INFRASTRUCTURE DEVELOPMENT AND GOVERNMENT POLICY SINCE 1950

INFRASTRUCTURE DEVELOPMENT AND GOVERNMENT POLICY SINCE 1950 India's infrastructure services are slowly but steadily moving away from the realm of government control to that of the private sector. Across sectors ranging from telecommunications and roads to power and ports, state-owned agencies are giving way to private sector entities operating in a competitive environment and subjected to economic regulation where necessary. Governments at both central and state levels are actively engaged in managing this transition, devising appropriate policy frameworks and establishing suitable institutions such as the central road fund and independent regulatory authorities in power and telecommunication sectors.

Telecommunications

Since India's independence, its telecommunications sector has continued to be governed by the Indian Telegraph Act of 1885, which placed all telecommunications within the government domain. Telecommunications services were the exclusive monopoly of the Department of Posts and Telegraphs, which had the mandate to regulate and provide these services. Public ownership over the next several decades hampered growth of the sector, leaving India's teledensity (defined as main lines per 100 inhabitants) among the lowest in the world: 0.4 in 1980 and 0.7 in 1990. The extremely high level of unfulfilled demand was evident from the long waiting lists and the willingness of Indian subscribers to pay large up-front payments for telephone connections.

The government initiated partial reforms in 1985, when the Department of Posts and Telegraphs was divided into separate entities, the Department of Posts and the Department of Telecommunications. In 1986 the government spun off basic telephone services in the two metropolitan cities of Delhi and Mumbai into a new public sector entity, the Mahanagar Telephone Nigam Limited. Overseas communication services were transferred to Videsh Sanchar Nigam Limited. Subsequently, the government ushered in the National Telecom Policy of 1994, which allowed private participation in both basic and cellular services. In 1997 the government enacted legislation to establish the Telecom Regulatory Authority of India.

The process of liberalization received further fillip in 1999 with the adoption of the New Telecom Policy of 1999, which permitted the entry of multiple players into all segments, including fixed line, cellular, and long distance telecommunications. Furthermore, the policy-making and service-providing functions of the Department of Telecommunications were separated; the latter were transferred to a new company, Bharat Sanchar Nigam Limited. In addition, the Telecom Regulatory Authority of India Act was amended in 2000, to bring clarity to the authority's functions and powers, and a separate Telecom Disputes Settlement and Appellate Tribunal was established to adjudicate disputes.

In November 2003 the government issued guidelines for converging the hitherto disparate basic and cellular licenses into Unified Access Services Licenses. This process of license unification is likely to be extended to other service segments. Today, most major telecommunications operators are aggressively seeking to expand their operations. These expansion plans will, however, require substantial additional investment, and will prove to be a considerable challenge for private players due to the steep decline in tariffs.

The spectacular progress of India's telecommunications sector has been largely due to the entry of private players. Private participation has resulted in greater competition, better service, increased penetration, and lower prices. By 2002 the average cellular tariffs were reduced by 53 percent, and national long distance and international subscriber dialing tariffs declined, respectively, by 56 percent and 47 percent. Cellular tariffs in India are now among the lowest in the world, and tariffs for cellular-to-cellular calls fell by almost 70 percent. This steep decline, coupled with a significant growth in wireless telephony, resulted in an unprecedented increase in teledensity, from 1.9 in March 1998 to 7 in March 2004. The cellular subscriber base nearly doubled in 2002–2003 to reach 12.7 million, and again in 2003–2004, to 26 million.

Though teledensity has grown at so rapid a pace, much of this growth occurred in urban areas and telephone connectivity in rural areas still remains a cause of concern. In rural areas, where two-thirds of India's population live, about 14 percent of the villages are still without any telephone service. While the costs of rolling out village public telephones are undoubtedly high, it is also widely acknowledged that the absence of credible penalties for nonfulfillment of rural rollout obligations by the licensees has not helped in this regard. The government is, however, committed to expanding the rural telephone network through a universal service fund.

Power

Private sector participation in the power sector is not new to India. In fact, at the time of independence in 1947, private sector utilities and licenses accounted for over 80 percent of all electricity supplied in India. Immediately after independence, the Electricity Supply Act of 1948 vested responsibility for the generation, transmission, and distribution of electricity to State Electricity Boards (SEBs), marking the first shift toward public ownership in the power sector. Within the next decade, the state electricity boards took over almost all private sector power licenses.

By the mid-1970s it had become apparent that SEBs alone would not be able to meet the rapidly increasing demand for power, and the central government established the National Thermal Power Corporation Limited and the National Hydroelectric Power Corporation Limited to enhance generation capacity. To mitigate regional imbalances, the government established the Power Grid Corporation of India Limited to manage the transmission of power between states and regions. By the mid-1980s it was clear that the power sector would not be able to meet India's growing demand without considerable restructuring. In 1991 the government amended the Electricity Supply Act of 1948 to encourage private investment by providing a legal basis for facilitating investment in generation and distribution. This policy was to provide additional generation capacity to complement the rapidly declining public sector resources.

The responsibility for the power sector is currently shared between the central government and the states. At the central level, policy and planning is under the purview of the Ministry of Power and its arm, the Central Electricity Authority. The Central Electricity Regulatory Commission was established in 1998 and deals with inter alia regulation pertaining to the tariffs of generating companies owned or controlled by the central government and those who sell electricity in more than one state, interstate transmission of energy including tariff of transmission utilities, and oversight of the India's Electricity Grid Code. At the state level, there are State Electricity Regulatory Commissions, whose functions include determining the tariff for generation, supply, transmission and wheeling of electricity within the state, issuing transmission, distribution and trading licenses, and facilitating intrastate transmission of electricity. The energy departments of each state address policy and planning issues.

Although the sector was liberalized in 1992, private participation has remained far below expectations. Out of nearly 120 expressions of interest registered to add 69,000 megawatts of capacity amounting to about U.S.$55.5 billion of investment, only a handful of private projects have been implemented.

One of the main factors impeding private participation in generation is the precarious financial condition of the SEBs, which, in turn, is attributable to nonremunerative tariff structures, poor operational and collection practices (which facilitates theft), and dilapidated networks. Despite some improvement over the previous year, the operating losses of state power utilities in 2002–2003 continued to remain high, at an estimated U.S.$4 billion. Aggregate technical and commercial losses are reported to be as high as 40 percent, and, of these, about two-thirds are said to be commercial losses, a euphemism for theft. As a result, private investors and lenders are wary of supporting power projects that have to sell exclusively to financially weak SEBs.

India's per capita electricity consumption is still among the lowest globally (for example, half that of China). It is estimated that over 100,000 megawatts of capacity need to be installed by 2012, which will require additional investments of U.S.$178 billion in the next decade. To meet these requirements, the power sector will have to rely on sizable private sector participation and investment, which in turn is intrinsically linked to reform of the sector.

In order to spur reforms, the central government has undertaken a few key initiatives. Parliament passed the Electricity Act of 2003, which consolidates the existing electricity laws and attempts to usher in a market-based competitive regime and institutionalize appropriate regulatory safeguards. Following the recommendations of an Expert Committee, the Ministry of Power is now providing incentives to the states that manage to reduce the gap between the cost of supply and revenue realization, through the Accelerated Power Development and Reform Programme. The Expert Committee also delineated a reform framework and financial restructuring principles that could potentially form the basis for devising state-specific reform programs. Central Electricity Regulatory Commission has notified and implemented an Availability Based Tariff regime, with a view to make the incentives of the utilities compatible with the merit order requirements of the entire network and thereby improve grid discipline.

At state level too, reforms are progressing, albeit at a varying pace. While Orissa and Delhi have moved furthest by privitizing power distribution in their respective states, quite a few other states have unbundled generation, transmission and distribution functions into separate entities. Twenty one states have constituted State Electricity Regulatory Commissions.

Ports

India has over 3,728 miles (6,000 km) of natural coastline and is strategically well-positioned on global trade routes. India has 13 major ports and over 181 minor ports (of which 139 are operational), which together handle the bulk of India's foreign trade. Most of the major ports in India were established after independence, except for Kolkata (Calcutta) and Mumbai (Bombay), which were built in the nineteenth century by the British. Responsibility for all major ports has mainly been, and still is, in the domain of the central government. The thirteen major ports handled over 280 million metric tons of cargo in 2001–2002, mostly petroleum, iron ore, and coal; they operate under the jurisdiction of the Ministry of Shipping. The Tariff Authority for Major Ports regulates prices at the major ports, while the remaining ports fall under the jurisdiction of their respective state governments.

While overall cargo traffic grew at approximately 7 percent per annum during the 1990s, most Indian ports are already operating at full capacity and there is a critical need for augmentation of capacity. Globally, increased trade, coupled with enhanced efficiency levels and improved processes, have made it difficult for traditional ports with outdated facilities and systems to compete effectively. Indian ports are plagued by widespread inefficiencies in cargo handling, poor connectivity, a mismatch of facilities and type of cargo traffic, and outdated labor practices. In the last few years, although there has been some improvement in operational performance, with the average turnaround time falling from 8.1 days in 1990–1991 to 3.7 days in 2001–2002, there is still a long way to go to attain international efficiency levels. Indian ports also face growing competition from nearby transshipment ports, such as Colombo, Singapore, Dubai, and Salalah, which offer world-class facilities and quick turnaround times. The mismatch of cargo facilities is further likely to impede future viability of the sector, as global trade is moving increasingly toward containerized cargo, which has been growing at over 10 percent per annum; only 13 percent of India's port capacity is dedicated to container traffic.

In due recognition of the aforementioned deficiencies, the government has sought to usher in market oriented reforms in the sector. As part of this, port trusts have been given the authority to spend up to 1 billion rupees (U.S. $22.2 million) without prior permission of the central government. Ports trusts are also now required to follow a new commercial "profit and loss" accounting system. More significantly, the central government as well as states have initiated measures to attract private participation in the sector. Major port trusts have awarded concessions for container terminals to global port majors such as P&O ( Jawaharlal Nehru Port Trust [ JNPT] and Chennai) and PSA (Tuticorin) and new international players are entering, viz., Dubai Port Authority in Cochin and Maersk in JNPT and Pipavav. Amidst poor efficiency gains in the port sector as a whole, the performance of some private port terminals has been impressive. The Nhava Sheva International Container Terminal developed by P&O Australia at JNPT initially expected to handle 500,000 TEUs (twenty feet equivalent units) by 2005, had already exceeded 900,000 TEUs by 2002.

It is imperative that Indian ports improve efficiency levels to match international standards. This cannot be achieved in an environment in which state-owned monopoly operators provide port services, since there is little incentive for them to improve efficiency. The experience of the private container terminal at JNPT clearly indicates the benefits that can be achieved through private sector involvement and competition. Accordingly, the government should curtail its involvement in this sector and instead devolve more power to port authorities, and embrace privatisation of various port services. In addition, the government should ensure good connectivity to ports with the rest of India's transportation network, so as to facilitate and enhance interport competition. As intraport and interport competition increases, the government should phase out economic regulation.

Roads

India's total road network, stretching approximately about 2 million miles (3.3 million km), is the second-largest road system in the world, comprising national highways, state highways, major district roads, and rural roads. Since independence the road network has suffered from a lack of funds, poor monitoring, and inadequate supervision of road projects. Maintenance has been a low priority, which has led to appalling safety conditions, resulting in over 70,000 fatalities per year. Only 46 percent of India's roads are paved, and of those only 20 percent are in good condition. The last few years have seen a rapid increase in motor vehicles and a marked deceleration in the development of road capacity, as over 85 percent of passenger traffic and 70 percent of freight traffic is carried by the road network. As a result, roads have become congested, and the quality of road travel has deteriorated substantially.

This problem is especially acute in the case of national highways (36,000 mi., or 58,000 km), which form the backbone of India's transport network. Due to the poor physical condition of roads, traffic speeds are low, leading to increased freight costs. In 1995 the National Highways Authority of India was given a mandate to develop, maintain and manage national highways entrusted to it. The authority is currently implementing the National Highways Development Project (NHDP) comprising of over 8,700 miles (about 14,000 km) of the national highways network, including the 3,600 miles (5,800 km) of roads linking the four major metropolitan cities and 4,500 miles (7,300 km) of the North-South and East-West corridors. The total construction cost of the NHDP has been estimated at about U.S.$13 billion. In addition to NHDP, forty-eight new road projects at an estimated cost of about U.S.$8.8 billion will be undertaken in the coming years.

According to a World Bank study, the completion of the new corridors will result in annual savings of approximately U.S.$1.8 billion in fuel spending, reduced wear and tear of vehicles, and faster transportation. It is noteworthy that, compared to an annual addition of 6.8 miles (11 km) of national highways since independence, about 3,200 miles (5,100 km) of roads have already been four-laned as part of the NHDP.

The high traffic risk and the unwillingness of commuters to pay tolls often impede private investment in this sector. In this regard, the government's decisions to indirectly collect road-user payments through a tax on fuel and to constitute a nonlapsable central road fund appear to be steps in the right direction. However, there remains scope for further improving the existing institutional arrangements. For example, including road-user representatives in the management of the road fund would help impart greater transparency, establish accountability, and ensure that expenditure decisions are more responsive to the user needs. Yet another area of concern is that a substantial portion of the NHDP is being implemented through traditional civil works contracts, which leaves subsequent maintenance of the roads to the vagaries of funds availability and allocation. In order to overcome this limitation, the government could consider adopting approaches such as Build, Operate, and Transfer (BOT), Annuity and Shadow Tolling, which seem to offer better incentives for the operators to adopt optimal life-cycle construction methods and to maintain the roads over the contract duration.

At the state level too, there has been some progress. Several states, including Gujarat, Karnataka, Kerala, Madhya Pradesh, and Maharashtra, are going ahead with their (state) highway development programs, funded by a variety of approaches including toll roads, annuity, and capital subsidies. The last few years have also seen a much-needed thrust by the government toward improving the rural road network in India. In 2000, with a view to enhancing rural connectivity, the government launched the Pradhan Mantri Gram Sadak Yojana, a centrally sponsored program funded by a tax on diesel.

Airports

Airports play a critical role in promoting trade, tourism, and the economic development of a country. The Airports Authority of India was constituted in 1995 to bring about integrated development and the expansion and modernization of operational, terminal, and cargo facilities at India's airports. Out of a total of 400 airports/airfields/airstrips in the country, the authority manages 94 civil airports (of which 11 are international airports) and 28 civil enclaves at defense airfields. These airports handled over 44 million passengers in 2002–2003 (15 million international and 29 million domestic). The authority is responsible for providing air traffic services over the Indian airspace and adjoining oceanic areas.

Although it may appear that India has considerable airport capacity, it has for the most part lost out in aviation; it missed the global travel boom of the 1990s, ceding its natural geographic and economic advantages as a cargo and courier hub to other countries. Air travel still remains confined to a tiny section of the domestic population. The share of India in total world aviation traffic remains minuscule. India accounted for a mere 2.4 million tourist arrivals in 2002, compared to 715 million worldwide and 130 million in the Asia Pacific region. Worldwide, tourism accounts for about 10 percent of gross domestic product; in India it is less than 5 percent.

There is considerable underutilization of existing capacity, as only 62 of India's airports are in use, with the rest remaining inactive. Moreover, there are a large number of airports where full infrastructure is available, but which operate only a few flights a day. Over 40 percent of the passenger traffic is concentrated in the two main international airports in Delhi and Mumbai, and the limited terminal capacity at these airports has led to increased congestion, bunching of flights, and delays in passenger clearance. This situation is exacerbated by outdated infrastructure, inadequate ground-handling systems and night-landing facilities, and poor passenger amenities. Grossly inadequate cargo-handling procedures at airports result in delays of days in transit from one terminal to another. Only ten airports in the country are profitable, despite airport charges in India being considerably higher than the international average.

India's airports urgently need to improve efficiency and undertake investments for capacity addition. There is an increasing recognition that private participation is the key for achieving both these two objectives. The government has recently taken a long-awaited decision on the privatization of the New Delhi and Mumbai airports, approving the proposal to set up joint ventures with 74 percent private ownership and a cap of 49 percent on foreign direct investment. The government has also approved plans for two new airports near Hyderabad and Bangalore, with majority private sector participation.

Railways

The Indian Railways (IR) is over 150 years old. Since independence, the IR has remained a government enterprise and it currently operates the world's second-largest rail network under single management, with a route length of over 39,500 miles (63,000 km). The railways carry over one million metric tons of freight and transport over 10 million passengers a day (of which over 5 million are in Mumbai's suburban network). The annual revenue of the IR is approximately U.S.$5.5 billion, of which freight transport accounts for 70 percent and the balance is passenger traffic.

IR is now facing strong competition from road transport, pipelines, and air transport. Arbitrary pricing policies by the government, especially after 1985, prevented IR from raising passenger fares in line with rising costs, and led to heavy cross-subsidization by overcharging freight customers. Greater customer orientation, more flexibility, and the lower costs of road transport, contrasted with the slow movement and poor service quality of the railways, induced many freight customers to move to relatively cheaper road transport. IR is also plagued by very high operational expenses. In 2000–2001, operating ratio—that is, ratio of total working expenses to gross traffic receipts—reached 98.5 percent. Even as IR is unable to generate enough internal resources to contribute to investment plans, the government too reduced its level of financial support to the railways in the last decade.

A combination of the aforementioned factors has placed the IR on the verge of a financial crisis and led to substantial whittling down of fresh investments. The Railway Safety Committee's recommendation to invest U.S.$2.2 billion over the next five years to improve the safety of the aging network through better track maintenance and general improvements has been inordinately delayed. The need to increase investment in rail infrastructure led to a policy decision in 2000 to allow private capital in the railways sector, covering rolling as well as fixed infrastructure. In December 2002, the government announced a scheme—the National Rail Vikas Yojana—aimed at increasing the capacity of the rail golden quadrilateral connecting the four largest cities, providing better connectivity to major ports and building a few critically needed bridges over the Ganges and Brahmaputra rivers. Funds required for this scheme, estimated at U.S. $3 billion, are planned to be raised through an innovative mix of budgetary and nonbudgetary resources, including market borrowings and multilateral funding agencies.

The early 2000s have seen some initiatives involving private sector participation in the railways, one in Gujarat, completed in May 2003, entailing an investment of U.S.$119 million. The project, which aims at providing rail connectivity to Pipavav port, has been developed by Pipavav Rail Corporation, a joint venture between Gujarat Pipavav port and the IR. A similar structure is now planned to connect Krishnapatnam port in Andhra Pradesh. In the southern region, the IR is encouraging private entrepreneurs to set up private goods terminals, which will comprise multi-modal facilities for rail-cum-road links, warehousing facilities, storage facilities, and information technology backup for logistics services.

Sunaina KilachandUrjit R. Patel

See alsoInformation and Other Technology Development

BIBLIOGRAPHY

Annual Report 2003–2004. Department of Telecommunication, Ministry of Communications and Information Technology, Government of India.

Annual Report 2003–2004. Ministry of Power, Government of India.

Blueprint for Power Sector Development. Ministry of Power, Government of India, 2001.

The Indian Railways Report—2001: Policy Imperatives for Reinvention and Growth, Expert Group on Indian Railways, New Delhi.

India Port Report: Ten Years of Reforms and Challenges Ahead. Navi Mumbai: i-Maritime Consultancy Private Limited, 2003.

National Highways Authority of India. Available at <http://www.nhai.org>

Report of the Committee on a Road Map for the Civil Aviation Sector. Ministry of Civil Aviation, Government of India, 2003.

Structuring of APDRP, Reform Framework and Principles of Financial Restructuring of SEBs. Expert Committee on State-Specific Reforms, Ministry of Power, Government of India, 2002.