Core Troubles Rock Infrastructure Initiative
Over the years, the much-touted infrastructure initiative has been reduced to a shadow-boxing match between moonwalking policymakers and look-but-dont-touch investors. One just has to consider the long-gestation yawns that the infrastructure discourse evokes these days to fathom the disenchantment that has set in.
Asian Institute of Transport Developments recently released National Infrastructure Report 1998 serves to put these core sector woes in perspective. Prepared by sectoral experts from Business Standard, the publication offers a wide sweep of the core sector and its various segments, some of them hitherto uncovered power, oil & gas, coal, roads, ports, shipping, railways, civil aviation, telecom, financial services, legal infrastructure and water resources.
For starters, the report acknowledges the quiet crisis of infrastructure inadequacy engendered by the famous failure of private sector to meet the investment slack created by a pull-back in public investment, and aggravated by an endemic shortage of public sector funds and policy adhocism.
For instance, the proportion of total investment going to infrastructure, which had increased from 19.7 per cent in 1980-81 to 28.8 per cent in 1986-87, had declined to 21.8 per cent in 1996-97. This is far below the 25 per cent (of overall rate of investment of 31.5 per cent) required to sustain the GDP growth rate of 7 per cent.
It emerges that, more than the financial squeeze, it is the core sector supply rigidities on the real side which have in fact led to the economy-wide demand dry-up, due to the critical linkages that they provide. This is already evident in the downward revision of the GDP growth rate for the year to six per cent.
But what does the report have to say about individual sectors? Lets consider the worst case first power. Even after half a decade since the private sector was invited in, the scenario remains dark and dismal. In fact, the situation has worsened! Eighth plan data shows that this is one of the worst ever performances in respect of capacity addition, with almost 46 per cent of the target not being achieved. Policymakers committed a virtual blunder by initiating reforms from the generation side, instead of concentrating on the distribution end. There is an urgent need for a clear-cut tariff policy, the report enunciates.
The report also throws the inadequacy of transport infrastructure into stark relief. These critical shortages impinged directly on transaction costs. Take the road sector, for instance. Due to poor road conditions and traffic congestion, annual losses in vehicle operating costs amount to Rs 12,000 crore. The sector needs gigantic investments, almost 35-40 per cent of which is expected to come from the private sector. But the response has been lukewarm. The reasons are: the problems of land acqusition and toll collection, the forex risk, and policy adhocism. In the short term, the government would do well to concentrate on inviting private investment for building short stretches. In the long term, it needs to make the projects secure and bankable.
The railways study deals with the three dilemmas of capacity generation, modernisation and resource mobilisation. It suggests the following: one, new capacity should be generated more through increasing operational efficiencies, where incremental investment will have maximum leverage. Two, modernisation needs to be undertaken by choosing the top-end technology, instead of going in for a cheaper middle-of-the-road option with which Railways will be stuck for the next 35-40 years. Three, the government will have to step up its support, considering the sectors various natural cost advantages. Most importantly, Railways has to increase its market share by becoming more market-oriented. It needs to get its prices right. Although there is a lot of disillusionment with private sector participation, it is this very option that seems to be the most promising one.
In ports, capacity constraints feature yet again. Most of them are operating at more than 100 per cent utilisation levels, but in an highly inefficient manner. The sad state of ports has had a direct impact on the shipping industry. As a result, its cost of handling ships and cargoes is one of the highest in the world. The report recommends a four-pronged revival approach for ports liberalisation, commercialisation, modernisation and privatisation.
Civil aviation has been a total policy disaster giving an extended monopoly to Indian Airlines and Air India, allowing more private airlines than the industry could handle and not investing substantially in airport infrastructure. According to the report, a clear, cohesive policy is the only panacea for the ailing sector.
Things could only look up from here. The telecom reform is among the most successful of the governments reforms, both quantitatively and qualitatively. Private service providers have a presence in virtually all telecom services although they have had more than their fair share of teething problems. The report concludes, some critical issues need to be addressed if the reform process is to remain on course: a complete overhaul of tariffs which reflect cost, strengthening the powers of the regulator, removal of bottlenecks in finacing of telecom operators, and, crucially, further reforms in areas like domestic and international long-distance traffic.
One thing is certain. Financial infrastructure is critical for the success of infrastructural reforms. Project finance is a new area, and expertise is limited. There is a need for a long-term bond market. A strong regulatory machanism, along with a supportive legal structure, is of utmost importance.
At the end of the day, the message is clear. Growth via shortages is not a strategy that can be pursued when supply rigidities take time to be eased, the report concludes. The preferred alternative is balanced growth via excess capacities, especially in infrastructure. Which can only be brought about through large scale private sector participation.