India Transformed

by Rakesh Mohan

  Recalibration

  The ‘recalibration’ phase under way now (and overlapping with continued ‘realization’) is distinguished by the growing recognition that public and private sectors must interact, collaborate over time, and jointly address technology and economic surprises in the infrastructure context. This requires not only accelerating the development of disinterested technical expertise such as urban planning, technology evaluation, regulatory review and other conventional elements of state capacity, but also institutionalizing the balance between flexibility and policy consistency, coherence and specialization, and discretion with accountability.35 It also requires a shift in focus to systems rather than simple dividing lines between public and private roles at a project level. Part of this realization has been forced by the prospects of private competition for public infrastructure providers; but other aspects of the new approach seem to have grown out of the increasing visibility of ‘last kilometre’ hurdles in infrastructure as well as the fragility of the first-generation PPPs and private investments.

  There are three broad categories where recalibration of the public–private relationship is both important and, to some extent, under way: (i) reframing PPPs to look at the context for longer-run interactions rather than simply the initial contracts; (ii) rationalizing and clarifying accounting so that it’s clearer about fund flows, opportunities to improve fiscal sustainability and incentives to provide infrastructure services efficiently; and (iii) continuing to develop the institutional framework for balancing accountability with independent expertise.

  The effort to restart stalled PPPs (and infrastructure projects in general) began in 2012 with the formation of a special group within the Department of Economic Affairs, Ministry of Finance, to review stalled projects and fast-track clearances. The initiative was in some ways the epitome of realization—taking the time to identify a mix of regulatory hurdles, financing constraints, challenges in environmental and other clearances from national and state entities, and land-acquisition problems.

  Recalibration, however, requires systemic approaches rather than project-by-project disentangling. The investigation found two broad classes of challenges. First, PPPs that foundered due to mistaken assumptions (e.g. lower traffic, more challenging building conditions) combined with the pressures created by the relatively short-time horizon for available finance. Second, projects that stumbled on land acquisition, either ex ante in terms of obtaining the necessary permissions, or ex post being criticized as unnecessary ‘giveaways’ to the private sector. These challenges interact, to the extent that conditions for the project change, and renegotiation becomes desirable. Any change that benefits the private sector has the potential to attract criticism. ‘The problem lies in an ostrich-like belief that once negotiated, ground conditions will continue to hold forever; that the terms of the agreement between the private party and the state are cast in stone; and that any changes required can only attract charges of crony capitalism,’ noted Vinayak Chatterjee, chairman of Feedback Infrastructure Services, in 2011 during a review of India’s PPP experience.36

  The Kelkar Committee recommendations focus on the partnership part and proposed a framework for ‘a change in attitude and in the mindset of all authorities dealing with PPPs, including public agencies partnering with the private sector, government departments supervising PPPs, and auditing and legislative institutions providing oversight of PPPs’.37 It is still too early to assess the implementation of the committee’s recommendations, and much will depend on actual implementation of critical functions such as faster dispute resolution. The Amendment Bill to the Arbitration and Conciliation Act, 1996, proposed in this year’s Budget speech is an important step. According to the finance minister, it will ‘streamline institutional arrangements for resolution of disputes in infrastructure-related construction contracts, PPP and public utility contracts’.38 (Just as in the critical turning point for telecommunications in the late 1990s, there is a need to untangle the past—the stranded assets in roads and power in particular and the financial stakes locked in these—as well as build a new course for the future. It will be important to move from ongoing discussions about creating one or more ‘Bad Banks’ to address India’s non-performing assets in infrastructure and beyond to credible implementation. This is an area in which the ‘balancing act’ state capacities of flexibility and discretion will be essential.

  However, general developments in infrastructure finance echo a constructive shift in attention to governance and financial course-correction over the life of the project rather than the moment of contract as a simple summary. The Reserve Bank of India, for example, issued guidelines for the establishment of Infrastructure Debt Funds to provide a secondary market for infrastructure assets and thus an opportunity to restructure risk and bring in longer-term finance for infrastructure—as Non-Banking Financial Companies in 2011. It revised them to allow more exposure to operational projects in 2015.39

  Pricing and accounting reform has started to gather momentum, but it’s still a mixed bag. Both are important for several reasons: first, improving fiscal sustainability through direct recovery of costs from those who can pay; second, clearly distinguishing between losses due to social obligations versus those from inefficiencies; and third, avoiding disincentives to stall on reforms that would affect the flow of cross-subsidies.

  The electricity sector continues to be entangled in cross-subsidies from commercial to agriculture and household loads, and SEB accounts are often opaque. Although the legal basis for an open-access regime is in place, tariff regime creates a strong disincentive to allow paying customers, from residential developments to industrial areas, to leave the system by contracting with alternative providers (using the SEB infrastructure as a distribution channel). It also creates a disincentive for supporting the paying customers’ own generation of distributed renewables by purchasing excess power via a feed-in tariff. Some state electricity boards in fact do the opposite, continuing to levy a cross-subsidy surcharge on larger electricity users who rely on their own installed capacity rather than connect to the grid at all.

  This financial tangle also distracts from the larger problem of market redesign to accommodate new and intermittent renewable sources of power. An increasing amount of wind and solar generation capacity is coming online, at lower and lower rates that affect the viability of investment in non-intermittent sources or storage required to continuously meet the load requirements. Electricity markets will have to adapt on several levels—from ‘time of day’ consumer tariffs, to reshape the load profile, to fees for grid stability services rather than just electricity inputs.

  The transport sector has seen limited moves towards more visible accounting, to distinguish clearly between public provision of resources for social obligations versus otherwise operating with commercial efficiency. Contrary to the repeated recommendations for corporatizing the railways, the Rail Budget was merged with the general Budget in 2017. While the minister had mentioned that this would allow for more explicit accounting for the costs of public-sector benefits given through free or subsidized rail access, critics have noted that the move towards a merged budget actually makes the railways accounts more opaque, with corresponding reduction in accountability. Furthermore, it has allowed Indian Railways to sidestep older and more urgent reform suggestions to adopt commercial accounting. On pricing, the ministry has not yet implemented the setting up of a rail-tariff authority, and did not address the persistent freight cross-subsidies to passenger rail in the 2016 Budget. However, the railways did take an unprecedented step of implementing ‘surge pricing’ on some express trains in September 2016. Similarly, Indian Airlines ran its first operational profit in 2015–16, since its creation in 2007. It still carries substantial debt even after a 2012 bailout, but it is being held to the tight performance targets, and recent demands for a softer budget constraint have not been met.40

  Within regulation, India appears to be developing an intertwined mixture of r
egulators, technical oversight bodies, and judicial and non-judicial dispute-resolution bodies. This is a departure from the first wave of conventional wisdom on the importance of independent, arm’s-length regulators staffed by experts and walled off from politics and political decisions. However, Dubash and Morgan argue that this kind of ‘regulatory governance’ may be a more reasonable approach to guiding public and private contributions to infrastructure in settings with ‘highly salient transnational pressures on the state; comparatively intense redistributive politics; and limited state capacity’.41

  The evolution of dispute resolution from the realization to recalibration periods is particularly striking. The first round of regulatory bodies set up in the 1990s and early 2000s combined oversight with dispute resolution in one entity. The Telecoms Regulatory Authority of India was an exception when the 1999 National Telecommunications Policy carved TDSAT from the regulator as a separate sector-specific entity. Disputes still spilled over into the courts, however, across infrastructure sectors.42 In an effort to relieve some of the backlog of cases around infrastructure among other sectors, the government has opened up the potential for arbitration with the Arbitration and Conciliation (Amendment) Act, 2015. The Kelkar Committee also recommends an Infrastructure PPP Adjudication Tribunal to focus on this category of disputes.

  The success of broad-based regulatory governance, however, will depend on the progress of capacity building within and outside regulators, technical wings of ministries, committees in Parliament, and the dispute resolution entities themselves. There are a variety of structural barriers to capacity development. First, the general scarcity of ‘independent expertise’ in the relevant sectors—as is common around the world. Many of those who would have the technical understanding required for policy, regulation and dispute resolution come from the industry themselves and thus may be seen as having vested interests. A clear regime for managing the revolving door needs to be developed. Second, the Indian Administrative Service (IAS) that is often looked to staff many parts of the regulatory governance infrastructure are brought in through an entrance exam and frequently rotated through assignments in a way that selects and reinforces highly skilled generalists. As a result, India relies extensively on consultants, which, in turn, affects data management, organizational learning, and incentives for experts to transfer knowledge to their colleagues and employees.

  Looking Ahead: Recalibration in an Evolving Context

  ‘What we learn to do, we learn by doing.’

  —Aristotle

  Nichomachean Ethics

  Infrastructure is important for growth, ease of doing business, ability to attract investment, social inclusion, and creation of employment and opportunities—everything that India seeks to accomplish in the coming years. Yet, it is also contingent upon continuing the overhaul of public institutions, private marketplace norms, and the relationship between the public and private sectors that began in 1991. The country’s ability to extend access to the high-quality infrastructure that it will need for environmentally and socially sustainable development over the coming decades is deeply intertwined with the institutional environment. India has moved from a setting in which public and private roles coexist to one in which they are more likely to co-evolve with direct influence on each other.43 Co-evolution, briefly, can be described as a context in which there are distinct forces driving the evolution (selection, variation, replication) of initiatives in various arenas—public, private, community or cultural spheres—but these evolutionary processes are intertwined. Political dynamics driving public-sector initiatives, for example, also affect competition among private providers of infrastructure.

  There are three developments that will shape India’s continued ‘recalibration’ in bringing public and private sectors together for infrastructure development. First, the boundaries on growth strategies are changing. Increasingly visible environmental change means that fossil-fuel intensive growth may be too costly, not only for the world (the externality), but for India itself. Rising levels of air and water pollution are visible and consequential reminders of local effects of ‘growth now, environment later’ tactics. Given that infrastructure substantially shapes our ability to maximize socio-economic development for a given level of resources, we will have to be strategic in how the next round of investments are made. Moreover, the shift from the use of human intellectual capital to information technology, algorithms and artificial intelligence has implications for infrastructure development. We will have to think about how to optimize information flow as well as goods flow to ensure a level and distribution of employment that meets the needs of India’s young population. The precedents of evolution from agriculture to manufacturing and services, and their implications for infrastructure, may no longer be relevant guidance.

  Second, the technologies for infrastructure are changing in ways that generate new opportunities for businesses as well as public-sector agencies to sustainably meet consumer needs. Changes in the scale and cost structures for providing data, energy, clean water, and other services affect the normative roles for public and private sectors as well as the actual opportunities for both to meet visible needs. The resulting combination of technologies can have a number of impacts. On the one hand, private entrants seeking to meet paying customers’ needs may relieve the pressure on the public sector to develop infrastructure—tanker water, for example, reduces the urgency of piped networks. The private value of infrastructure has increased enough in some cases to justify private investment in proprietary infrastructure, instead of just waiting, e.g. captive ports, captive power.

  On the other hand, technology change can affect the economics of infrastructure investments by allowing people to opt out of public provisions. The possibility of obtaining water from a borewell, for example, places a cap on user charges that can be viable. Looking ahead, it is possible that the state electricity boards could be simply bypassed if private entities are able to both generate and store power economically.

  Third, the distribution of power within the public sector is shifting. India has become both substantially more federal, but also more centralized and coordinated. India has decentralized in economic and political terms since 1991, and the constituent units have started to be more openly competitive for investment, in political claims of successful development, etc. This has added to the fragmentation of authority and jurisdiction, and has also changed the objective function for infrastructure. Infrastructure projects are now justified as much in terms of economic competitiveness as development impact.

  ‘Learning from states’ is also important as a new approach to federal management. India’s Constitution gives the central government substantial fiscal power and some extreme political powers, but states are increasingly politically powerful and less likely to conform to national governments’ requests or laws simply because the rules have been stated. The central government has used a variety of financial incentives, intergovernmental diplomacy, and other tactics to motivate state reforms. The latest tactics appear to focus on how the national government can reinforce states’ own constituency-, competition-, or leadership-led efforts to reform. This approach has its benefits—allowing creativity, innovation and diverse approaches in a varied country—but it also adds a layer of fragmentation for efforts to develop nationally integrated networks.

  In summary, a state that is itself in transformation must at the same time develop new capacities for partnership with the private sector and citizens, even as these two groups are discovering and responding to new social and economic pressures. The economy and the expectations of its participants are not sitting still while the state decides how to invest in infrastructure that shapes India’s transformation.

  18

  Infrastructure: Hopefully a Renewed Opportunity for the Private Sector

  Vinayak Chatterjee

  For all the problems we face today, Indian infrastructure has taken huge strides forward in a broad range of sectors through new intr
oduction of the private sector in what was earlier a public-sector preserve. But we have made mistakes in seeing the private sector as mainly a way to bring scarce capital into infrastructure, however with little regard to putting in place enabling institutions, laws and processes which could put that capital to effective use.

  It is difficult to look at the current state of Indian infrastructure and not be pessimistic. The big infrastructure boom that was triggered in the late 1990s, and reached its peak about five years ago, appears to have reached its end. Many of India’s largest private-sector infrastructure developers—who, during the boom years of the last decade, executed a massive expansion of India’s road network, set up new power plants, helped modernize India’s creaking port infrastructure and built world-class airports—face the very real possibility of going bust. India’s public-sector banks, which helped fund that boom, now face the risk that a large share of their loans made to infrastructure may never be paid back. India’s citizens, who have been promised for years that we, as a country, would get infrastructure on par with that of China’s, continue to struggle with power cuts, crowded and unsanitary railway stations, erratic water supply and gridlocked roads.

  The subjective experiences of the commuter and citizen are more than borne out by official statistics. Investment in the economy as a whole, which was growing at 24 per cent in the last quarter of 2009–10, had, by the last quarter of 2013–14, actually shrunk as compared with a year earlier. Indeed, as of the fourth quarter of 2015–16, investment growth remained weak, having fallen by just under 2 per cent from a year earlier.1