India Transformed
Page 40
Petroleum engages multiple stakeholders: the politician who knows what should be done but does not know how to get re-elected thereafter; the government that appreciates the importance of fiscal prudence but does not have the legislative backing to stave off political pressure; the bureaucrat who will espouse the virtues of the free market but is loath to relinquish the power and patronage derived from control over a cash-rich industry; the management of the PSEs which want operational and financial autonomy but dare not ignore the demands of their government bosses; and the consumer who wants reliable, clean and affordable energy but does not object when the government pegs the logic for ‘bad economics’ on its perception that the consumers desire nothing but subsidies and low prices. The story of the petroleum sector reform over the past twenty-five years has been all about managing these interwoven and often conflicting interests. The storyline that emerges from this review of the twists and turns of deregulation is fuzzy but two hard truths do emerge
One, the market is remorseless. It cannot be indefinitely bucked. This said, the market does not offer a panacea. It has to be fettered. The challenge for governments, now and into the future, is to find the appropriate balance between a functioning market and regulatory oversight.
Two, petroleum engages public and private interest. It will not go off the political radar; and consumers will never be totally indifferent to its evolution. Its future concerns everyone. The government must endeavour therefore to engage all stakeholders as they push to create a world-class, competitive, entrepreneurially innovative and sustainable petroleum sector.
17
India Evolving: Infrastructure since 1991
Jessica Seddon, N.K. Singh
The country’s infrastructure may be perpetually described as ‘straining’ under the pressures of economic growth and transformation, but the quarter century has seen a remarkable expansion of its scale and reach. At the same time, the transition path has been a learning process. The transition is also still under way and must accelerate— ‘recalibration’ must not slip back into ‘naïve optimism’.
India’s 2016 infrastructure looks substantially different from what it was in 1991. First, there is more of it, in more places. Five million Indians had telephones in 1991. There are more than a billion telecom subscribers, mostly wireless, in India in 2016.1 The proportion of India’s population with direct access to real-time information and communications networks has increased dramatically over the past quarter century (see Figure 1a). Access to electricity has also grown over the years. Just over 50 per cent of the population reported an electricity connection in 1990; close to 80 per cent did so by the 2011 census (see Figure 1b). Although access to actual electrons flowing through wires is lower—just 67 per cent of households report use of electricity for lighting in the 2011 census—nearly all (97.6 per cent) of villages are grid connected.2 The road network has expanded and evolved to include more state and national highways, while the number of rail network-kilometres has also grown (see Figure 1c, 1d). In 1991, air travel was rare and almost entirely provided by the state-owned airline. India has one of the world’s largest and fastest-growing domestic civil aviation industries as of 2016, with increasing numbers of links not only between the major metros but also to emerging regional hubs. The 2016 Civil Aviation Policy includes a provision for developing 350 new ‘no frills’ airports in more remote areas. Urban and, particularly, rural access to clean drinking water and sanitation has increased3 (see Figures 1e, 1f). Similar expansion and improvement have occurred in other sectors, from ports to public transport; irrigation to fuel pipelines. The country’s infrastructure may be perpetually described as ‘straining’ under the pressures of economic growth and transformation, but the quarter century has seen a remarkable expansion of its scale and reach.
Figure 1a: Telecom
Source: World Development Indicators.
Figure 1b: Electricity Access
Source: World Development Indicators.
Figure 1c: Road Network (Km)
Source: World Development Indicators.
Figure 1d: Rail Lines (Total Route—Km) in Thousand
Source: World Development Indicators.
Figure 1e: Access to Sanitation
Source: World Development Indicators.
Figure 1f: Access to Improved Water Source
Source: World Development Indicators.
More significantly, the production process for infrastructure has changed. Infrastructure in 1991 was largely financed, developed and maintained by the public sector. Electricity, where it was available, came from state-owned power plants and publicly constructed dams, and was conveyed over transmission and distribution lines owned and managed by state-government-owned utilities. Telephones—‘landlines’—were instruments at the end of wires owned and operated by the Department of Telecommunications. The transport network—roads, rails, ports, inland waterways—was almost exclusively constructed and maintained by public-sector entities, as were many of the freight- and passenger-transport vehicles that used them. Water infrastructure—drinking water supply, irrigation, removal and treatment of wastewater—was done through public-infrastructure projects servicing a limited subset of India’s urban and agricultural territory.
Infrastructure in the present times, enabled by new technologies and incentivized to meet new needs, involves a mix of public initiatives, private ventures and public–private partnerships (PPPs) as providers. Although distribution remains largely in public hands, nearly 40 per cent of grid-connected and captive power is generated from plants with substantial private investment. The proportion of private participation in renewable energy, which some would argue is the energy of the future, is more than twice that figure.4 Drinking water has seen a similar shift to a marketplace of options: in urban areas, borewells and private tankers filled with groundwater complement and compete with piped water. India’s largest desalination plant, at Minjur in Tamil Nadu, was built by IVRCL Infrastructures and Projects Limited, along with the Spanish multinational Abengoa—a distinct change from the era of large public-infrastructure projects as ‘temples of modern India’.
Similarly, India’s increase in teledensity was substantially driven by the mobile-phone industry, an almost entirely private endeavour (albeit built on access to spectrum, a public resource). The balance-of-capital requirement has shifted from a network that required substantial public investment and limited household investment (in the fixed line instrument) to an arrangement where consumers are essentially financing a large part of the system through their payments to private providers as well as to the Universal Service Obligation (USO) fund for extending communications networks to rural areas. This is a significant departure from the days of the Department of Telecommunications, Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL).
In transport, much of the network infrastructure remains publicly owned and operated, but private companies have an increasing role in construction, operation and maintenance of the urban and internationally connected parts of the network in particular. Just under 60 per cent of India’s air traffic flows through airports that have been built and operated by private developers5 and a quarter of the highway-kilometres have been constructed and/or managed by the private sector.6 Minor (state-level) ports, which tend to have a higher proportion of private involvement than the major (national) ports, handle 44 per cent of the maritime trade.7 More than half—57 per cent—of freight is now being carried by privately owned road freight fleets rather than on the publicly owned Indian Railways tracks.8
The transition from limited, publicly provided infrastructure in 1991 to more expansive access and higher-quality infrastructure delivered through a diverse set of institutional arrangements has been a significant shift. Much of what we take for granted today as the nature of infrastructure development would have been unthinkable in 1991.
At the same time, the transition path has been a learning process. This essay argues that In
dia’s infrastructure development since 1991 can be divided into three broad eras: ‘naïve optimism’ during the initial opening of markets and investment opportunities to the private sector; ‘realization’ years in which policymakers recognized that the state had to change in order to attract significant private investment towards public goals on sustainable terms; and the more recent ‘recalibration’ involving a renewal and reshaping of India’s public–private interface in infrastructure. The next section lays out this evolution from opening, to high-level-policy reframing, to implementation of new public–private relationships. It draws on examples from the three sectors that have seen the most sustained change in the public–private mix of investment: electricity, transport and telecommunications.
The transition is still under way and must accelerate: ‘recalibration’ must not slip back into ‘naïve optimism’. In physical terms, there are still major gaps in India’s infrastructure: congested ports, lack of even one deep-sea port, and connections to inland logistics; limited last-kilometre connectivity for roads and for true international-standard broadband; at least a third of the country with inadequate access to electricity and clean energy for cooking and heating; urban infrastructure that is far behind the needs of larger cities, much less smaller and fast-growing ones. These gaps are also opportunities for India to ‘leapfrog’ conventional, and now obviously unsustainable, infrastructure systems. Seizing this opportunity, however, will require the deepening and acceleration of the transformation of the public–private relationship that has been under way since 1991. The Rs 3.96 lakh crore (4 trillion, or about 18 per cent of the Budget) of public funds allocated to infrastructure in the 2017–18 Budget must be accompanied by the acceleration of regulatory and policy changes to attract at least as much private financial and technological contributions.
The third section concludes with some thoughts on the context for such a ‘leapfrog’, given the larger context of technological, economic and political developments that have both affected the normative roles of public and private sector in infrastructure development and altered each group’s ability to deliver the kind of infrastructure that India requires.
India’s Infrastructure Evolution: Three Phases
India’s engagement with the private sector in infrastructure provision in each sector has gone through three broad phases: naïve optimism immediately after liberalization; realization of challenges in combining market forces and public purpose; and recalibration to make the institutional changes required to support constructive co-evolution. The specific time frame for these phases varies by sector (see Table 1), but each sector’s development has passed through roughly the same evolution in approach.
Naïve Optimism
The first phase of liberalization focused primarily on attracting private investment and participation in infrastructure alongside public initiatives in order to fill the gaps in infrastructure faster. The then finance minister Manmohan Singh’s Budget speech in 1993, for example, noted:
Industrial modernization, and especially the creation of internationally competitive industries, requires a massive expansion of and qualitative improvement in infrastructure … Traditionally, these areas have been the preserve of the public sector. Substantial expansion of public investment in these areas is certainly necessary. However, the needs of the country are far beyond the capacity of the public sector to deliver in a reasonable time frame. The government has, therefore, adopted a policy of encouraging private-sector involvement and participation in these areas to supplement the efforts being made by the public sector.
This initial era of infrastructure policy reforms comprised stroke-of-the-pen reforms to open up new sets of activities to private companies and private finance, without as much thought to why these companies would actually undertake these activities, what terms would be sufficient to attract them, or how to shape pursuit of profit towards contributions to public purpose. The 1996 India Infrastructure Report submitted by Expert Group on Commercialization of Infrastructure Projects (chaired by Rakesh Mohan)9 provided the intellectual rationale for much greater private participation in Indian infrastructure, but it also offered several notes of caution—that public-sector investment would be a critical backbone for sustaining growth; that growth prospects were a precondition for attracting private investment; and that institutional, legal, financial and regulatory reforms would be essential for facilitating the free flow of investment into infrastructure. The early years of policy opening, however, belied more naïve optimism.
In electricity, for example, the central government opened electricity generation to private participation in October 1991. By August 1995, there were 189 projects planned, offering over 75,000 MW of capacity and investment of more than Rs 2,76,000 crore ($67 million in 1995 dollars).10 The red carpet was laid out, from an international ‘road show’ of high-level secretaries from the power and finance ministries in May–June of 1992, to openness, to negotiated (rather than competitively bid) memoranda of understanding11 and designation of ‘fast-track’ projects with sovereign repayment guarantees of 16 per cent rate of return on capital. In and of themselves, these projects would have met only a small part of the new generation capacity required, even if they had all been implemented (which did not happen),12 but the hope at the time was that they would serve as ‘showcases’ to catalyse further investment in the sector.13
Enron’s Dabhol plant on the Malabar coast was one of the most visible symbols of this era: a relatively advanced ‘new fuel’ (naphtha/gas) plant, built to supply a sole customer (the Maharashtra State Electricity Board) that many observers were not sure could either use or pay for the power, with extensive guarantees from the state and Union government. The negotiations on the terms were secret, the Foreign Investment Promotion Board rejected its proposal for guarantees, and the World Bank refused to finance the project. Industry commentary and advocates called it a ‘watershed’. The gamble may have paid off if fuel prices (which were passed through to the customer) had not unexpectedly increased, if power trading to widen the customer base had been allowed and enabled earlier, if both parties had had incentives to manage risks and adapt, or if its parent company, Enron, had not otherwise run into turmoil. As it stands, however, the best thing said about the project is that ‘it helped government policy evolve’.14
There was much less attention to restructuring the public part of the electricity system in the early years. The distribution sector, the main customer for electricity, remained in public hands, with almost no attention to even middle-ground steps such as ‘corporatization’, which would shift these bodies to more commercial operation and clearer accounting for subsidies.
In transport, restrictions on private participation in transport were steadily repealed from the mid-1990s to the 2000s, but mostly in areas where the public-sector presence was limited or new needs were emerging to be met. Civil aviation in India was almost completely controlled by the government after the Air Corporations Act of 1953 nationalized the existing airlines and created Air India (international) and Indian Airlines (domestic). The Act was repealed in 1994, and the number of flights expanded dramatically. India’s central government ports had been owned and operated by port trusts under the Union Ministry of Shipping. Through a series of policy guidelines as well as amendment of the Port Trust Act in 1996 and 1997, the government began to allow private operators to construct terminals, provide services, and enter into joint ventures with the national port trusts. There has been reluctance to move towards the full ‘landlord’ model15 of private operation in public facilities. However, the services model remains in force. Port trusts remain operators as well as landlords, with this structure giving rise to inherent conflicts of interest. The invitation to the private sector was further extended to foreign investors in 1998, with a shift to automatic approval of up to 100 per cent FDI in ports and shipping, and 51 per cent in support services. Some state governments moved further than national policy. Minor or state-owned ports were more
aggressive in courting private investment in the 1990s and in even allowing captive ports. Mundra, India’s largest private-sector port, for example, began with the 1994 approval for a captive jetty from the Gujarat Maritime Board.
The private sector may have been invited to open spaces in the transport system, but there was much less change in the structure of the public-sector incumbents involved in transport at this point. Railways remained protected. Provisions for private investment in inland container depots (albeit with some relatively onerous conditions for land acquisition attached) were passed only in 2005. While corporatization, or restructuring of public-sector service providers to function along commercial lines at arm’s length from political control, has proceeded at the state and urban levels with experiments such as the Bangalore Metropolitan Transport Corporation,16 national discussions have been slower. India’s nationalized airlines have been consolidated into one but the move to operate on commercial—if not private—lines has been euphemistically termed a ‘marathon’ as of 2017.17 Indian Railways, the vertically integrated behemoth, continues to remain firmly in government-department mode in spite of a series of specific restructuring recommendations from the 2001 Indian Railways Report18 and the 2014 India Transport Report19 of the National Transport Development Policy Committee also chaired by Rakesh Mohan, to the 2015 Report of the Committee for Mobilization of Resources for Major Railway Projects and Restructuring of Railway Ministry and Railway Board chaired by Bibek Debroy. Among the actors in Indian infrastructure, Indian Railways have perhaps been the most resistant to reform, while continuously losing traffic, both freight and passengers, to other modes, particularly roads. With the exception of the 2017 Budget (the largest ever for Indian Railways), the annual investment in the railways has been about half that in roads since the mid-2000s.