has suggested a conditional lending programme for IPPs by financial institutions, in line with the multipartite agreement in Karnataka, as an alternative to escrow based lending.

Orissa
Power sector reforms initiated in Orissa six years ago have come to a halt (a detailed analysis is given in Section 9.3). AES Corporation, the US power major has a 49 per cent stake in the Orissa Power Generation Company (OPGC)

44 India Infrastructure Report 2002 and a 51 per cent stake in Central Electricity Supply Company (CESCO), distribution company for central Orissa. The AES has initiated arbitration proceedings against GRIDCO for non-payment of dues and has threatened to pull out of CESCO if tariffs are not increased. CESCO is losing several crores every month in high costs and low tariffs. The power corporation is in red after six years of operation. The public, too, is not appreciative of slow and halting manner of the reforms process. From being a model in power sector reforms, Orissas experience is now a lesson on how not to go about privatizing the power sector. has received bids for divesting 51 per cent stake from private companies and final financial bids are to be called soon. Under the scheme, the balance 49 per cent would be held by the government but the strategic partner would be given complete freedom in running the distribution companies.

Tamil Nadu
US based power major CMS Energy has threatened to pull out of the US $ 1.4 billion Ennore power project if the Union government does not agree to provide a counter guarantee on payments. The state government has strongly advised the Centre not to agree to a counter guarantee. The corporation has demanded that the government modify the payment security mechanisms for the Ennore project. CMS Energy holds 26 per cent of the equity in Dakshin Bharat Energy Consortium (DBEC), which is executing the 1,850 MW project. The central government is working to provide a type of counter guarantee under a new terminology called termination guarantee. Serious doubts are being raised as to whether the multi-million dollar integrated liquefied natural gas (LNG) import terminal-cum-power project proposed in Tamil Nadu will take off. The DBEC was willing to sell the entire power generated from the Ennore project to the PTC. Tamil Nadu Electricity Board (TNEB), however, decided that it will buy only 750 MW of power on long-term basis. The MoU stipulates this and states that PTC will buy the power generated from Ennore as per the PPA terms agreed to between PTC and the developer, namely, DBEC and in consultation between TNEB and other beneficiary states. The company has drawn the Prime Ministers attention to the signing of the Joint Development Agreement on 14 September 2000 in Washington, giving the Ennore project special status by both the American and Indian governments. The agreement sought completion of the Payment Security Mechanism (PSM) concept by 15 December and full PSM documentation by 31 March 2000. The government is targeting to generate 10 per cent of the power requirement from renewable energy sources and plans to set up additional generation capacity of 10,000 MW and a target for electrifying 18,000 remote unelectrified villages by 2012. Andhra Pradesh leads in power generation from bio-mass such as bagasse, rice husk and agricultural waste. Fifty plants of 6 MW range each had been sanctioned, of which five had been commissioned and 25 had been sanctioned loans. All the plants are expected to be fully operational in two years, accounting for a total of 300 MW of additional power. Private entrepreneurs now produce wind electricity in nine states. Together, they have a total installed capacity of over 1100 MW Karnataka has 40 MW, Andhra Pradesh

Andhra Pradesh
Andhra Pradesh (AP) has provided major boost to the power sector reforms. The Rural Electrification Corporation (REC) has almost doubled the disbursement amount to the state to undertake rural electrification programmes last year. Under its lending programme for AP, the corporation has decided to disburse Rs 800 crore to the Transmission Corporation of Andhra Pradesh (APTransco) in 2001, which is substantially higher than Rs 420 crore during the previous year.

Rajasthan
The Rajasthan government has decided to spend Rs 2,000 crore on power sector reforms in the next two years in an attempt to make the energy sector self-reliant by 2005. Jhunjhunu, Jodhpur, Alwar and Jalore districts of the state have been identified under the Accelerated Power Development Project of the central government. Rajasthan, facing power shortage, has decided to work more on non-conventional resources like solar and wind energy. The first wind power project has been set up by an IPP in the border district of Jaisalmer. The state has already achieved a record by setting up 9,900 domestic light connections based on solar energy. According to the Renewable Energy Development Authority (REDA), three demonstration wind power stations are already functioning in Jaisalmer, Phalodi and Devgarh. All the three wind units have generated more than 7 million units of electricity so far.

Jharkhand
Recognizing the need to open up the power sector to private investment, Jharkhand has decided to privatize electricity supply in the state. Power supply as well as revenue collection will be first privatized in the state capital, Ranchi, on an experimental basis. If successful, it will be implemented in Jamshedpur, Bokaro, Dhanbad and other towns.

Delhi
The Delhi Vidyut Board (DVB) has invited financial bids for privatization of three distribution companies. The Board

The Infrastructure Sector in India, 20001 over 90 MW and Tamil Nadu over 800 MW. During the 20001 fiscal year, the 40 MW installed capacity in the state produced 71.1 MW electricity, 8 per cent of the 882.6 million units from renewables sources (solar, bi-product steam from sugar companies, biomass and small hydel).

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OTHER SECTORS
Upstream Hydrocarbon Regulatory Authority
The Union government has almost reached a consensus to constitute a separate regulatory authority for the upstream hydrocarbon sector. This has become all the more important in view of the recent round of bidding under the new exploration licencing policy. The upstream hydrocarbon regulatory authority (UHRA) would be set up once the operational framework is finalized. A bill to this effect is expected to be introduced in Parliament. It is mooted that UHRA should not be subservient to the government in its daily functioning and that government interference should be minimal, along the same lines as the Telecom Regulatory Authority of India (TRAI). UHRA should have full operational and functional autonomy within a framework of set rules and regulations laid down by the government. Public overseeing of the institution could be ensured through annual review by the government and auditing by CAG (Comptroller and Auditor General of India).

Roads
Besides telecom, construction activity of arterial roads has been the most visible sign of the new infrastructure. The road widening (four lane) projects on the Golden Quadrilateral are being expeditiously implemented by NHAI with funds being raised from a variety of sourcesbudgetary resources, multi lateral borrowings (World Bank/ADB), market borrowings by NHAI and private participation. The first major BOT project on national highways using the annuity approach, four laning of the Panagarh Palsit stretch on NH 2 received better response. Six other four laning projects have been offered to the private sector on the annuity format. Several applicants have qualified to bid for these projects. IDFC has been involved in this initiative as an advisor to NHAI from the onset, defining the concept, finalization of the evaluation parameters for qualification and final selection, procuring documentation, managing the procurement process, finalizing the BOT concession structure and concession agreement, and negotiating with bidders. The first major BOT project on National Highways using direct tolling approachsix laning of the Jaipur Kisangarh stretch on NH 8 received poor response with

only one bid. Moradabad bypass, implemented by a whollyowned subsidiary of NHAI, started functioning in 2001. The recently commissioned first phase of the Moradabad bypass has received enthusiastic response from users, with toll collections over Rs 1 lakh per day in less than a month since the road was opened to the public. A few more BOT projects which became operational during the year were the Delhi-NOIDA toll bridge, Wainganga bridge project near Nagpur, and Baroda-Halol four laning project. Several state governments, such as Maharashtra, Karnataka, Kerala and Punjab, are pursuing initiatives for road development, some of them through dedicated road development or infrastructure development corporations. Motorists will now have to pay for driving on newlyupgraded Indian highways. The government plans to toll the entire NHDP in perpetuity. This means that BOT roads are likely to be tolled even after the end of the concession period. The government has fixed a rate of 40 paise per kilometer for cars and an upper limit of Rs 1.40 for heavy vehicles. NHAI is to finalize the toll for different stretches, including bridges. It is estimated that NHAI will mop up annual revenues worth Rs 20 lakh per km through tolling of every completed kilometre of highway along the Golden Quadrilateral linking the four metros of Delhi, Mumbai, Kolkata and Chennai. Taking into account a construction cost of Rs 4 crore per km, this works out to an average recovery of about 5 per cent of the total funds invested for developing the Golden Quadrilateral. The SPV route appears to be the new buzzword fuelling Indias great highway dream. This new financing route is fast catching the fancy of the NHAI. The authority is considering the option of taking up projects through the SPV route on the Ahmedabad-Vadodara Expressway and plans to connect 12 ports including Kandla, Cochin, Paradip, Tuticorin, Haldia, JNPT, Vizag and Marmugao. In future SPV projects, NHAI proposes to invest 30 per cent of the equity of the project with the EPC contractor contributing a minor 5 10 per cent so that there is a sense of ownership towards the project. However, the success of the SPV route, would depend upon identification of commercially viable projects. NHAI hopes to take up projects worth Rs 2,500 crore via the SPV route.

The Central Road Fund


It is hoped that the Central Road Fund will ensure funds raised through the cess will be used for road development. The act, however, does not provide for complete ring fencing of the cess fund. Establishment of a road board to manage funds professionally is not mandatory in the act. The government has lost the opportunity to ensure that users get the quality of roads they pay for. A critical assessment of the act is given in Box 3.1.2.

46 India Infrastructure Report 2002


Box 3.1.2 The Central Road Fund The Central Road Fund Act 2000 gives statutory power to establish a Central Road Fund for development and maintenance of national highways and state roads, development of rural roads, construction of under- or over-head railway bridges, erection of safety works at unmanned rail-road crossings and other prescribed. The cess on petrol and high-speed diesel (HSD) will be levied and collected at the rate of rupee one per litre. The proceeds of the cess shall first be credited to the Consolidated Fund of India; the central government may credit proceeds to the fund e xtend grants and loans. Any fund provided by the central government for the development and maintenance of state roads is also to be credited to the fund. The balance to the credit of the fund is not to lapse at the end of the financial year. The fund is to be administered by the central government and is to allocate and disburse money to concerned departments. Projects of state roads, approved by the central government using set criteria to be financed out of the share for state roads shall be monitored by the central government. Fifty per cent of the cess on HSD is to be allocated for the development of rural roadsand the balance as follows: 7.5 per cent shall go for the development and maintenance of national highways; 12.5 per cent for the construction of under- or over-head railway bridges; 27 per cent on development and maintenance of state roads; and 3 per cent on central government approved speci fic state road projects. The salient features of the Act are: from Cess collected from users shall be spent on development and maintenance of roads. All the central government funds earmarked for road sector shall be channelized through the fund. State road projects financed the fund shall follow established criteria. Regulation and control of motor vehicles throughout the country come within the jurisdiction of the central government. There is no provision for a cess drawback for off-road usage of HSD which will keep the administration of the fund simple. Money from the fund cannot be allocated for the maintenance of an expressway.
ASSESSMENT OF THE

CRITICAL

ACT

The administration of the fund remains with the central government and there is no statutory provision for an oversight board having user groups representation. The proceeds of the cess are not completely ring-fenced; the central government is required to credit the proceeds to the fund from time to time after deducting the expenses of collection. The fund has no budget constraint as the government may credit money by way of grants or loans. The government has powers to disburse funds to any prescribed project. The fund remains under political control except that proportion of money to be spent on development and maintenance of national highways is fixed. The act provides a weak legal basis to the fund but it will have published financial rules and regulations. The fund shall not be subject to independent, technical and financial audits.

Annuity vs EPC
In public-private partnership for infrastructure financing, received wisdom is that the contract should be such that risk ought to be borne by the party that is best able to mitigate it. Annuity is one such instrument. Soon after NHAI received the bid for the first annuity project, it received extremely sharp criticism from financial circles and analysts. Criticism of the popular press was based on prices quoted by the GaumudaWCT combine of Malaysia for Rs 69.8 crore (half yearly payments) for the PanagarhPalsit pilot project. This was for a stretch of only 65 kms. They compared the annuity to the cost of four-laning a two lane highway at approximately Rs 4 crore per kilometer. However, one needs to consider the price to be paid for implementing a pilot project. It was expected that the prices would be lower once private entrepreneurs gain confidence in the concept. The annuity method is

considered the most risk-free variant of BOT highway projects with private sector participation. However, analysts objected to annuity concept on the following grounds (Haldia, 2000): Annuity payments essentially entail budgetary funding on a deferred basis. Tight budget constraint, implies that only a fraction of the development programme can be sustained. Price at which a private company can raise funds from the market will be higher than that of the government. Dichotomy arises when user pays toll only on some roads. Political justification for a toll road at one place and annuity payment at another place will be difficult to sustain. To support annuity payments by the state government for state roads, it is not easy to impose another cess to support a state road fund.

The Infrastructure Sector in India, 20001 The developer demands a traffic guarantee or even a revenue guarantee which goes against the philosophy of private enterprise6. The annuity programme is a logical way of getting better management control into the public sector. The government still manages virtually the entire road sector and has the option to collect toll on these roads7. Subsequent bids for annuity based projects have countered criticism from the popular press. The annuity prices quoted by the Hyderabad based G. Mallikarjun Rao (GMR) group for three projects has again suggested that this is a viable alternative. The GMR group has quoted Rs 29.48 crore for the Tuni-Ankapalle project, Rs 37.59 crore for the Dharwad-Belgaum project and Rs 41.85 crore for the Tindivanam-Tambaram project. The internal rate of return (IRR) works out at about seven per cent. In conclusion, whereas the BOT route tilts the burden of project risks and responsibilities towards the private developer, the annuity route provides for a more balanced approach to risk and responsibility allocation between the project participants. The government has been able to strike the right balance so far by adopting the annuity scheme on seven stretches totaling nearly 450 kms.

47

Toll Roads
The first BOT project (Rs 673 crore six lane highway project between Jaipur and Kishangarh on NH 8 in Rajasthan) under the direct tolling method is likely to be awarded to Larsen & Toubro and Joannou & Paraskevaides (Overseas) Ltd of Cyprus. The bare construction cost of the project is estimated at around Rs 493 crores. However, the total project cost is expected to rise to Rs 673 crore after factoring interest during construction (IDC). The successful bidder will develop the highway and recover costs by collecting tolls from the users directly during a concession period spanning 15 years. The agreement provides for a 100 per cent indexation to the wholesale price index (WPI) while revising the toll fees annually. Accordingly, increase in inflation will be passed on to the users fully at the time of annual revision in toll.

expected to connect 1.4 lakh habitations with the highway network, has a total outlay of Rs 58,200 crore over the seven year period. Approval from the Planning Commission has been waived for this scheme. The programme would be fully funded by the Centre on the basis of state government project reports. Under the programme, unconnected habitations in rural areas with a population of 1,000 or more is planned to be connected with all-weather roads in three years. In the second stage all habitations with a population of over 500 persons are to be covered by the end of Tenth Plan. The third stage extends to northern-eastern states, Sikkim, Himachal Pradesh, Jammu and Kashmir, Uttaranchal and the desert areas. The objective is to connect habitations with a population of 250 persons and above. The roads constructed under this programme would be maintained by panchayati raj institutions. The ministry of rural development will be the nodal implementation agency to raise additional financial resources from the World Bank and the Asian Development Bank to complete the programme by 2007. The ministry of rural development has been asked to set up a Rural Road Development Agency to provide advice on technical, quality control, and management aspects of the projects. The present source of funds comes from the 50 per cent share of cess on highspeed diesel totaling over Rs 17,500 crores during the sevenyear period.

Ports
Following the issue of guidelines in June 1988 for the formation of joint ventures by major ports with foreign ports, minor ports and private operators, necessary amendments to the Major Port Trusts Act 1963 have been effected and enforced. The government has also decided to initiate the process of phased corporatization of major ports to enable them to operate in a market-oriented economy with adequate flexibility. Steps have been initiated for the corporatization of the Jawaharlal Nehru Port at Navi Mumbai, New Mangalore Port, Mormugao Port and Tuticorin Port. The government has also planned to develop hub ports, one in the east at Chennai Port and one on the west coast at Navi Mumbai. With the globalization of the Indian economy, creation and upgradation of port and shipping services to international standards is essential. By allowing joint ventures, the government intends to attract new technology, introduce better managerial practices, expedite implementation of schemes and foster strategic alliances with minor ports. The Peninsular and Oriental (P&O) Steam Navigation Ltd of Australia has taken over the Rs 400 crore container terminal project at Chennai port. P&O was selected as the preferred bidder in 2000, but took control of the facility

Rural Roads
The Pradhanmantri Gram Sadak Yojna was launched in August 2000. The Prime Minister has reiterated the governments commitment to this programme. The scheme,
6 For the argument that the larger gains from involving the private sector are in allocative efficiency, see section 6.1. 7 Annuities though may not lead to better allocative efficiency, because governments still decide the road location. They still do have the benefit of private construction, maintenance and management.

48 India Infrastructure Report 2002 only in 2001. The terminal will be constructed on BOT basis. The mandate includes developing and managing the terminal for a 30-year period, with construction scheduled to be completed in two years. P&O Ports anticipates investments to the tune of $130 million in the first five years of the concession period for promoting Chennai as Indias leading east coast box port. First major corporatized port at Ennore (Phase 1, Coal handling berth) was completed this year. Tamil Nadu Electricity Board (TNEB) is installing coal handling equipment. The Jawaharlal Nehru Port Trust (JNPT), which has attained super-port status because of its efficiency and productivity, is now focussing on marketing internationally. It was handling around 1.2 million containers annually and is expected to touch 1.4 million containers by December 2001. The efficiency and productivity of the port has visibly improved over the past three years. International shippers earlier preferred Colombo or other parts in west Asia. However, JNPT is now receiving cargo from Karachi to be further dispatched. The port has also attracted cargo from the gulf countries, which were earlier going to Dubai. JNPT is further augmenting its facilities to cater to international shippers. The port has a linear quay length of 680 metre, six rail-mounted quay cranes, two super post panamax, rubber-tyred and rail-mounted gantry cranes, and will be adding additional container berths. The port handles around 70 per cent of the inland container depot products of the Concor at Nagpur. A study is underway to convert JNPTs four bulk berths into container berths. The Mumbai Port Trust (MbPT) failed to receive bids for licencing of the five terminals at Victoria Dock as multipurpose berths for cargo operations. Bids were invited for licencing of the five terminals with 13 berths for five years, extendable as may be mutually agreed. arrangement continues, the prescription of an accounts format and CAG audit are necessary. TAMP has also urged the government to hold prior consultations with the tariff regulator before making investments and awarding BOT concessions to the private sector, as the royalties paid to major ports and the revenues shared with them will affect the tariffs of BOT operators. Besides, the creation of assets will have significant tariff implications.

Inland Waterways
India has 14,500 km of navigable waterways of which 5,700 km are navigable by mechanized vessels. There are three national waterways. These include Allahabad-Haldia, Dhubri-Sadiya over Brahmaputra and Kottapurram-Kollam on the west coast canal. The cabinet has approved the Inland Waterways Authority of India (IWAI) Amendment Bill 2001 to enable it to constitute the IWAI. The policy package for the sector will allow the authority to form joint ventures with private sector companies. The new policy also allows equity participation for joint ventures upto 40 per cent for BOT projects and grants tax exemption as offered in the infrastructure sector. Major private and public sector companies, including Hindustan Lever Ltd, Indo Gulf Corporation, NTPC, Numaligarh Refineries and Concor, have evinced interest in developing inland water transport facilities in the country.

Railways
The Railway ministry has opposed the idea of corporatization of the organization as proposed by the Planning Commissions approach paper to the Tenth Plan. However, a beginning at restructuring seems to be in sight with the Railways agreeing to corporatize some of its non-core activities. The ministry feels that corporatization of the entire organization would not bring significant benefits. The Khanna Committee Report released in February 2001 sharply criticized the role of the Railway ministry, especially in not maintaining correct data on accidents and the action taken on the reports of the enquiry committees. Its recommendations included merger of departments, closer interaction with overseas research agencies to improve crashworthiness of coaches, closure of railway lines where state governments are unwilling to bear losses, dropping projects for which only token allocation of funds has been made, total freeze on gauge conversion projects and reduction of staff strength by 25 per cent over the next ten years.

Transport Policy
The 52nd Report of Parliamentary Standing Committee on Transport has recommended that there is no need for a regulatory authority for ports such as the Tariff Authority for Major Ports (TAMP). In the present scenario of modernization and corporatization, major ports should have the liberty to fix port tariff. Major ports also face competition from minor and state ports. The proposal to convert TAMP into an appellate tribunal, as suggested by the C. Babu Rajeev Committee, has evoked stiff resistance from none other that the TAMP Chairman himself. TAMP has also sought legislative powers from the union government to levy fees for services provided. It has urged the government to formalize the arrangement of audit of its accounts by the Comptroller and Auditor General of India (CAG). At present, TAMP is totally dependent on the government for budgetary support. As long as this

The Rakesh Mohan Committee Report


The Rakesh Mohan Committee comprising 17 members, was constituted on 31 December 1998. It submitted its

The Infrastructure Sector in India, 20001 final report, outlining among other things, a financing plan to make the Railways a commercially viable organization. The committee has recommended major restructuring followed by eventual corporatization of the Railways. This includes disbanding of the present Railway Board, forming an Indian Railways Corporation to be governed by the Indian Railways Executive Board, and constituting an Indian Rail Regulatory Authority. The group has challenged the monopoly of railway officials over the transportation monolith by recommending lateral induction of experts other than railway officials into the executive board. It does not appear that this measure will be implemented. Broad suggestions made in the report are given in Box 3.1.3.

49

Pipelines
The pipeline sector has been creating new capacity away from the public gaze. The private sector is willing to invest

here even though it is inherently a monopolistic sector. However, no big player wants to be left out even though a regulatory framework is not in place. An interesting tussle has brewed between Gujarat, which has passed an act and Gas Authority of India Limiteda central government PSUis disinclined to be regulated by a state regulator. Gujarat enacted the Gujarat Gas (Regulation of Transmission, Supply, and Distribution) Act in March, 20008. This has enabled the state to start a Rs 3,000 crore gas grid project of the Gujarat State Petroleum Corporation (GSPC). The project involves setting up a 2,500 km grid for the transportation of indigenous gas and imported liquefied natural gas (LNG) throughout the state. For this purpose GSPC, in which the state government has an 80 per cent stake, acts as the nodal agency. A special purpose vehicle, the Gujarat State Petronet Limited (GSPL), has been floated to own the assets. The grid will connect the

Box 3.1.3 The Rakesh Mohan Committee Report Within the Indian Railways (IR), there is no controversy on rationalization of passenger fare and making it immune from political interference. However, the high growth targets set by the committee do not seem to be palatable. The committee has emphasized that competition has been increasing in the transportation business. In the 1980s, road transportation grew rapidly, eroding the share of the Railways, including the area of commodities where the Railways had traditional stronghold. The annual growth rate, measured in net tonne kilometres, averaged 5.33 per cent between 1984 to 1991 and dropped to 1.86 per cent during the next eight years (19929). Road dominance is likely to increase even further after the four-laning of the Golden Quadrilateral and the development of new expressways in the country. The increasing use of pipelines for the transportation of POL products is likely to further reduce demand for their transportation. These developments call for a basic change in IRs approach to freight transportation. Total passenger kilometers (pkm) had been growing at a trend rate of about 4.5 per cent over the last 15 year period, and the last five years have seen an acceleration to about 5.8 per cent. The patterns for physical volumes show a significant increase in the share of the upper classes, particularly after the 1980s, but the overwhelming share remains in the lower classes. The ratio of average passenger fare to the average freight tariff is amongst the lowest in the world. The railways, therefore, has to invest and reorganize in a significant fashion over the next few years in order to meet the rising demand of passenger business and, growing, but intensely, competitive freight business. Wrong pricing policies, inefficient public enterprise operations and other difficulties have all contributed to this situation. But the solution does not lie in borrowing funds, without improvements in returns. Expansion of traffic on high density routes to raise the speed of freight trains significantly requires both managerial action and investments in new technology. The existing managerial, financial and accounting systems are inadequate to meet the challenges ahead. IR also has to undergo major structural change in its organization if it is to serve the emerging needs of the country; this is the considered view of the expert group. The group has estimated that if there are no significant changes in performance, it would have an operating deficit of Rs 3700 crore by 2003. The challenges and concerns that lie ahead are: Growing customer needs and rising expectations Lack of goal and task clarity Outdated organizational structure Lack of autonomy Undue political influence at all levels of decision making

The expert committee particularly stressed the need for organizational change. The overwhelming sentiment is that action is overdue and business as usual would be disastrous. The view of the expert group is that the potential exists to double the underlying rate of growth of IR. The stage of development favours the growth of rail especially freight. Accepting anything less would be a loss to the nation. The rail system is too important to permit its withering away.
8

On salient features of the Act and on its hopefully not still birth pangs see Section 6.2.

50 India Infrastructure Report 2002 states gas-supplying centres with users, chiefly power plants. The act also envisages setting up of a regulatory authority. The Ministry of Petroleum and Natural Gas has taken up cudgels on GAILs behalf and has asked the state to reexamine the act on the grounds that would not only make the hitherto unanswerable GAIL comply with more than one regulatory authority but would also conflict with its interests. The central government is taking a myopic view of the real import of the Gujarat Gas Act. The main purpose of the act is to ensure the growth of the gas industry in the state. But since most of the LNG terminals are being conceived and built in Gujarat, the act would ensure the growth of the gas industry of the country as well. It also lays down a well-defined structure for the evolution of the gas industry, as well as the principles of regulation. And contrary to GAILs misplaced fears, the regulatory framework being introduced in the state is a light-handed one and does not regulate the price of gas. This has been rightly left to the market to decide as there is already a competition among gas sellers, and between gas and other fuels. The regulator would only regulate gas transmission charges. With regard to GAILs apprehensions that its existing infrastructure would become available to third parties, GAIL ought to realize that gas pipelines are a natural monopoly and hence should be regulated on the basis of the common carrier principle where all the companies should have open access at a fair price. Accordingly, the Gujarat Gas Act has been formulated to provide for regulation of gas transmission and distribution on an equitable basis. underway. There still needs to be the requisite amendment to the Airports Authority Act 1994. The aviation establishment has broadly come to an understanding that it would adopt a dual-component scheme of leasing. The first would be a one-time, fixed payment for the entire duration; and the second, a variable annual payment. It is estimated that the revenue from the leases of the four major airports would be sufficient to sustain the development and maintenance of the remaining 119 airports across the country. The Airport Authority of India (AAI) presently earns an annual revenue of approximately Rs 1,800 crore; of which nearly Rs 1,000 crore is generated by the airports at Delhi, Mumbai, Chennai and Kolkata. The AAI has been privatizing other airport services as well. The operation, maintenance and management of the centre for perishable cargo for exports at the Indira Gandhi International Airport has been given to a private operator last year.

Integrated Transport
NHAI is now looking at linking the high-density Golden Quadrilateral to points of high economic potential. To start with, the authority is interested in connecting 12 major ports to the highway network in a bid to attract more traffic. NHAI is in the process of establishing SPVs for the Haldia, JNPT and Vizag ports. The other ports that have been identified for connectivity are Kandla, Cochin, Paradip, Tuticorin and Marmugoa. NHAI is keen on the SPV route after it successfully implemented its first SPV project in the Moradabad bypass last year. It plans to invest 30 per cent in each project and raise the balance from the market. In the future, NHAI proposes to offload its stake in the SPV Company and generate earnings. The idea is to create a rolling stock of earnings via disinvestment. The proceeds would be reinvested in future projects where NHAI proposes to take equity. The Container Corporation of India (Concor) is planning to launch dedicated freight trains with fixed time schedules for arrivals and departures between Shalimar (Howrah) and Mumbai, and Shalimar and Nagpur. The launching dates are yet to be finalized as demand estimates are being worked out. Concor has already launched similar dedicated freight trains with fixed time schedules between Shalimar and Chennai (July 2000), Shalimar and Hyderabad (November 2000) and Cossipore (Kolkata) and New Delhi (March 2000), for domestic traffic; and Cossipore and Haldia dock (May 2001) for international traffic. All services, but for the last, are doing well.

Airports
The government is planning to introduce an integrated civil aviation policy which will incorporate guidelines on transport and tourism. It has been decided to club transport and tourism with aviation policy as good road and rail connectivity with airports would help both tourism and trade. The centre is also considering the appointment of an independent economic regulator for airports to fix airport tariff and safeguard public interest. An autonomous statutory Airports Economic Regulatory Authority (AERA) has been proposed as a long-term measure for the limited economic regulation of airports in view of the inherent monopoly characteristics of airport services. The regulator will be delinked from government control. The issue of setting up a regulatory authority has come in the wake of the government initiative of permitting complete foreign investment in airports. The government has approved the construction of new airports at Devenhally in Bangalore, Shamshabad in Hyderabad and Mopa in Goa, with majority private sector participation. The government decided to give major airports on longterm lease to private operators. The bidding process is well

Urban Infrastructure
Urban infrastructure is particularly neglected. The deteriorating infrastructure for drinking water compelled the Eleventh Finance Commission to sound a cautionary note

The Infrastructure Sector in India, 20001 on the inadequate maintenance of civic services and the need for rationalization in pricing of urban services. It has called for increase of tax revenue and user charges to cover operation and maintenance expenses. The commission also mentioned the need for speeding up devolution of funds and a concomitant transfer of staff from state governments to local bodies in line with the 74th Amendment. Progress along better quality private participation and investments has been slow due to inadequate revenue streams. However, a few states have been attempting innovative ways of construction and financing. The progress in municipal bond markets has been very little. The credibility of urban local bodies (ULBs) which

51

had raised money earlier has come under cloud as ULBs lack financial management skills. Their accounting is not in line with generally accepted practices. For example, the Nashik Municipal Corporation failed to open an escrow account (a key bond issue condition) even two years after the bond issue, setting back the nascent market. The deliberations on National Water Policy and Report of the Sukthankar Committee were two important policy initiatives last year. Whereas the first raised the important issue of sharing of water resourcesmainly surface water among different states for different usage, the second one detailed the complexity of drinking water in urban and rural areas. The latter also highlighted complex institutional

Box 3.1.4 The Sukthankar Committee Report The Government of Maharashtra (GOM) established a committee to prepare a roadmap for improved provision of water and sewerage in rural and urban areas under the chairmanship of Mr. D.M. Sukthankar, former chief secretary of Maharashtra (GOM 2001c). The committee was to suggest future strategy for O&M for existing and new schemes, the framework of an institution for tariff setting, feasibility and means of private sector participation in the water sector and to suggest effective implementation of the Ground Water Act 1993. The government had perceived the problems as the non-collection of water tariff, funds not being allocated for O&M, and lack of trained manpower with ULBs. The committee however, found that allocation of funds for O&M through budgetary process had completely failed and local government accounts are not maintained properly. There was lack of accountability within ULBs. Water leakages are as high as 50 per cent, new water schemes do not meet local needs. There was an emphasis on construction rather than O&M, and at best they supplied some water rather than good quality water in adequate quantities. The Committee made many suggestions, of which the important ones are: Villages should have self-sustainable single village schemes. In smaller rural areas, community driven approaches need to be initiated. The government should empower local institutions (zilla parishads and gram panchayats) and user groups (village water committees) to assume the lead role in decision making and operations. Village schemes should be integrated water resources management (90 per cent of rural water schemes depend on ground water) ensuring source sustainability at local level. The funds from the state government must be directly transferred to village water and sanitation committees, who should have freedom to procure the services from the community and market. Multi-village schemes should be constructed where sustainable source of water is not locally available. Larger urban areas generally require larger piped water supply schemes. There need to be a commercial orientation. City water and sewage establishments (CWSEs) should be set up independently (as a municipal undertaking, company under the Companies Act, or co-operative societies under the Co-operative Society Act). The CWSEs should enter into long-term concessions (2530 years) with private firms, selected on a competitive basis. CWSEs should mobilize their own investment resources from the market on a commercial basis (through capital market, domestic financial institutions or the proposed state revolving fund or bond bank). Maharashtra had enacted the Ground Water Act 1993, which gave priority to ground water for drinking use. The Act primarily relates to drinking water, but the state lacked political will to enforce it. Hence, the state needs to set up a Maharashtra Gr ound Water Regulatory Authority (MGRA) with provision for regulation of all uses of groundwater including irrigation, establishment of independent local watershed management units, and community management. The report points out that over extraction of ground water is a direct result of free electricity provided to villagers. The government should change the economic price of electricity for pumpsets so as to prevent over-drawing of ground water. As groundwater rights are chattel to land ownership, it would be useful to explore the introduction of a community rights framewor k for water resources, including ground water. The committee strongly recommended the establishment of an independent Maharashtra Water and Wastewater Regulatory Commission so that abuse of the local monopoly of the CWSEs does not take place. The Commission could also regulate the existing local bodies (both urban and rural) to create incentives for restructuring at the local level. The Maharashtra Jeevan Pradhikaran (MJP), a state parasatal body responsible for design and construction of water and wastewater schemes in urban and rural areas and mobilization of resources on behalf of local bodies, must be restructured. MJP needs to establish independent corporate entities. The main (future) role for MJP should be limited to project design and construction supervision. The committee recommended incentive based disbursement of state funds to urban, local and village bodies.

52 India Infrastructure Report 2002 arrangement in Maharashtra, which is similar to many other states. Draft National Water Policy 1998: The National Water Resources Council did not accept the Draft National Water Policy in its meeting held in July 2000. The working group, set up to study the draft, consisted of water resources ministers from all states. It discussed the draft and guidelines for water allocation among states. The states were vertically divided with regard to River Basin Organizations (RBOs). The issues remained unresolved for the following reasons: Participants did not want RBOs with statutory powers as they did not find them in consonance with the constitutional provisions and the spirit of the federal structure. Some states felt that the priorities with regard to water allocation should be drinking water, irrigation, hydel power, aquaculture, agro-industries, non-agricultural industries and navigation and other uses. They felt that the Inter-state Water Disputes Act 1956 could be suitably reviewed and amended to provide for conciliatory powers in Section 4 (1), timeframe for constitution of tribunal, completion and adjudication by the tribunal and for publication of award by the union government. A few states are of the opinion that the policy and guidelines appeared to have been drafted to accommodate the narrow interests of a few privileged states. Some states felt that the centre was trying to take control over the rivers and other water resources through this policy. The working group eventually decided to constitute a core group of ministers under the chairmanship of the Union Minister of State for Water Resources to go into the details of water allocation and the setting up of an RBO. The final definition of provisions coined by the core group relating to water sharing is: The water sharing/distribution amongst the states should be guided by a national perspective with due regard to water resources availability and needs within the river basin. This statement is open to several interpretations. The group also decided not to empower the proposed RBOs with statutory powers. Water conservation, its importance and limitations: One of the main proponent of water conservation, Rajendra Singh, who strongly believes in community rights of water, water harvesting and water conservation received the Magsaysay Award in 2001 for his work in Alwar, Rajathan. His work is a good example of integrated water system at village/ community level which is also an economically efficient solution for drinking water. It has proved that systematic development of village level watershed can change the economics of the village community. The strategy of water harvesting and surface water development was through a series of check weirs and earthen dams, soil conservation through series of gully plugs, afforestation and agro-forestry to meet the requirement of fodder, fuel and fruit as well as for soil conservation. There are many other successful examples of water harvesting in Madhya Pradesh, Andhra Pradesh and Maharashtra at village/community level. A few state governments have extended the concept of water harvesting to a city level and have passed resolutions that all new dwellings should have water harvesting devices on their roof. These are simple devices. The seasonal availability of water limits its use but this will help in recharging the groundwater table. Development at state level: The chosen method adopted by states to build urban infrastructure is partnership with the private sector. State governments short of funds have taken initiatives to establish infrastructure fund/project development companies in partnership with private sector financial institutions. The role of these institutions is to bridge the gap of risk perceived by a private promoter and the risk perceived by the present provider of the service. These are developments in the right direction. Not all the institutions are of the same genre, nor is it proposed that they have similar functions. Table 3.1.3 captures succinctly different types of institutions. Generally, these institutions are referred to as Infrastructure Initiative Funds (IIF).

Infrastructure for the Agriculture Sector


The government has finally realized that the value addition in agriculture sector is constrained by poor infrastructure. To mitigate this constraint, it announced the first ever National Agricultural Policy and set a target of more than 4 per cent per annum growth over the next two decades. A significant development has been the announcement of a National Policy on Handling, Storage and Transportation of Food Grains with the objective to harness efforts and resources of public and private sectors, both domestic and foreign, to develop the requisite infrastructure. The government accorded infrastructure status for bulk grain handling and transportation, and incentives have been extended. Further, the government guarantees utilization of this infrastructure. Twenty locations have been identified in grain producing centres, consuming centres and port towns for integrated bulk handling and storage along with testing facilities and quality control. Punjabs agro marketing co-operative Markfed, has prepared a blueprint to provide adequate storage for 10 million tons of wheat by setting up hi-tech modern silos. Private sector participation is also envisaged. India is the worlds second largest producer of fruits and vegetables. However, more than 30 per cent of the produce

The Infrastructure Sector in India, 20001


Table 3.1.3 Some Examples of Infrastructure Initiative Funds (IIFs) Model (Main Pupose) Examples and Partner Agency APIIF (in partnership with IL&FS) UPIIF PIIF Applicability and Implications

53

Dedicated IIF Pure Project Development

Necessary where project definition processes of departments are inadequate IIF can take proactive role in identifying projects and developing them on its own initiative State government should be willing to allocate funds to IIF without seeking significant returns Mechanism must exist for IIF recommendations to be implemented by respective state government departments Viable developed projects to be supported by purely private funds. Non viable projects will devolve on the state government Fund may be useful for credit enhancement of developed, support worthy projects Funding support to projects independent of project development. Development of a project by IIF does not automatically entitle it to funding support by IIF Required in situations where even beyond development, availability of funding for developed projects is a constraint Impetus and motivation to initiate project development exercise must come from departments State departments to reimburse PDC for expenses with suitable profits PDC recommendations may be adopted by departments at their own discretion Identify projects and develop them Secure concessions from government Implement projects through JV and invest in the equity of the JV

Integrated IIF Project Development & Funding

I-DECK TNUDF

State Owned Project Development Company (PDC)

I-KIN I-WIN PDCOR

Other Forms

FFUIDC (Feedback Finance Urban Infrastructure Development Company)

is apparently wasted in the absence of proper storage and processing facilities. A subsidy of Rs 78 crore for setting up cold storages for perishable commodities was provided during 20001. It is now proposed to extend the coverage of the scheme to cover rural godowns. The subsidy to be provided by the government would be suitably enhanced to take care of this. The 2001 Budget proposed a number of initiatives. Important among them was: total exemption of excise duty on processed fruits and vegetables, credit linked subsidy schemes for construction of cold storage in villages and establishment of agri-business centres and agri-clinics. Notwithstanding the new government initiatives, the sector remained moribund by wide ranging restrictions that have been imposed on inter-state movement, storage and stocking of food grains and agriculture products.

CONCLUSION
During the past year, many beginnings have been made. The transport sectorroads, ports, airports, and connectivity with portswitnessed a flurry of activity which will improve infrastructure and reduce transport time. This could have major positive feed back effect on the economy. Railways have been provided a robust framework for change but have yet to respond positivelyit is clearly caught in the crossconnections of vested interests. Power remained in the limelight, but without any physical improvement in the sector. Some cobwebs have hopefully been cleared and it is generally accepted that adequate user charges have to be levied, billed and collected if the sector is to see any improvement: the role of the government has to diminish. The telecom sector has demonstrated that competition can

54 India Infrastructure Report 2002 do what regulation and state control cannot. Deregulation brought cellular tariffs to nearly a tenth of what they were two years ago. Urban infrastructure remained long on promises and short on delivery. We are seeing emergence of new realism at the state level. What we are witnessing among the states is institutional competition. As states compete, and some do visibly better than others, rulers and administrators would have to mend their ways to move forward. All state governments have come to realize that there is no alternative to competition and public-private partnership in infrastructure.

3.2 WLL, GOVERNANCE, CORPORATIZATION, AND SWANS: A REVIEW OF INSTITUTIONAL DEVELOPMENTS


Rekha Jain
The telecom sector witnessed several developments over the year. The government decided to allow limited mobility in the wireless local loop (WLL). This brought the jurisdictional boundaries of various fixed service providers (FSPs); agencies such as the Telecom Regulatory Authority of India (TRAI), Department of Telecom (DoT), and the Prime Ministers Office (PMO) over the issues of policy, pricing and allocation of spectrum (a scarce resource) into sharp focus. The Department of Telecom Services (DTS) and Department of Telecom Operations (DTO) were merged to form into a public sector company called Bharat Sanchar Nigam Limited (BSNL) with effect from 1 October 2000. The process of corporatization highlighted the need for prior ground work in evolving a road map and a blueprint of the strategy. The draft of the Convergence Bill which had been announced last year was made available to the public. The bill proposed setting up of the Communications Commission that was to be responsible for regulating both telecom and broadcast sectors. The bill did not specify the regulation of competition issues, and role and scope of the appellate board, a gap that could result in delays in resolving disputes. Other practical issues in implementing the Convergence Bill also arise. Several state governmentsGujarat, Andhra Pradesh, West Bengal and Rajasthanhave gone for stateswide area networks (SWANS). Others are likely to follow suit. Dedicated physical facilities especially cable links for SWANS need a re-examination, given the growth of the internet, the networking of Internet Service Providers (ISPs), and the resulting possibility of virtual networks. Even after the setting up of TRAI in 1997, the policy and part of the regulatory function continued to be with the Telecom Commission. The creation of TRAI should have also led to redefinition of the role of Telecom Commission and DoT, but this was not done satisfactorily. In the creation of various departments (DTS and DTO) from the DoT), the department had attempted to separate the policy functions from the operations9. Amalgamation of DTS and DTO and the subsequent corporatization led to the creation of BSNL and the DoT, the erstwhile Telecom Commission. This streamlined the structure by a separation of the policy and regulatory function (responsibility of DoT) and the actual operations (BSNL). Thus there is still much overlap between TRAIs and DoTs defining rules. Currently DoT is responsible for policy formulation, licensing, spectrum management, administrative monitoring of public sector undertakings, research and development, and standardization/validation of equipment. Spectrum management and equipment standards are areas that are usually under the regulators purview in many countries. While the TRAI Act 1997 had precluded it from spectrum management, the TRAI Amendment Ordinance 2000 gave it only a recommendatory role for spectrum management and standards. The overlapping jurisdictions of TRAI and DoT has led to delays in the past as in the formulation of guidelines for opening up the domestic long distance market or resolution of issues arising out of the WLL (with limited mobility) case.

Political Interventions
In order to give the telecom sector a boost, the Prime Minister, Atal Behari Vajpayee set up a high powered group on telecom (GOT) in 1999 to evolve a policy framework for the sector. This was possibly done outside the DoT as it was felt that it may not be able to conceive radically different roadmap, or it may even thwart involvement of
9 This was not done as a part of any overall sector restructuring plan but under pressure from both Indian Telecom Service and Indian Administrative Service cadres to head DoT. The governments inability to handle this issue effectively had resulted in the creation of these departments. (3iNetwork 2001, Section 8.1).

The Infrastructure Sector in India, 20001 private sector or deregulation in its own limited vested interest. The GOT drafted the National Telecom Policy 1999. Another example of political interference was in a recent case when BSNL billed advance rental to its customers. The telecom minister intervened to say that it was a mistake and that these would not be charged. Such political interference in organizational issues would create impediments to an independent functioning and the fixing of responsibility for decisions. On its part BSNL did not inform the customers in advance and/or suggest alternative payment methods. For example, it could have suggested staggered payments or provided incentives to those who paid the entire amount at one go, thus smoothening the interaction with the customers. Role of regulatory agencies in the convergence bill: Even as the debate regarding the functioning of TRAI continues, the draft of the Convergence Bill provides for significant reorganization of the existing policy and regulatory institutions. The setting up of the Communications Commission would necessitate requisite review and redesign of the existing institutions such as TRAI and Prasar Bharti10. The Bill also envisages important changes in the powers of the existing bodies in areas such as licensing. For example, currently, while Ministry of Information and Broadcasting (I&B) is the licensor for broadcast licenses, DoT under the Ministry of Communications is the licensor for telecom licences. The Convergence Bill gives such powers to the Commission, thus significantly enhancing the scope of the proposed regulatory institution. In comparison, under the existing TRAI Amendment Ordinance (2000), TRAI has a recommendatory role in licensing with respect to the following: (a) need and timing for introduction of new service provider (b) terms and conditions of licence to a service provider; and (c) revocation of license for non-compliance of terms and conditions of license. Further TRAIs function is to ensure compliance of terms and conditions of license. From this it is obvious that it has been hard for the government and the incumbent to give significant authority to TRAI despite its reorganization. It remains to be seen how the provision in the bill that gives even greater powers to new institutions than those currently existing would be accepted by the government. The bill itself has not been actively pursued for passage in parliament, as there has not been significant legislative activity in general
10 Prasar Bharati is a statutory autonomous body established under the Prasar Bharati Act. The Board came into existence from 23 November 1997. The Prasar Bharati is envisaged to be the public service broadcaster of the country. The objective of public service broadcasting is to be achieved through All India Radio and Doordarshan which earlier were working as independent media units under the Ministry of I and B. http://mib.nic.in/information&b/ AUTONOMUS/frames.htm.

55

since the inception of the bill. The lack of progress has been due to pressures from the opposition parties on the governments handling of the situation arising out of the disclosures of the Tehelka tapes. Telecom and competition regulation: The key issue in telecom regulation is to design appropriate interventions that achieve both static and dynamic efficiency. Under the current regulatory framework, static efficiency is achieved through ex ante sector specific regulation (such as those related to licensing) and dynamic efficiency is aimed through ex post competition policies. While the ex ante regulation regarding licensing is in place and significant experience exists in this domain, the ex post regulation regarding competitive processes has yet to evolve. In the current multi-service provider regime, there are likely to be several mergers and acquisitions and scope for vertical integration in service provision. For example, Zee Networks and Siti Cable are business entities that provide various elements of what may become a vertically integrated service provider covering both telecom and broadcast service as well as content. This could lead to anticompetitive practices by their bundling of set top boxes, network and content to subscribers, effectively eliminating choice. Technological convergence also has implications for regulatory institution design. While on one hand convergent services require that boundaries of sector specific regulatory agencies be expanded, on the other it implies that general competition policy would play a greater role in the regulation. The other issue is the trade off between regulatory capture and sector specific skills (IIR, 2000, p. 69). A convergent/ competition regulator is less prone to capture by players in a specific sector, due to the diversity of interests across sectors that is represented, although it may lack the technical expertise for managing the sector specific issues. Under the current regulatory regime issues related to monopolistic, restrictive, and unfair trade practices are to be handled by Monopolies and Restrictive Trade Practices Commission (MRTPC) established under subsection 1 of Section 5 of the Monopolies and Restrictive Trade Practices Act 1969. While the MRTPC itself has little teeth and is to be replaced by a Competition Commission, this framework recognizes the importance of managing competition. On the other hand, while the Convergence Bill provides for an Appellate Tribunal, it does not specify its scope. On this aspect the bills focus is procedure oriented as for example, in specifying the details of the procedures for handling cases that come before the Appellate Board. While appropriate regulatory institutional design is one possible way of dealing with competition and anticompetitive practices, the other could be through designing of licensing conditions. Such conditions could be effects

56 India Infrastructure Report 2002 based general competition related conditions so that the onus of not indulging in anti-competitive practices is with the licensee. There are several examples of how competition related issues are handled in different countries. There are instances of sector specific regulation handling these issues (as in Canada) or sector specific regulator handling it along with competition specific agencies (as in UK, where Office of Telecommunications (Oftel) and Monopolies and Mergers Commissions as well as the Department of Trade and Industry, the policy making body for telecom have a clear role and authority in competition related issues). (3iNetwork 2001, pp. 635) Independence of regulators: Currently both TRAI and Prasar Bharati have budgets allocated from the Consolidated Funds of India. This requires them to follow the employment, promotion and other rules and regulations as applicable to government departments, reducing their autonomy and restricting choices for appointments. TRAI has been perceived as following the governments perspective rather than having an independent view. This has led to weakening of the regulatory process. Despite this lack of independence in TRAI the Convergence Bill has proposed that the Commission be dependent on government funding. The funds generated by the Commission by way of fees are to go to the Consolidated Fund of India and its budget is to be passed by Parliament. Further, the employees of the Commission and the Appellate Tribunal are to be appointed, as well as their salaries and other conditions of service are to be determined, by the central government. In addition, the Secretary General, who will play a very important role in the functioning of the Commission will be only on deputation from the central government. These points seem to compromise the independence and autonomy of these two bodies. The Bill needs to specify the creation of a Convergence Fund that would have contributions from the service providers for financing the Commissions operations. In USA, Canada and UK, regulatory agencies do not have independent sources of income. In USA, the FCC (Federal Communications Commission), which is funded by the Congress, has traditionally been sensitive to its wishes. However Commissioners have been known to take decisions contrary to Congress when they have felt that the President or the courts would support them. Independence in views is also brought about by requiring that not more than three out of five Commissioners be from a single political party. In UK Oftels budget is approved by the Parliament, whereas running costs are met from license fee which are roughly proportional to the operators turnover. Despite dependence on the Parliament, Oftel has shown considerable independence in decision-making. Besides overlooking the provision of financial autonomy, the bill also provides for the central government to issue all sorts of specific directives relating to licensing that will be binding on the Commission, thus further compromising the independence of the Commission. The role of the government ought to have been limited only to the issue of general policies and the Commission should have been able to determine the implementation. Spectrum management: TRAI and DoT have to work out an equitable method of allocation of spectrum between fixed and cellular services. In addition, there is a need to put in place a mechanism for spectrum allocation that is applicable to different types of sectors such as telecom, broadcast and Information Technology (IT). Traditionally most regulators have different allocative mechanisms for telecom and broadcasting sectors. Spectrum for broadcast in the United States was allocated freely owing to the public interest component embedded in such services. This had enabled a certain kind of regulatory oversight over television, which may not have been possible otherwise. The advent of the internet and new models of service provision, such as bundling of telecom, cable, and internet services, requires an examination of these regulatory policies. The lower levels of content regulation on the internet are likely to put pressures on regulatory agencies to lower content supervision over television. As a consequence it may become necessary for the government to review its broadcast spectrum allocation processes. This need becomes more critical in a fast changing technological scenario in which broadcast services turn digital and internet becomes the delivery channel for different types of services including telecom. By treating spectrum for these services differentially, the government in effect dictates the technology for services thus preventing the market from making those choices. The issue of service specific licenses can be dealt with by having two level licensinginfrastructure license and spectrum license. The idea is to delink particular bands of spectrum from specific types of service. For efficient management of spectrum, the Wireless Planning and Coordination Wing should evolve a time table for moving government agencies currently using spectrum in the commercial bands to other bands. Further, all agencies whether government or private, should pay for the spectrum. The governments payment of such charges will make explicit the subsidies inherent in the provision of those services that use spectrum. It will also tend to allow for more efficient use of spectrum and help find alternative technologies for services that do not necessarily find wireless to be cost effective.

STATE WIDE AREA NETWORKS

FOR

GOVERNANCE

Although SWANs were designed with the objective of providing e-governance, the slow pace of development of

The Infrastructure Sector in India, 20001 applications had led to its limited use predominantly for voice and video conferencing. While the build operate transfer framework is useful for infrastructure development, the basic issue of developing dedicated infrastructure to serve the objectives of a SWAN need to be questioned. With the proliferation of internet usage and internet service providers, achieving the same objectives through internet would be possible. However, the need for appropriate application interfacing and last mile access would still remain. The current application development process that drives the e-governance initiatives should include more citizens participation and be more citizen centric. It should also span across departments. Data validation and maintenance are critical tasks that need to be undertaken in a systematic manner. A usability review could be helpful in evolving a portfolio of applications for maintenance. Currently very few applications are available on SWANs. Given the current status of application development, project structures that include stringent service level agreements drive the cost of implementation high. Currently state governments bear all the revenue risk. By explicitly sharing such risks, the focus would turn towards those applications that citizens are most willing to pay for. The government may also be required to provide applications that do not generate revenue (access by poor people). By explicitly stating such requirements, the costs and subsequent subsidies can be better targeted. A realistic demand assessment for bandwidth for such networked applications, based on the nature of applications (several types of applications do not necessarily need a network e.g. land record applications) needs to drive the requirements.

57

CREATION

OF

VSNL

Although Mahanagar Telephone Nigam Ltd. and Videsh Sanchar Nigam Ltd. were corporatized in 1986 and there had been talk of corporatization of DoT since the submission of Athreya Committee report in March 1991, the process of corporatization of VSNL was done in a hurry. The consultants were given a very short time to prepare a report. They have been subsequently retained to help in the restructuring. The corporatization process was not smooth. Prior to the corporatization, the employees, both in the workers and officers categories went on strike, paralysing the service provision and managed to get their demands met. The demands included salary increases, a no retrenchment policy and the requirement to pay their pensions from the Consolidated Fund of India and not a general fund set up for this process as is normally done for other public sector organizations.

In several countries, corporatization has been brought about after enactment of law/s that created the organization, specified the functions and defined the corresponding regulatory framework. Often this has required concurrent changes to other Acts so as to bring about a smooth transition11. The corporatization of VSNL was affected without legislative changes. The employees concerns regarding the provision of provident fund led to prolonged strikes. The organizational structure of VSNL consists of a Chairman and Managing Director, supported by a board consisting of five membersfinance, planning, operation, human resources, commercial and network services. Additional external members are yet to be inducted. The full time board members are from within the erstwhile DTS/DTO/DoT. It is well recognized that external ( to the government and the company) board members can bring in the required differences in perspective necessary for growth. The requirement of external directors is mandatory as per SEBI (Securities and Exchange Board of India) guidelines for large companies. However, no time frame has been stipulated by the government for this induction on the VSNL board. The corporatization process had little immediate impact as few changes had been made in the existing administrative structures. The many levels of hierarchical structures need to be reviewed, and a flatter structure that could be more responsive needs to be devised. The consultants task is to suggest the appropriate organizational form and process12. After corporatization VSNL has been structured as a single organization. For administrative ease, it has been divided into circles, roughly corresponding to state boundaries. However, if privatization is to take place VSNL would need to be divided either along business lines or along geographical regions, as otherwise it would be difficult to find investors with the requisite financing. The separation could create problems as some of the resulting units (such as the local business when divided along business lines or
For example, in Malaysia legislation was enacted in 1987 to separate the Jabatan Telekom Malaysia (JTM), the government department responsible for telecommunications into two partsthe regulatory unit called JTM and an operating company called Syarikat Telekom Malaysia (STM), a government owned company. STM was later privatized into Telekom Malaysia by selling off its stake to private and institutional investors. Suitable amendments were also made to the Employees Provident Fund Act and Pension Act to protect employees interests and enable them to continue with provident fund facility in the new organization. 12 In contrast, in UK, the corporatization and the subsequent privatization were preceded by changes in the board composition. Several other changes were made to BTs structure within the framework of a white paper that outlined the roadmap for the privatization. This plan was reviewed periodically.
11

58 India Infrastructure Report 2002 the eastern region when divided geographically) may not be attractive to investors. As the road map of privatization has not been spelt out, it is difficult for the organization to prepare itself for the future. This uncertainty has led to a low morale of the employees. VSNL plans to get into cellular service provision. But its roll-out seems hesitant. In this segment, private operators have had a head start and have developed the marketing expertise, customer databases and infrastructure. For example, MTNLs cellular services have been able to register only 10,000 customers in New Delhi and around 8,000 in Mumbai compared to Bhartis nearly 33,000 in Delhi for Bharti and BPLs 27,000 in Mumbai (as of April 2001), the dominant operators in the two cities (see the COAI website). Therefore, to make a success of the cellular operations, VSNL may need to create a separate entity that could be staffed by people with a greater market orientation than that available in VSNL. Such an entity would need to work on a commerciallyoriented manner with management having the autonomy to give commissions to sales staff; flexible payment structures; ability to price competitively; give discretion and responsibility to staff; salaries linked to performance or targetsattributes that are absent in VSNLs operations today. International long distance could be an area of expansion for VSNL. Exploiting value added services would require cultural, overhaul in the organization. As VSNL changes towards becoming a corporate entity in practice, a key requirement would be the implementation of commercially oriented accounting systems including management control systems. Such a system would require not only basic changes to the existing accounting systems right down to the field level, but also training and significant computerization to implement the system. Given the long decision cycles in the government, and the massive investments required, such a system will require a dedicated project team that would have to have the requisite financial powers and technical understanding of the management issues in computerization. Corporatization thus far has not changed the earlier decision making structures and processes. There is a need to train managers to have a business perspective and build accountability for performance, an aspect that is lacking in most government departments. For example, it will have to develop performance norms as per the new technology inducted and move away from an earlier culture where employees demanded to be evaluated on performance as per the norms of older technology, causing low productivity and additional costs for the network. For example, the number of DELs (Direct Exchange Lines) per employee in VSNL (Table 3.2.1) is low, not only in comparison to developed countries but also in comparison to countries such as Indonesia and Philippines. From a monopoly mind set where VSNL was used to treating customers as though doing them a favour by providing services, it will have to change to being more sensitive to customer needs. This change is very critical and is going to determine whether VSNL continues to be a profit making entity. Appropriate systems need to be designed for facilitating customer interactions. For example, instead of expecting customers to come to its premises to pick up forms, these could be widely distributed through retail channels and the web. While it has started distribution of some forms through the web, it needs to do so for all its services. Similarly, a variety of options for payment of bills could be offered. Such systems need to be designed for the different elements of service. With corporatization costs are being treated and reported more appropriately. The costs of its inefficient operations were hidden and paid for by the tax payers are now revealed in its lower profits. VSNL does have tremendous strengths vis--vis competition, in terms of its reach and trained personnel.

Table 3.2.1 Comparison of Telecom Indicators in Different Countries Country Year No. of Lines No of Employees Number of Lines per Employee 203.40 311.93 176.69 150.54 207.55 229.19 83.73 362.99 NA 50.00 Source

Denmark TDC Tele Denmark Indonesia Philippines France Telecom(10 countries) France (France Telecom) South Africa Argentina Singapore (Singtel) Japan(NTT) India(VSNL)

2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 1999

3735000 3400000 6662065 1999922 3.9E+07 3.4E+07 5075417 3723936 NA 2.2E+07

18363 10900 37705 13285 188866 148846 60613 10259 NA 224000 431874

www.teledammark.dk www.telkom.co .id www.pldt.com.ph ww.francetelecom.com.fr ww.francetelecom.com.fr www.telkom.co.za www.telecom.com.ar www.sinftel.com www.ntt.co.jp ww.dotindia.com

The Infrastructure Sector in India, 20001 But to build upon it would need full autonomy. That could prove difficult.

59

CONVERGENCE BILL HIGHLIGHTS


Key highlights of the Convergence Bill drafted by a committee under Fali Nariman: Formation of a single commission that would address both content and carriage regulation. The enactment of this Act would lead to a repeal of the Indian Telegraph Act 1885, Indian Wireless Telegraphy Act 1933, Telegraph Unlawful Possession Act 1950 and the Telecom Regulatory Authority of India Act 1997. Licensing as a key function: (The Ministry of Communications for telecom; and the Ministry of Information and Broadcasting for FM Radio.

MAJOR FUNCTIONS COMMISSION


OF THE

REGULATORY

Licensing Determination of tariffs

Formulation and determination of conditions of fair and equitable access Promotion of competition Protection of consumer interests Promotion and enforcement of universal service obligations Formulation of advertising codes for content application services Formulation of commercial codes in respect of communication services and network infrastructure facilities Taking steps to regulate or curtail the harmful and illegal content on the internet and other communication services Formulation of codes and technical standards and norms to ensure quality and interoperability of services and network infrastructure facilities (including equipment) Carrying out any study and publishing findings on matters of importance to the consumers, service providers and the communications industry Institutionalizing appropriate mechanisms and interaction on a continual basis with all sectors of industry and consumers so as to facilitate and promote the basic objectives of the Act.

REFERENCES
3iNetwork (2001), India Infrastructure Report 2001: Issues in Regulation and Market Structure, Oxford University Press, New Delhi. COA/(2000) http://www.coai.com. Government of Gujarat (2001), The Gujarat Gas (Regulation of Transmission, Supply and Distribution) Act 2001, Gandhinagar. Government of India (2000a), Draft Integrated Transport Policy, Planning Commission, New Delhi. (2000b), Draft National Water Policy (1998), Ministry of Water Resources, New Delhi. (2001a), Report of the Expert GroupSettlement of SEB Dues, Planning Commission, New Delhi. (2001b), Report of the Expert GroupRestructuring of SEBs, Planning Commission, New Delhi. (2001c), The Electricity Bill 2001, New Delhi. (2001d), The Indian Railways Report: Policy Imperatives for Reinvention and Growth, Expert Group on Indian Railways, Indian Railways, New Delhi. (2001e), 52nd Report on the Ministry of Shipping, The Parliamentary Standing Committee on Transport and Tourism. Government of Karnataka (2000), Report of the High Level Committee on Escrow Cover to IPPs to Government of Karnataka, Banglore. Government of Maharashtra (2001a), Report of the Energy Review Committee Part I, Mumbai. _________ (2001b), Report of the Energy Review Committee Part II, Mumbai. _________ (2001c), The Sukthankar Committee Report on Operation, Maintenance and Management of Rural and Urban Water Supply Schemes, Water Supply and Sanitation Department, Mumbai. Haldia Gajendra (2000), Indian Highways: A Framework for Commercialisation, National Council of Applied Economic Research, New Delhi. Singhal Rajrishi, Malini Goyal and Arindam Sengupta (2000), Tomorrows CEO must be a Coach, Not Power-Base, an interview with Jack Welch, Economic Times, 18 September.