Cover Story

Infrastructure: India’s Achilles heel

All grandiose talks of economic reforms are getting stymied due to India’s rickety infrastructure. For infrastructure development, the prime task is to tone up functional efficiency in addition to stepping up financial allocation. Foreign Investor-friendly legislative changes and regulatory mechanisms are to be in place to ensure that infrastructure bottlenecks don’t impede the growth of GDP

Dr. Ranjit Singh

That infrastructure plays a vital role in nurturing a nation’s economic activity, is stating the obvious. What is surprising is why India is so clumsy about the whole issue.

Consider the daily grind. An average Indian spends over 2 hours commuting daily between home and place of work. His mode of conveyance – whether car, bike or a bus meanders through a maze of an assortment of vehicles spewing oxides of carbon, sulphur, and nitrogen – while skillfully negotiating potholes and frayed tempers.

Compare this scenario with that in any major world city like Paris, New York, London, Singapore, Tokyo or Moscow, where the city planners embraced underground metro-rail several decades back - - conquering the tyranny of distance and time. It seems we in India have the habit of crossing the bridge only when it comes. Though it may sound a ‘sound’ practice, the price we pay for investing ‘late’ in the infrastructure is simply mind-boggling though not easily quantifiable.

The 2001-02 budgeted outlay for the infrastructure development is Rs. 76,647 crore – up 14 per cent over the Rs. 67,260 crore revised estimate for 2000-01. The share of infrastructure outlay in total central plan outlay is however lower at 58.9 per cent for 2001-02 budget estimate than 61.9 per cent in the 2000-01 revised estimate.

According to CII, the estimated contribution of urban sector to India’s GDP increased from 29% in 1950-51 to around 60% today. "We see a continuous migration towards large towns, due to lack of employment opportunities and poor infrastructural base of small and medium towns", says Babu Khan, CII’s representative overseeing the infrastructure. This disproportionate growth of urban population, as compared to rural and total population, is exerting a relentless pressure on India’s urban infrastructure.

The government is the largest spender in the area of infrastructure development in India. Though its various ministries and public sector enterprises, the investment occurs in the six core sectors of the economy. Product-wise, they are: cement, steel, coal, electricity, crude petroleum and petroleum refineries. On the other hand, the classification of infrastructural segments is broadly understood under areas such as Roads, Railways, Ports, Shipping, Civil Aviation and Telecommunication.

Whereas in the neighbouring Singapore, a ship can offload and reload its cargo within24 hours, India’s ports are famous for inordinate delays. Low port productivity is directly related with the obsolete equipment, inadequate mechanized handling facilities, poor port management techniques and outdated labour practices.

"JNPT and Chennai ports which are capable of berthing mother vessels, need to be developed as mainline gateway ports connected by a rail/road bridge and equipped with efficient, modern container handling facilities", asserts an industry source.

For the road sector, a number of studies have highlighted the adverse impact of road conditions on the Indian economy. It is estimated that the fuel wastage alone costs Rs. 500 crores per annum while total loss amounts to Rs. 2,000 crores per annum.

Massive road-building exercise will improve communications besides providing jobs —setting off a virtuous cycle of higher income and consumption. National highways constitute less than 2% of the entire road network but carry more than 35% of the total road traffic. Almost 98% of the national highways are not motorable under world standards, according to a survey conducted by the Indian Road Research Institute

While the freight and passenger traffic carried via road network has increased at over 10% over the last four decades, the road length increased only by 3% p.a. This growing mismatch between demand for roads use vis-à-vis availability of road facility has increased the traffic density – added to the already existing pressure on the roads.

The roads in India have many shortcomings, such as poor quality of road surface (nearly 52% of the road network is un-surfaced), inadequate pavement width, excess pressure on major road networks and so on.

Why has the road network in India remained undeveloped despite the widespread adverse consequences to the economy? The answer to this lies in the investment pattern. The investment for road construction and maintenance has, in successive plans, fallen short of the requirements for it. An examination of the investment pattern in the Five Year Plans indicates that although the absolute investment in road sector increased with each Plan, its relative importance in investment allocation has declined. This is reflected from the decrease in the percentage share of investment to total plan outlay from 6.7% in the First Five Year Plan to 3% in the Eighth Five Year Plan.

The consumption of petroleum products has been steadily increasing over the years at the rate of 5 to 8 per cent per annum. The demand grew from 55 metric million tonne (mmt) in 1990-91 to 90.6 mmt in 1998-99. As per the ninth plan mid-term review, it is estimated that consumption will be around 107 mmt in 2001-02 and around 148 mmt by the year 2006-07. Movements of the petro products via road and rail puts strain upon the already overloaded facilities. Pipelines will thus play leading role in transportation of petroleum products and crude oils to the various demand centers and the processing units.

While pipelines play crucial role for transporting petroleum products within the country, huge tankers bring crude to the ports. Shipping companies like SCI (Shipping Corporation of India), GE Shipping (Great Eastern Shipping Company), and Essar Shipping see rosy future ahead in spit of the fluctuations in the OPEC production.

Ports thus form a significant component of the infrastructure. Of India’s 12 major ports namely, Mumbai, Chennai, JNPT, Haldia, Kandla, Vizag, Paradip, Cochin, Calcutta, Tuticorin, Mormu and New Mangal — Kandla handles the largest share — nearly 50 million tonnes of cargo.

To facilitate handling of cargo, ports like Visakhapatnam are currently implementing ambitious information technology projects, setting a new trend in port operations.

According to Dr Harinath, IT Advisor for the project, the entire port area, starting from the fishing harbour on the one end to the ore handling complex on the other, is being linked by cables. For remote installations such as fertiliser berths, wireless communication facilities have been provided.

Budget Barometer

As a result of this year’s budget announcements, increased private investments are likely to take place in the road sector due to the increase in tax holiday for road projects. Construction activity is expected to get a boost from the sops given to the infrastructure sector. Stress has been laid upon the rationalisation of port tariffs in a fair and transparent manner through Tariff Authority for Major Ports and focus on corporatisation of ports.

Main budget points are:

For power companies, a five-year tax holiday and a deduction of 25% (30% in case of companies) of profits in the subsequent five years is allowed to an undertaking engaged in the business of generation/ distribution of power, which commences power generation on or before March 31, 2003.

It has become a tradition with government of all hues to bring in provisions in the Income Tax (I-T) code for encouraging/discouraging investments in infrastructure. "Long-term perspective is needed for the infrastructure projects", says Dr. Tridib Biswas, an economic consultant. Mere provisions for tax advantage will not be enough to promote infrastructure. Much more is required, as this is an area that is not profitable in the initial years. Tax holidays will not mean much, as the gestation periods are large, and profits accrue only after a decade or so.

Creeking infrastructure: issues beyond money

But if enough funds are available, can the infrastructure for speedy economic growth be provided? In reality, money is only one aspect of the problem. Even more important is the prompt and proper maintenance of the infrastructure facilities – an aspect sadly neglected all these years (see Box 1).

The observations made by the World Bank in 1994 highlight the gross inefficiencies in the infrastructure sectors, many of whom are owned, managed and operated by the public sector. The problems of the public sector have been examined at length by several Parliamentary Committees and expert groups. The inefficiencies are directly traced to the inadequate monitoring and evaluation systems currently in force. Moreover, myriads of recommendations of these expert groups have not been carried out because of the lack of political will, indifference of the bureaucracy and opposition from employees’ organisations.

Consider for example, the Railways, which is the government’s largest undertaking with 7,000 locomotives, 30,000 passenger coaches, 300,000 wagons covering a rail network of 63,000 km and employing 16 lakh workers – the largest employer among public sector undertakings. With such a mammoth network, even a reduction of efficiency by a fraction leads to much larger adverse effect on the overall economy.

We all have experienced (and tolerated) the tardy level of operational inadequacies of rail travel. Whether it is the punctuality or cleanliness, or safety record, there is nothing superlative to write about. The difference becomes all the more glaring when you compare the experience of rail travel with that in a country like France.

In fact, country’s whole infrastructure with some exceptions is creeking with neglect. The terrible rail disaster in Kerala where the controversy boiled down to whether the bridge was classified in records as merely an ‘old bridge’ or a ‘distressed’ one did not make the difference to dozens of people who lost their lives. This accident will just become a matter of statistics for Railways, where they mention it as "Factors beyond Railways’ control" (see table 2).

Indian Railways have signed a project agreement with a German government’s development bank, KfW, for modernisation of signalling and telecommunication systems. To begin with, the Delhi-Mughalsarai section of the Northern Railway is being taken up.

The main elements of the project are introduction of solid-state interlocking systems, automatic block signalling, optical fibre cable communication system and upgradation of train radio system. These systems will enhance reliability of the signalling and telecommunication systems and improve capacity, safety and efficiency of the train operations. KfW is providing a loan of DM 185 million for this project.

The point to be stressed is that the money and investment are only part of the story; the elan and mindset characterizing careful monitoring, evaluation, and proper usage of the material are equally important. Apart from the misery caused by the neglect, the time taken for restoration after an accident leads to disruption in the economic activity that is neither quantified nor highlighted. Who has not experienced that every monsoon causes defacement of the colony-road that was only repaired a few months ago? Evidently, non-adherence to norms is responsible for this — and also responsible for felling of entire building-complexes in cities of Gujarat, after the 26th January 2001 earthquake devastated the State.

Financing issues

Infrastructural projects being gigantic in size require huge investments that are traditionally undertaken by the government. However, this route, characterized by lack of professional monitoring mechanism, greatly reduces the efficiency of capital employed.

How about attracting investments from abroad? Here, the main hurdle seems to be the absence of necessary policy changes, which make such investments attractive and safe for the foreign investor. The roadblocks faced by Enron could well explain why nobody takes India seriously as a preferred investment destination even more than a decade after economic reforms were initiated in 1991. (Annual Foreign Direct Investment of $2.6 billion in India is peanuts compared to China’s $43 billion). In fact contribution of FDI to our GDP is a pathetic half-a-per cent compared to Thailand’s 6.3%.

Giving budgetary sops helps, but does not add to the comfort level of foreign investors who face far less hassles in neighbouring China, Singapore or Malaysia. Basically, the democracy that India is, requires concomitant changes in the legislative-paradigm and ushering in the regulatory/monitoring framework required for attracting foreign investment.

As example, road projects that are highly complex, usually take long time to achieve financial closure. For financing the Roadways, leading financial institutions and consultants have sought longer maturity periods for funding to ensure sufficient returns for the project promoters. Says Tony Pouter, partner, Price Waterhouse & Cooper, "Since the revenue predictions on highways projects were not very accurate, it was better to go in for loans with a longer tenure". Infrastructure Development Finance Company’s Deputy Managing Director, Nassau Muncie feels the maturity period could go up to 30 years. In fact, he is in favour of a flexible maturity period depending upon the circumstances. "Infrastructure projects must be completed on schedule since 80% of the funds raised by the financial institutions are from the public," says P.V. Narasimham, Chairman and Managing Director of Industrial Finance Corporation of India.

Deepak Parekh, Chairman and Managing Director, Infrastructural Development Finance Corporation laments that the government is the biggest stumbling block in developing the much needed infrastructure through the private enterprise. "Unless the government takes right steps, Financial Institutions can never face the challenge of financing the infrastrucrure, Too much money is chasing too few infrastructure", he rues.

Funding: The Railways experience

A new corporation, namely Indian Railway Finance Corporation was set up in 1986 to raise money from the market for funding purchase of rolling stocks, which are then leased to Railways. (This was done after concessional loans to Railways from the government got progressively reduced over the years).

The average rate of of leasing works out to 17-18 per cent. But since rolling stocks generate revenue from the day thay are acquired, debt servicing is not a problem for Railways. The average volume of funds raised by IRFC every year is Rs 2500-3000 crore at an average of 13-14 per cent. The funds are raised through bonds of 7-10 years maturity through private placement with banks and financial institutions.

On the other hand, the experience with the BOLT scheme has been less than happy. In this scheme, a private entrepreneur invests his money and completes the project with Railways giving him an assured sum on a monthly basis for a certain period of time. Certain tax benefits under Section 10(23) G have been given, which make such investment attractive.

But the experience of the last few years has not been very happy and the scheme is yet to take off in a big way mainly due to the reluctance of banks to lend funds for such projects and the grey areas on eligibility of tax relief under section 10(23) G. The present scenario is such that unless the issue is speedily resolved, the fund requirement Of Indian Railways for their expansion will be affected.

The experience of MSRDC (see Case Study) shows that there is no dearth of funds for worthwhile or profitable projects or organisations which have an excellent record of project management and completion. Thus for the projects with sufficient return, the appropriate strategy would be to raise money from the market through creation of certain special purpose vehicles and then ensure that the projects get completed in the least possible time.

CASE STUDY

MSRDC: A Trail Blazer

The Maharashtra State Road Development Corporation is a corporate 100 per cent owned by the Government of Maharshtra with a subscribed capital of Rs. 5 crore. The corporation has been permitted to raise funds from the open market for meeting the requirement of resources and the state government ‘s guarantees was made available.

To check the deteriorating quality of life in urban areas and the degenerating physical environment, the government needs to control the increasing population pressure on urban centres and prioritise implementation of various schemes already in place. The challenge of reorienting the urbanisation process thus lies in overcoming the infrastructural deficiencies and taking the best advantage of economic momentum in urbanisation

Certain projects like Mumbai-Pune Expressway, construction of 50 flyovers in Mumbai city and road-over-bridges in Maharashtra have been entrusted to the corporation on BOT basis. The corporation was able to convince the financial institutions that the expected revenue on completion of the projects will be adequate for not only servicing the interest liability but also for the return of the principal capital.

MSRDC approached the market in January 1998 and was able to raise Rs. 1150 crore, which is a measure of the confidence that the corporation enjoyed, considering the state of the debit market at that time. The corporation also took innovative steps like sending a quarterly newsletter to all major investors about the progress of the projects and also taking a team of representatives from the banks and FIs to show the actual progress on the field. Such transparent interaction with the financiers created a lasting impression about MSRDC as a professional organisation committed to excellent project execution.

This credibility with the investors enabled MSRDC to raise a second tranche of loans to the extent of Rs. 450 crores. It ended up raising more than Rs. 1000 crores – sufficient for completing the projects on hand. No wonder, MSRDC has become role model for other government organisations.

Urban infrastructure: growing nightmare

The government’s effort to contain migration of population from small and medium towns to larger towns, through the ‘Integrated Development of Small and Medium Towns’ (IDSMT) scheme, has only made a limited headway, according to the recent CII report on infrastructure.

The scheme with the primary objective to develop small and medium towns (population < 5 lakhs) by providing the economic and physical infrastructure and essential facilities and services, has so far covered about 945 towns cutting across nine states with central assistance of about Rs 345.30 crores released upto 31st March, 1999. The developments are not in sync with the growing population and urbanisation and this large-scale rural-to-urban migration is exerting tremendous pressure on the urban infrastructure.

To check the deteriorating quality of life in urban areas and the degenerating physical environment, the government needs to control the increasing population pressure on urban centres and prioritise implementation of various schemes already in place.

The challenge of reorienting the urbanisation process thus lies in overcoming the infrastructural deficiencies and taking the best advantage of economic momentum in urbanisation.

Addressing the urban crisis becomes all the more critical to sustain as well as to increase its contribution to the national income. The report has pointed out that the increasing population is in turn exerting immense pressure on the urban infrastructure.

Housing has been considered to be an important part of urban infrastructure development programmes, according to the report. The government has launched several schemes such as the National Housing and Habitat Policy (NHHP) to provide quality and cost effective shelter options, especially to the vulnerable groups and the poor. However, the massive mismatch between the demand and supply still exists. This situation thus calls for enhanced private investment to supplement government efforts, the report has stated. Allowing FDI with realistic lock-in periods is another measure that the government needs to explore, according to CII.

Citing a housing scheme for the economically weaker sections, CII report observed that in 2000-2001 (up to July 2000), against the annual target of 1.96 lakh dwelling units, 1.02 lakh units were constructed upto July 2000. Similarly, in the case of LIG housing, in 2000-01 (up to July 2000), against the annual target of 0.27 lakh dwelling units, 0.06 lakh units were constructed. This status clearly underlines the need for mobilising state resources to accelerate these projects.

Water supply and sanitation also form an important component of urban infrastructure in any region, being important basic needs affecting the quality of life and productive efficiency of the people. At present 81.6 percent of the population has access to drinking water and the sanitation facilities are available for only 23.6 per cent of the population. A centrally funded scheme with a view to provide safe and adequate water supply facilities to the entire population of the towns having a population less than 20,000 was initiated in 1994. 2151 such small towns were identified in the entire country. However, this scheme has also not seen notable progress like other urban development schemes, with only 439 towns approved at a cost of Rs 500.86 crore up to 31st March, 2000.

For improving the sanitation facilities in the country, a centrally sponsored, Low cost Sanitation Scheme (LCS) for liberation of scavengers was also introduced in 1980-81. However only 1249 towns have been covered until 31st January, 2001, which paints a grim picture again. The status report of the water and sanitation projects spells the need to encourage public-private-partnership.

Urban transport is another important component of urban infrastructure.

A good network of roads and an efficient Mass Urban Transport system make a substantial contribution to the working efficiency of a large city for its economic and social development. A poor urban transport system slows economic growth and hence urgent measures are needed to tackle this problem.

Apart from the public transport systems already in operation, buses, taxis, three-wheelers, etc. there are a number of mass urban transport projects which are partially complete / under progress, in the country, such as Kolkata Metro system, Delhi MRTS, Bangalore LRTS (Elevated Light Rail Transport System), and Hyderabad LRTS project.

Such mass urban transport projects need to be completed early to enhance connectivity and access. An integrated approach to the mass transport system would impart momentum to the lagging projects. Apart from this, for improving the connectivity and transportation system, CII has called for an integrated road-rail network planning.

Metro holds promise for Delhi

After making life easy for citizens in Kolkatta, the ambitious metro-rail project is making headway in Delhi. The metro rail system is planned to have a frequency of three minutes, in line with the international standards.

Titled ‘Delhi Mass Rapid Transit Project’, the estimated investment is of the order of Rs, 8,155 crore. Its first section is expected to open in 2002 and complete deployment of the two metro lines should take place by 2005. A consortium of IRCON, India, Cobra, Spain and Eliop, Spain have signed contract for the power supply, traction system and the SCADA system (Supervisory Control and Data Acquisition) of the underground corridor of the Delhi Metro project.

France’s leading company, Alcatel CGA transport has bagged a 20 million euro contarct for supplying contactless fare collection system for the metro lines. The token-collecting device, developed and patented by Thales, eliminates the need for magnetic stripe technology. The system could evolve into future applications for the metros as well as buses, car parks or electronic purse.

The rolling stock is being procured from the Japanese-Korean consortium of Mitsubishi, Koros and Mitsubishi Electric. The coaches are expected to be delivered within 20 months. As per the agreement, the contract is worth Rs. 1250 crore, part of which will be paid in rupee terms as the last 100 coaches will be manufactured within the country.

Ambitious Power Plans

According to the latest electric power survey conducted by Central Electricity Authority (CEA), the Ministry of Power plans to install 100,000 MW generation capacity by the end of 11th Plan. This will double the existing capacity of 100,000 MW and ensure power for all by the year 2012. At current price levels, the investment of about Rs 8 trillion (i.e. Rs 8,000 billion) will be required including investment in transmission and distribution.

Currently about 16,500 projects are in different stages of execution and are scheduled for completion during the 10th Plan. Additionally, there are 41,500 MW of CEA-approved projects.

Thermal generation which accounts for 71% of the present generation capacity, will continue to dominate the scene. Hydel generation as being a clean source of energy with non-inflationary tariff will be given due attention: it has been decided to substantially step up the contribution of hydel generation in the 10th and 11th Plans, leading to 35,000 MW share against the present 25,000 MW.

The new power strategy envisages promotion of Gas/LNG based plants to take advantage of greater thermal efficiency and environment benefits of combined cycle gas turbine systems. Thermal plants will be located near pit-head and coastal plants to avoid high costs of transporting coal with high ash content Indian coal.

Moreover, large-sized units to reap economies of scale and super critical technology will be preferred for achieving greater efficiencies and reduced environment impact.