India Transformed

by Rakesh Mohan

  The initial years of telecommunication liberalization, like in power and transport, involved opening the doors to private participation without substantially changing the core network infrastructure or its governing framework. Telecoms equipment manufacturing was opened for private participation in 1991, in part to develop technology to be deployed through public initiatives. In principle, the National Telecoms Policy of 1994 opened up the telecom sector for competition in basic and value-added services. In practice, however, the policy left the public-sector incumbent (at that time the Department of Telecom and MTNL) in charge of many critical functions as well as the backbone network, conditions that significantly affected operating conditions for private licensees.

  As in other sectors, the private sector did take the invitation. Various companies, including leading corporate groups such as Tatas and Reliance, along with new entrants such as Himachal Futuristic Communications Ltd, bid for and received licences for basic and cellular services, and radio paging. The first auctions were for wealthier, more densely populated—hence more viable—urban areas, but licences for other circles with lower population density were also bid for and awarded.20 Online services were also opened for free entry to private companies in 1998, and 110 licences were awarded to Internet service providers within the first couple of years.21

  Many of the bids, however, turned out to be wildly optimistic and operators did not actually make the investments required to use the spectrum that had been allocated. Some also requested delayed or reduced payment for the licences. While some of the optimism may have stemmed from a misreading of the market, the public sector’s dominant position as regulator, policymaker and competitor also limited business potential. The government also retained policymaking and tariff-setting authority until 1997, when the Telecoms Regulatory Authority of India (TRAI) was established by court order, and the public-sector utilities retained dominance over critical pieces of the network. There were no provisions for interconnection, for example, or termination of telephony.22 Though the private ISPs were allowed to lease transmission links from basic telecom providers, the international traffic was still controlled by DoT’s Internet node or Videsh Sanchar Nigam Limited’s Gateway Internet Access Service. VSNL also had a monopoly over international Internet-leased lines as well as the terms for private access to these parts of the network.

  India’s limited focus on opening up infrastructure opportunities for private participation, without comprehensive attention to restructuring the larger systems, may have been a function of policy bandwidth and prioritization in the early 1990s. ‘Infrastructure problems were not the central focus of policy when the reforms began in mid-1991,’ notes Montek Singh Ahluwalia in his review of the infrastructure policy in India. ‘The agenda for reforms in the early years was understandably dominated by crisis management and the need for domestic and external stabilization.’23

  Realization Years

  The ‘realization’ phase involved both an intensification of efforts to attract private investment and recognition that more intensive change in the policy and regulatory context for private investment would be required. Tactics in this era of infrastructure initiatives reflect several broad lessons from the early years. First, that safeguards needed to be put in place to ensure that agreements between public and private sectors were more transparent, competitive and equitable in allocating risks between public and private parties. Second, that regulatory independence and capacity would be key for managing a marketplace of public and private infrastructure providers in the public interest as well as for rationalizing the balance between user fees and subsidies that would inevitably still be required. Third, public-sector capacity for setting the terms of PPPs was limited and would need to be built. Much of today’s high-level policy framework for infrastructure was laid during the realization period; implementation of the new approach is still under way as part of the ‘recalibration’.

  The language of infrastructure policy began to shift from a focus on investment to a more nuanced target of ‘bottlenecks’ during the realization phase. ‘The next ten years will be India’s decade of development. To achieve this objective our strategy must encompass the following elements … [including] a sustained assault on infrastructure bottlenecks in power, roads, ports, telecom, railways and airways,’ noted the then finance minister Yashwant Sinha in the Budget speech of 2000–01. By the end of the decade, the euphemisms had been dropped: ‘Investment in infrastructure for the growth of economy is critical. I have urged my colleagues in the central and state governments to remove policy, regulatory and institutional bottlenecks for speedy implementation of infrastructure projects. I, on my part, will ensure that sufficient funds are made available for this sector,’ offered the then finance minister Pranab Mukherjee, in the Budget Speech of 2009–10.

  The ‘realization’ years of electricity-sector reform, for example, looked past generation capacity to focus on redefining policy and regulation as well as reining in cross-subsidies and power ‘lost’ to non-paying customers to create a market-linked ‘pull’ for private investment. Federal diplomacy came first in the late 1990s, with the prime minister convening a conference of chief ministers in 1996 and again in 2001 to develop and refine a Common Minimum National Action Plan (CMNAP) for power. Both meetings explicitly focused on metering and reduction of cross-subsidies as well as more explicit accounting for subsidies in state budgets rather than as obligations buried in SEB accounts. Enabling legislation came next, with the Electricity Regulatory Commissions Act of 1998 and the landmark Electricity Act of 2003. The 1998 Act created the Central Electricity Regulatory Commission and made it easier for private companies to sue state governments to demand formation of a regulatory commission.24 The Electricity Act of 2003 laid out a vision and enabling provisions for a competitive electricity market, in which generators would compete to provide power at the lowest cost; the transmission grid would reliably carry any seller’s output to meet demand across the country; and distribution utilities would provide electricity and customer service to metered, paying customers. Further amendments to the Act in 2014 deepened the emphasis on competition by separating carriage (wires) from content (power generation) in the distribution sector and encouraging multiple-supply licensees.

  Financial incentives for restructuring were the third prong of the ‘realization’ era in electricity. The government formed an Expert Group in 2001 to recommend measures for a one-time settlement of SEB arrears and suggest strategies for capital restructuring to improve these entities’ credit ratings. Following the report’s recommendations, the government approved a one-time settlement of the SEBs’ outstanding dues in March 2002.25 The national government also launched the Power Development and Reform Programme, initially designed to provide investment support for states to upgrade their distribution networks to reduce technical losses, but later expanded to include incentives for states to reduce their overall losses (due to theft and/or technical losses). The Accelerated Power Development and Reforms Programme (APDRP) of 2002 was followed by the Restructured APDRP (R-APDRP) in 2008, and subsumed under the Integrated Power Development Scheme in 2013. The 2015 Ujwal DISCOM Assistance Yojana (UDAY) programme, which encourages states to accelerate reforms as well as take over and refinance SEB debt in exchange for access to additional central funding for power-sector development, could be seen as the latest iteration of incentives to restructure the distribution sector. Like its predecessors, however, it only addresses the stock problem—the accumulated debt. Stemming the flow, or accumulation of losses will require a shift in state governments’ mindset. Competitive federalism and increasingly obvious economic damage from intermittent power supply and expensive backup may press some states to reform tariff policies; competitive politics may drive others to continue to cross-subsidize for as long as possible.

  The competitive market envisioned in the 2003 Act and 2014 amendments has been slow to materialize, however. States have been slow to unbundle, and open-access pro
visions that would allow electricity generators to connect directly with consumers other than distribution utilities remain incompletely implemented. Pricing, metering and collection efficiency have been slow to change, and distribution-sector finances remain precarious, leaving those who would invest in new generation capacity with limited market incentives. Transmission-grid infrastructure and management protocols—the critical ‘distribution channels’—from generation to distribution, also need to be strengthened before the Electricity Act of 2003’s vision of a free-wheeling marketplace, open to new technologies, can be realized.

  Similarly, in spite of a steady drumbeat of exhortations to address consumer pricing for electricity, there has been little progress on rationalizing power tariffs and limiting cross-subsidies. The original expectation that the setting up of ‘independent’ State Electricity Commissions along with the Central Electricity Regulatory Commission would lead to rational tariff, setting it free from political influences, has clearly been belied. The 2004 Task Force on the National Electricity Policy (chaired by N.K. Singh) emphasized the importance of untangling cross-subsidies and increasing user charges, as did the resulting NEP. The 2014 Amendment to the Electricity Act also reiterated mandatory metering and revised sections sixty-one and sixty-two on tariff-setting to mandate recovery of ‘all prudent costs’, ‘without any revenue deficit’. The 2016 Economic Survey called for regulators to simplify pricing, apply welfare analysis to setting rates and cross-subsidies, and match industries in need of power with excess generating capacity in need of a buyer by allowing open access. ‘[Tariff restructuring] is easier said than done,’ noted Pramod Deo, former chairman of the Central Electricity Regulatory Committee, in response. ‘It is a political issue and a systematic problem.’26

  The realization era in transport primarily revolved around developing an institutional framework to harness the PPP model for use in highways, airports, and to a lesser extent, in container operations in railways. The Central Road Fund, a non-lapsable corpus financed by a cess on petrol and high-speed diesel, was also a key institutional innovation for accessing lower-cost private finance for roads development. The 2000 Ordinance-cum-Act created a pool of funds for use in specified road and rail development and maintenance, as well as an asset against which the government could raise finance for the national highways programme. This innovation has not been as widely applied to other sectors as it could be. The USO Fund for extension of telecommunications service to remote areas, for example, would likely achieve its purpose faster if it were converted into a similar structure rather than kept as a pool of funds for BSNL to use for extension of service.

  Although the move to PPPs occurred across various infrastructure sectors, it was most prominently promoted in transport. The roads sector took the lead, promoting PPPs as an integral part of the National Highways Development Programme (NHDP), but more ambitious projects such as Hyderabad and Mumbai metros (at the time some of the highest-value transport projects in the world) soon followed suit.27 In terms of quantity and value, transport projects accounted for the bulk of India’s foray into PPPs over the 2000s (see Figure 2).

  Figure 2: PPP Projects—Sectorwise

  Source: Database on PPP projects, Department of Economic Affairs, Ministry of Finance, Government of India, https://infrastructureindia.gov.in.

  The policy promotion of PPPs worked on three tracks for the first wave of partnerships.28 The initial approach to developing PPPs in India across sectors was to create and showcase pilot PPP projects as a ‘proof of concept’. Many of the initial PPP attempts, with the exception of those undertaken by the NHAI were stand-alone, ad hoc, champion-led projects. Second, policy focused on shoring up project finances to ensure that they would be attractive for private investors. The government announced viability-gap funding29 for PPPs in 2005, followed by India Infrastructure Finance Company Limited in 2006 to provide long-term financing for projects. Third, the government attempted to build capacity for project design by developing a set of ‘Model Concession Agreements’ (MCA) for use by various agencies and state governments.30 It also established the India Infrastructure Project Development Fund (IIPDF) in 2013 to support consultants, transactions advisers, and other costs associated with project design.31

  The MCA approach made sense as an initial approach to quickly build capacity in a public sector that was more used to direct construction (sometimes with procurement) than articulating project structure, risks and responsibilities for an external partner. In retrospect, however, it has several limitations. First, any weaknesses in the contract design are propagated across a large number of projects. Second, a ready and accepted model creates less incentive to scrutinize the details of the projects to ensure that the agreement includes reasonable cost estimates and risk allocation. Third, many projects of interest have unique technological, input or demand risks that may go beyond standardized templates. There have been calls for revision of the model concession agreements across sectors, particularly as banks’ exposure to non-performing assets in infrastructure have mounted. An August 2016 submission from the Parliamentary Standing Committee on Transport, for example, pointed out that the National Highways Authority of India had allowed concession agreements with cost estimates different from those used in loan applications to go through. It suggested that the revised MCA, including various provisions for project exit and clarifications on responsibilities, be reviewed by banks and financial institutions as well as ministries.

  Throughout this period, much of the dialogue around PPPs focused on their ability to attract private finance into infrastructure, rather than their ability to bring in new technologies, management practices, complementary risk mitigation or other benefits from the partnership. The then finance minister Chidambaram described the PPP imperative as ‘a need to adopt a more aggressive approach for preparing a shelf of bankable projects that can be offered for competitive bidding’, in his 2007 Budget speech, for example. This is actually one of the weaker reasons to enter into PPPs, since public-sector access to finance is nearly always cheaper than private. Private borrowing also creates long-term economic liabilities that may be difficult to justify, since the efficiencies gained through the partnership do not reduce the overall financing required relative to public finance and implementation.32 Reform attention is also focused on contract design, rather than the management of the longer-term relationship. Both approaches have recently been reviewed and revised as discussed below in the recalibration section.

  In telecommunications, the 1999 National Telecommunications Policy, the TRAI Amendment Act 2000, the Unified Access Licensing regime first proposed by TRAI in 2003, and, importantly, a revision in the terms of licensee payments, helped the sector turn a corner from the limited, fragile, private participation of the late 1990s. The 1999 NTP and 2000 Amendment started to clarify the division of regulatory responsibilities from adjudication and dispute resolution by setting up the Telecoms Dispute Settlement Appellate Tribunal (TDSAT) for the latter. It reiterated that TRAI was meant to be an independent regulator and clarified its legal precedence over the Department of Telecommunications. NTP 1999 also committed to separating the Department of Telecommunication’s service provision role from policymaking and licensing, removing (at least in principle) its conflict of interest as both competitor and policymaker.

  Many observers, however, identify two changes in the licensing regime as the critical turning point for the sector. First, the shift from a fixed licence fee to revenue sharing in the 1999 NTP allowed existing licence holders and their financiers a reprieve. While some in the government at the time argued that the shift offered an unnecessary concession to companies that had bid, agreed to pay and should pay, others felt that the cost of this lesson would damage the sector irretrievably. The latter camp prevailed. Second, unified licensing—provision of service for an area using any technology—is seen as a catalyst for telecommunications-sector growth in an era of changing technology. The new regime, developed in part through co
nsultation with industry,33 opened the door for innovative technology selection rather than simply arbitrage between approaches to different ways of providing the same service.

  As the sector grew, however, and the telecommunications market and its revenue potential expanded, these high-level changes in the framework did not provide sufficient protection for safeguarding public value in public–private collaboration. The ‘2G Scam’, in which the government offered a second round of licences on the same ‘first-come, first-served’ basis as 2003 rather than auctioning them, brought corruption into the headlines, with sensational estimates of revenues lost to the public. The headlines focused on the crores of rupees, while the legal wrangling in the background hinged on justifying the ‘first-come, first-served’ for a market that was increasingly attractive. Pradeep Baijal, one of those accused of being responsible for the ‘first-come, first-served’ approach used in 2008, writes an insider’s view of the differences between the policy requirements of 2003 and 2008, as well as the way in which these differences were recognized by key stakeholders such as the finance ministry.34 His narrative highlights the fact that while some policymakers did recognize the need to move from an approach suitable for a new market to one more appropriate for 2008, the process was not strong enough to ensure that regulatory advice prevailed over political pressure to dispense favours.

  In summary, the realization years ended with many of the high-level frameworks for public–private coexistence in place or at least on the radar as important policy problems. None have been fully implemented; all need further refinement to shepherd not only today’s public–private interaction towards delivering better infrastructure, but also the unforeseen challenges and opportunities that new technologies will bring.