The Infrastructure Sector in India, 2000–1
3 THE INFRASTRUCTURE SECTOR IN
INDIA, 2000–1
3.1 A REVIEW OF SECTORS
In the year 2001, infrastructure sector grew less than
expected. There was much discussion about the failures and
‘half achievements’, but there were some successes, too.
HIGHLIGHTS
The Deepak Parekh Committee Report on Escrow Cover
(Government of Karnataka, 2000) unequivocally raised the
question of unsustainability of escrow accounts and brought
out the importance of privatization of distribution in power
sector. One could hardly disagree with the prognosis of Jack
Welch that India cannot be a ‘software superpower’ if she
does not produce enough power. ‘Everyone thinks the internet
shows up here, on the computer, and it doesn’t use power.
It’s a wonderful new industry. But the fact is every basis bit
of information uses electronics. And if you don’t have power,
nothing happen.’ (Singhal et al. 2000). The Enron saga
came to full boil and has spurred many tumultuous changes
in the sector which will bear fruit in the years to come.
Villages continue to suffer incessant power cuts. The failure
of the northern grid which plunged a large part of northern
India into darkness for a couple of days, brought home the
importance of the transmission business.
Draft Bill
Undoubtedly, the precarious financial health of the state
electricity boards (SEBs) can hardly be conducive for any
investment. Promoters and investors have shied away from
the sector. Policy risks continue to be high. The Electricity
Bill drafted by the NCAER (National Council of Applied
Economic Research) had gone through eight drafts. The
37
Anupam B. Rastogi
Bill seeks to replace the Indian Electricity Act 1910, the
Electricity (Supply) Act 1948 and the Electricity Regulatory
Commission Act 1998. The government’s own Draft Bill
2001 is slated to be introduced soon in Parliament. The
objective is to bring about comprehensive reforms in the
power sector.
Whither Convergence
The only sector that seems to be attracting private capital
is telecommunications, where large projects are being
implemented. However, there are problems here, as well.
The government continues to drag its feet on the issue of
convergence. It has taken too long to draft the convergence
bill and its passage.
The continuous changes in technology further challenge
the boundaries of many departments. This hindered the
provision of a legal framework for the development of the
telecom sector in India. Industry, however, is going ahead
with consolidation through mergers and acquisitions. It is
entirely possible that basic operators will formally join hands
with cellular operators to fight the government!
NHDP Goes Ahead
The transportation sector has a few successes in its bag and
a few failures too. Ports witnessed the beginnings of
corporatization and serious efforts at privatization of port-
related services.
In Roads, the National Highways Development Plan
(NHDP) is progressing on schedule and many states are
spending fair sums of money to improve their state highways
and district roads. But the battle against ‘short-termism’
38 India Infrastructure Report 2002
needs to continue. The focus is on construction rather than
providing good road service to people on a sustainable basis.
Cratered surfaces of newly refurbished roads and highways
are expensive witnesses of this folly. The government has
further emphatically reiterated that road building in rural
India would be a fully sponsored by the Central government.
However, there are no visible developments on the ground.
Cross nodal connectivity is the new mantra, but other than
the Planning Commission’s Draft Integrated Transport Policy
(GOI, 2000b), there is no big blue print to make it happen.
Railways and NHAI
The much awaited Rakesh Mohan Committee Report on
Railways (GOI, 2001d) was submitted to the Railway
Minister. The major reorganization of the Railways suggested
in the report is being studied by an internal committee of
the Railways! Severely strapped for resources, the Railways
have started courting state governments and private sector
organizations to get resources for developing inter-
connectivity with ports and other bulk cargo facilities. The
NHAI (National Highways Authority of India) too has a
ground plan ready to connect major ports with the Golden
Quadrilateral.
Some Southern Cities Move Ahead
Urban infrastructure remained in doldrums. But there is
much talk about providing better services—drinking water,
sewerage system, district roads—in cities. Finances of urban
local bodies have been stretched to their limits and user
charges are so low that they cannot even support operation
and maintenance costs of these services. However, some
metropolitan cities such as Bangalore, Chennai and
Hyderabad, have taken certain steps in the right direction.
Some states such as Haryana and Uttar Pradesh have been
encouraging the private sector in providing civic services in
‘new’ cities such as Gurgaon and the NOIDA area. Rajasthan
has introduced a comprehensive bill which aims to promote
private-public partnership in providing many civic amenities
in all its cities.
Table 3.1.1
Sanctions and Disbursement of Major DFIs
Disbursements
1998–9 1999–2000
IDFC 374 642
ICICI 15807 25092
IDBI 14470 17059
Total 30651 43537
Percentage growth over previous year 42
Much has occurred in the approach of most state
governments. The competition to attract private capital to
provide all types of economic infrastructure is discernible.
However, the bureaucracy in many ways continues to be
suspicious of the ‘profit motive’ and finds it difficult to
accept that there are risks involved in private provision of
services, which need to priced.
Investments in Infrastructure
Reflecting the general slowdown in the economy, the
infrastructure index of the Ministry of Industry and
Commerce registered a dismal one per cent growth during
April-June 2001, compared to 9.3 per cent during the
corresponding period of the previous year. The growth rate
of infrastructure-related industries—electricity, coal, steel,
crude petroleum, petroleum refinery products, and cement—
accounting for a weight of 26.68 per cent in the index of
industrial production (IIP), was much lower at 5.3 per cent
during 2001–1 compared to 9.1 per cent in the previous
year. The slowdown was particularly pronounced for
electricity, steel and cement, reflecting basically the paucity
of investment demand. Obviously the severe recession in the
industrial sector has had its effect on the infrastructure
sector. The cumulative industrial growth for July 2000 to
June 2001 was also much lower at 1.5 per cent against 5.9
per cent in the previous period.
Sanctions and Disbursement
The sluggishness in investment demand from the private
sector is reflected in the performance of domestic financial
institutions (DFIs) in a major way. The total sanctions of
the three top ranking DFIs—IDBI, ICICI and IDFC—
grew only at a rate of 21 per cent during 2000–1 as against
a robust 44 per cent last year.
More disturbingly, the total disbursements of the three
DFIs had slided to 15 per cent growth compared to 42 per
cent growth during the previous year.
Power and Telecom continued to rely on traditional project
financing methods. The Transport sector witnessed new
(in Rs. crore)
Sanctions
2000–1 1998–9 1999–2000 2000–1
762 1682 1866 2467
31965 24717 43523 56092
17500 23745 26966 28711
50225 50144 72349 87270
15 44 21
 The Infrastructure Sector in India, 2000–1
initiatives. Work on the Golden Quadrilateral is almost on
schedule. Success achieved in execution of the Moradabad-
by-pass using an SPV (special purpose vehicle) has
emboldened NHAI to try some more projects using the
same method. It was rail-port interconnectivity that saw
long-term concession awarded to the private sector by the
Railways. The Railways would construct the fixed
infrastructure and maintain and operate it, the private sector
would assure a certain fixed amount of traffic and raise
funds to build the facilities.
The urban infrastructure witnessed the use of many
forms of financial initiatives. Despite all the jugglery, if the
urban bodies cannot pay, these initiatives are likely to remain
non-starters.
Fiscal Incentives for Infrastructure: The Union Budget of
2001–2 proposed certain measures to provide a boost to
infrastructure investments and industrial growth. But the
decision-making process and governance of the country
came to a standstill because of the series of unexpected
political developments.
PM’s Task Force on Infrastructure: This Committee after
designing detailed framework and implementation of the NHDP
and the North-South and East-West corridors considered issues
related to ports, aviation and integrated transport policy.
PM’s Economic Advisory Council: It was probably the first
time that the report of the Council was forthright in detailing
all that ails in the sector. It pointed out that inadequate user
charges (and the states’ inability to compensate the private
sector), and regulatory uncertainty, are the two main causes
for the poor response of the private sector’s participation in
the sector. There are enormous risks in the current scenario
which have held back the private sector from enthusiastic
participation. The main recommendations of the Council
are delineated in Box 3.1.1.
INITIATIVES AT THE STATE LEVEL
West Bengal
The West Bengal government is in the process of framing
a policy for allowing private participation in infrastructure
like roads, flyovers and water distribution. The policy is
going to be introduced through a government resolution
rather than through legislation—a weak initiative since the
government of the day can change the rule of the game later.
Private parties will be allowed to exploit adjoining lands for
commercial exploitation. Open bidding is to be the basis
of private participation.
Karnataka
The government has recognized the importance of private
sector participation in the designing, financing, construction,
39
operation and maintenance of infrastructure projects. The
basic reason for this is that contracts can be specified, and
the profit motive used to create incentives for its delivery.
The government is preparing a comprehensive legislation
for reducing administrative and procedural delays, identifying
generic project risks, detailing various incentives, detailing
the project delivery process and procedures for reconciliation
of disputes.
Andhra Pradesh
The state enacted the Infrastructure Development Enabling
Act 2001 (Draft Bill) to provide for the rapid development
of physical and social infrastructure in the state and to
attract private sector participation. The bill provides
comprehensive legislation. It also lays down procedures for
reconciliation of disputes and provides for other ancillary
and incidental matters with a view to present bankable
projects to the private sector and improve the level of
infrastructure in the state.
Rajasthan
To attract private investment in urban infrastructure,
Rajasthan is introducing freer, market-friendly policies and
legislations. Policy changes and legislative amendments
include the New Rajasthan Town and Country Planning
Act, nearly three hundred amendments to the Rajasthan
Municipal Act 1959, abolition of the Urban Land Ceiling
and Regulation Act, and amendments to the Rajasthan
Urban Improvement Act 1959, Jaipur Development Act
1982 and Urban Land Allotment Rules 1974.
Rajasthan is the third state, after Haryana and Uttar
Pradesh to invite private sector to liberally invest in joint
sector townships on BOT basis. While the latter offered
townships (such as Gurgaon, Greater NOIDA) on stand-
alone basis, Rajasthan is offering majority of its urban centres
to prospective developers.
POWER AND ENERGY
True reform is awaited in the power sector. The single buyer
model of private generation of electricity could never have
taken off with the SEBs in near bankrupt conditions. The
process was started with the Deepak Parekh Committee Report
which questioned the suitability of escrow account of SEB
receivable and escrow capacity of KSEB (Karnataka State
Electricity Board). The Committee also suggested that funding
should be done on the strength and viability of the project
itself. Important suggestions were made in the expert group
reports (GOI, 2001a and 2001b), the energy review committee
reports (GOM, 2001a and 2001b) popularly known as the
Godbole Committee Report. Finally, the Electricity Act 2001
is ready. If passed by Parliament and implemented, it will be
40 India Infrastructure Report 2002

Box 3.1.1
Infrastructure Sector in the Report of the PM’s Economic Advisory Council

The council’s report on economy laid emphasis on investments in economic infrastructure if India is to achieve a growth target
of 8 per cent during the Tenth Five Year Plan. Private sector investments were muted because the pre-conditions for successful
large scale entry of the private sector were not yet met. Two main reasons provided in the report were inadequate user charges
and regulatory uncertainty.
While infrastructure remains an exclusive public sector monopoly, the rationalization of user charges in infrastructure is abso lutely
vital. A regulatory regime that is seen to be fair to consumers and also sensitive to the legitimate needs of investors, is abs olutely
essential.

POWER
‘The flaw in the policy with regard to electricity was the failure to recognize that the root of the problem lies in the financial
unviability of the state electricity boards. This has made independent power projects (IPPs) look for temporary solutions such as
escrow arrangements and central government guarantees which simply do not address the core problem.’
It suggested that the huge transmission and distribution losses could be brought down through privatization of distribution as
the privatized areas would help achieve better efficiency from the distribution system.
The central government should play a pivotal role in the reform of SEBs (State Electricity Boards) as large parts of these dues
are to the central government organizations, such as NTPC, Coal India, Railways, and NHPC.
In view of the rapid convergence of telecom, IT and media, a new comprehensive statute, which creates the framework of single
license for multiple services, needs to replace the Indian Telegraph Act of 1885.
The government must levy fees to meet administration and regulatory costs, along with universal service obligation charges,
through revenue sharing, and not as an avenue to raise resources for the government. Increasing competition within the sector will
ensure benefits of reduction in license fees is passed on to consumers. The only area where government should collect rent is in
the allocation of spectrum, which is a scarce resource.

ROADS
The council suggested that the private sector be encouraged to participate in road projects through the BOT (build, operate, transfer)/
Annuity system as ‘EPC (engineering, procurement and construction), and O&M (operations and maintenance) contracts be merged
and given to the same contractor who would be responsible for construction and maintenance of the road during the concession
period.
According to the committee, private sector made little progress for so long because the government found it more attractive
to raise money cheaply through riskless gilt-edged debt, rather than paying the private sector’s capital costs with their risk-premium.

PORTS
The existing port trusts should be corporatized and turned into landlord ports that would then invite different operators, both public
and private, to invest in cargo handling and port infrastructure services. The ports as such should concentrate on the development
of common user general cargo facilities. Rather than fresh ports it suggested existing ports be optimally utilized through efficiency
enhancing investments. Tariff fixing is no longer necessary as intra-port and inter-port competition will ensure competitive pricing
of services.

RAILWAYS
The council strongly recommended depoliticization of Railways, rationalization of user charges and corporatization of production
units. Railways have a key role in initiating development of the key inter- and trans-modal facilities.

CIVIL AVIATION
The council recommended leasing the major airports (Delhi, Mumbai, Chennai and Calcutta), and inviting private sector management
of airports. An independent regulatory framework for ensuring economic regulation in the sector was suggested as there are many
operators.
The inland air travel tax and foreign travel tax should be converted into a common ‘civil aviation cess’ to ensure sufficient flow
of funds to develop civil aviation facilities in other parts of the country.

the harbinger of a new market structure for the power sector Little progress has been made in bringing new investment
in the country (see a review of the Draft Bill 2001 in Section to the power sector. During the past year no major IPP has
10.3). achieved financial closure. The main reason for this is the
 The Infrastructure Sector in India, 2000–1
non-resolution of a bankable security package for lenders;
finalization of the escrow agreement and its operation-
alization1.
The power ministry has firmed up an action plan to
double the electricity generation capacity in the country to
over 2 lakh MW by the end of the Eleventh Five Year Plan
(2008–12). Projects aggregating 1,07,000 MW generation
capacity had been identified by the ministry for completion
during the Tenth and the Eleventh Five Year Plans. While
43,000 MW additional power generation capacity has been
planned for the Tenth Plan, 64,000 MW target has been
fixed for the Eleventh Plan. The institutional and policy
changes to realize even half of these are challenging. We are
doubtful, about the achievement of these targets, but need
not presume failure that would be inevitable.
Under the action plan, the power ministry has envisaged
large-sized thermal units such as 3 × 660 MW Sipat (NTPC)
and 6 × 660 Hirma (IPP) to reap economies of scale. The
Plan would target 35,000 MW additional generation capacity
in the hydel sector as against the existing capacity of 25,000
MW! The likely problems in land acquisition and in
management of environmental problems, and rehabilitation
and resettlement, do not find adequate mention.
Under the Tenth Five Year Plan, the Power Ministry
hopes to operationalize the mega power policy with a set
of fiscal and other incentives (such as customs duty exemption
and ten year tax holiday) extended to large-sized inter-state
projects of over 1,000 MW for thermal, and 750 MW for
hydro. The ministry hopes that these steps would ensure
offtake of power from identified mega projects to beneficiary
states and bulk consumers on the basis of long-term power
purchase agreements.
It has proposed a five-point strategy to convert loss-
making SEBs into viable profit-making concerns. The
strategy was chalked out after taking into account the
recommendations of the Ahluwalia Committee (GOI
2001b), established to suggest remedial measures on sick
power utilities. The strategy includes working out state-
specific revival packages as part of the SEBs’ restructuring
exercise, preparation of district-wise distribution plan across
the country, converting all distribution feeders into proper
profit-centres, ensuring metering of all consumer
connections, and bringing the accounting procedures of all
SEBs in line with the international standards for greater
transparency2.
1 [To continue viewing the problems of the power sector as
arising out of escrow is itself a fallacy. The source of disease is thereby
not addressed (see Chapter 2).]
2 These are really operational decisions of any electricity company.
That at a policy level the government has to lay down 100 per cent
metering is indicative of the deepseated problems to SEBs, wherein,
even operational decisions have to be taken by the government.
41
Settlement of SEB Dues
The chief ministers’ conference, held on 3 March 2001
under the chairmanship of the Prime Minister deliberated
on the Power sector. They agreed to meet the challenge of
restructuring head-on. The Union Minister of Power
constituted an expert group under the chairmanship of
Montek Singh Ahluwalia to recommend measures for one-
time settlement of outstanding dues of SEBs to the central
public sector undertaking (CPSUs) and the dues from CPSUs
to SEBs. The group was also entrusted to suggest a strategy
for capital restructuring of SEBs to make them operationally
viable.
The expert group’s recommendation includes a package
of incentives and disincentives linked to commercial discipline
and initiation of a process of reforms. The group emphasized
that the recommendations have to be accepted in toto. For
the states participating in the scheme, the group
recommended 50 percent waiver of the surcharge/interest
on delayed payments. The rest of the dues, including the
full principal payment amounting to Rs 33,600 crore was
to be securitized through tax-free bonds bearing an interest
rate of 8.5 per cent and issued by the respective state
governments. The group recommended that if a state defaults
in current payments for power/fuel, there should be a graded
reduction in the supply of power from central power stations
and coal supplies to the state. Further, SEBs should accept
reform-based performance milestones such as setting up of
SERCs (State Electricity Regulatory Commissions), metering
of distribution feeders and improvement in revenue
realization. Several states including MP, Orissa and West
Bengal have objected to the severe penalties proposed by the
panel against defaults. The government has accepted the
first part of the report.
SEB Restructuring
In the second part of the report (GOI, 2001b), the group
has proposed a comprehensive restructuring of the sector
to make it viable. The causes of failures are in line with other
reports. The committee has suggested that market borrowings
and private investments should be tapped to finance
expansion and modernization plans in the sector. It has also
recommended waiver of loans provided by the states to the
SEBs and central assistance for bridging the revenue gap,
meeting the costs of the work force rationalization and
adjustment costs for shifting to open access. The group has
recommended that the adjustment costs of the transition
would have to be funded out of the budgetary support.
Further, it has recommended central assistance equal to 5
per cent of the total sale revenue of an SEB in 2000–1,
subject to a ceiling of Rs 100 crore per year for allowing
‘open access’ of electricity. It has also suggested that the
42 India Infrastructure Report 2002
assistance should be provided to the SEB or its successor
entities for a period of three years after ‘open access’ is
guaranteed.
The group has recommended that during the first year
of direct sale by any private generator to bulk consumers,
the SEB or the transmission company should receive central
assistance of 50 paise per unit of power wheeled, subject to
a ceiling of Rs 250 crore. The panel has recommended that
‘this assistance should be reduced to 25 paise per unit during
the second and third years, the ceiling remaining unchanged’.
It has estimated that the central assistance on this count
would not exceed Rs 10,000 crore during the Tenth Plan.
The second part of the report has not yet been accepted by
the government.
The Electricity Bill 20013
The salient features of the bill are:
• No techno-economic clearance for generating stations
and no state licencing
• Non-discriminatory and open access to the
transmission system
• Major role for the regulators, SERCs and CERC
(Central Electricity Regulatory Commission) in licencing,
tariff, grid rules, and access rules
• Provides for power trading, and the eventual creation
of a spot market
• Graduated reduction of subsidies; and
• Mandate for the regulator to cover tariff in all segments.
DPC Report4
The Energy Review Committee headed by Madhav Godbole
found a complete failure of governance of various governments
at the state as well as the central government level in their
dealings with DPC (GOM, 2001a). In the report (part I)
the committee found that the Enron power purchase
agreement (PPA) had built in excessive payments to Enron
from the Maharashtra State Electricity Board (MSEB) as a
result of undue burden of the regasification facility, high
recovery charges of shipping and harbour and O&M, and
inflated claims of fuel consumption. Based on these findings
the committee recommended a reduction in tariff.
The committee drew up a blueprint for restructuring the
Maharashtra State Electricity Board (MSEB). The committee
emphasized two elements essential to the success of the
reforms: a reliable estimate of how much power is consumed
by each user group; and an organizational structure, which
devolves the responsibility to measure consumption and
3 See a critical review of the Bill in Section 9.4.
4 Section 6.6 draws the governance implications from the findings
of the Godbole Committee Report.
collect charges to entities as close as possible to each user
group possible.
It has suggested trifurcation of the MSEB. There is to
be a set of independent generation companies formed by
clubbing the existing facilities into sets of six. Some are to
be open to privatization, others not. Likewise, there will be
a set of independent distribution companies which may be
offered for private ownership. In keeping with the natural
monopoly characteristics of this activity, the transmission
company will continue to be under a single operator. The
company will be kept under public ownership, with wheeling
charges to be determined by the state’s power regulator.
Over time, it may be handed over to a private operator, but
private ownership of the transmission company is not
envisaged by the report.
The committee has rationalized that the overriding aim
of power sector reforms is getting people to pay for the
power they use at the rates which are set for that particular
category. If the provision of power at below cost to specific
categories of users, for example farmers, is deemed socially
desirable, then it is incumbent on the government to
reimburse the distribution company the difference between
the price charged and the cost incurred. So far, this
subsidization has been done by underwriting the losses of
the SEBs, but under the reform blueprint, it now needs to
be done by an overt transfer from the government to the
private distributor who will then buy power at the regulated
rate from the generators5. For the system as a whole to be
viable, the distributor needs to know precisely who is to be
thus favoured and how much this group collectively
consumes. Without an accurate estimate of consumption,
rates cannot be set with any degree of precision. Distribution
companies making plans based on erroneous estimates of
paid-for consumption run grave risks of financial non-
viability. Interestingly, the committee has recommended
that the proceeds of privatization be deposited in the Power
Sector Reform Fund, a state level fund.
According to the report, ‘the essential feature of the
model (defined as the Maharashtra model) is to avoid the
problems of persisting with government ownership, mixed
zones, the single buyer approach and an annual regulatory
process, while at the same time phasing in the transition to
a full-fledged market system, as envisaged in the proposed
Electricity Bill, in an orderly manner’. (GOM 2001b, p. 88)
POWER SECTOR REFORMS AND STATES
Reforms at the state level have been moving slowly.
Administrative changes have not been easy to bring about.
5 Even this would not work, since the incentives to over report
consumption by the subsidized sector would remain. Only direct
subsidization would work. See Chapter 1.
 The Infrastructure Sector in India, 2000–1 43

Table 3.1.2
Power Sector ‘Reforms’: A ‘Score Card’ for Statesa
Parameter SEB Constitution Commercialization MoU with Central
Restructuring of SERC of Distribution Government

Andhra Pradesh ü ü Strategy being –

finalized
Assam – – – –
Bihar – – – –
Chattisgarh – – – –
Delhi ü ü Committed—proposal to –
be done during 2001
Goa – – – –
Gujarat Reform law approved ü Strategy being ü
by GOI finalized
Haryana ü ü Strategy being ü
finalized
Himachal Pradesh – ü – –
J&K – – – –
Jharkhand – – – –
Karnataka ü * To be completed *
by Dec 2002
Kerala The state has proposed to reorganize SEB into three profit centres
Madhya Pradesh Reform Law passed ü – ü
in the Assembly
Maharashtra – ü ü –
Orissa ü ü ü –
Punjab – Notified; yet to – –
be constituted
Rajasthan ü ü Committed –
Tamil Nadu – ü – –
Uttar Pradesh ü ü Strategy being ü
finalized
Uttaranchal – – – –
West Bengal – ü ü –
North East States Willing to constitute joint Electricity Regulatory Commission
a These constitute reforms in a formal sense. In content restructuring is not uniform across SEBs. Gujarat has trifurcated on paper,
the GEB, purely to meet certain targets set by the ADB (Asian Development Bank) while the sector continues as before. It is hoped
that the Reform Law would make a difference.
Source: CII (2001), Press Release.

Some state regulatory authorities have also passed tariff
orders but restructuring and corporatization of the SEBs is
proving difficult. Internal changes due to corporatization
has been even more difficult. Table 3.1.2 succinctly captures
the progress of reforms in various states.
Karnataka
The expansion of the generation capacity at the Raichur
Thermal Power Station (RTPS, Unit 7) by the Karnataka
Power Corporation Limited (KPCL) became the first project
where financial closure is subject to reforms. The government
of Karnataka, KPCL, Karnataka Power Transmission
Corporation Limited (KPTCL) and IDFC signed a
multipartite agreement which specifies milestones for reforms
to be met by the state government and KPTCL such as
privatization of distribution within a specified period,
commitment to financial discipline and creation of a
dedicated power fund. Encouraged by this development,
the Union Finance Minister has suggested a conditional
lending programme for IPPs by financial institutions, in line
with the multipartite agreement in Karnataka, as an
alternative to escrow based lending.
Orissa
Power sector reforms initiated in Orissa six years ago have
come to a halt (a detailed analysis is given in Section 9.3).
AES Corporation, the US power major has a 49 per cent
stake in the Orissa Power Generation Company (OPGC)
44 India Infrastructure Report 2002
and a 51 per cent stake in Central Electricity Supply
Company (CESCO), distribution company for central
Orissa. The AES has initiated arbitration proceedings against
GRIDCO for non-payment of dues and has threatened to
pull out of CESCO if tariffs are not increased. CESCO is
losing several crores every month in high costs and low
tariffs. The power corporation is in red after six years of
operation. The public, too, is not appreciative of slow and
halting manner of the reforms process. From being a model
in power sector reforms, Orissa’s experience is now a lesson
on how not to go about privatizing the power sector.
Andhra Pradesh
Andhra Pradesh (AP) has provided major boost to the power
sector reforms. The Rural Electrification Corporation (REC)
has almost doubled the disbursement amount to the state
to undertake rural electrification programmes last year. Under
its lending programme for AP, the corporation has decided
to disburse Rs 800 crore to the Transmission Corporation
of Andhra Pradesh (APTransco) in 2001, which is substantially
higher than Rs 420 crore during the previous year.
Rajasthan
The Rajasthan government has decided to spend Rs 2,000
crore on power sector reforms in the next two years in an
attempt to make the energy sector self-reliant by 2005.
Jhunjhunu, Jodhpur, Alwar and Jalore districts of the state
have been identified under the Accelerated Power
Development Project of the central government.
Rajasthan, facing power shortage, has decided to work
more on non-conventional resources like solar and wind
energy. The first wind power project has been set up by an
IPP in the border district of Jaisalmer. The state has already
achieved a record by setting up 9,900 domestic light
connections based on solar energy. According to the Renewable
Energy Development Authority (REDA), three demonstration
wind power stations are already functioning in Jaisalmer,
Phalodi and Devgarh. All the three wind units have generated
more than 7 million units of electricity so far.
Jharkhand
Recognizing the need to open up the power sector to private
investment, Jharkhand has decided to privatize electricity
supply in the state. Power supply as well as revenue collection
will be first privatized in the state capital, Ranchi, on an
experimental basis. If successful, it will be implemented in
Jamshedpur, Bokaro, Dhanbad and other towns.
Delhi
The Delhi Vidyut Board (DVB) has invited financial bids
for privatization of three distribution companies. The Board
has received bids for divesting 51 per cent stake from private
companies and final financial bids are to be called soon.
Under the scheme, the balance 49 per cent would be held
by the government but the strategic partner would be given
complete freedom in running the distribution companies.
Tamil Nadu
US based power major CMS Energy has threatened to pull
out of the US $ 1.4 billion Ennore power project if the
Union government does not agree to provide a counter
guarantee on payments. The state government has strongly
advised the Centre not to agree to a counter guarantee. The
corporation has demanded that the government modify the
payment security mechanisms for the Ennore project. CMS
Energy holds 26 per cent of the equity in Dakshin Bharat
Energy Consortium (DBEC), which is executing the 1,850
MW project. The central government is working to provide
a type of counter guarantee under a new terminology called
‘termination guarantee’. Serious doubts are being raised as
to whether the multi-million dollar integrated liquefied
natural gas (LNG) import terminal-cum-power project
proposed in Tamil Nadu will take off.
The DBEC was willing to sell the entire power generated
from the Ennore project to the PTC. Tamil Nadu Electricity
Board (TNEB), however, decided that it will buy only 750
MW of power on long-term basis. The MoU stipulates this
and states that PTC will buy the power generated from
Ennore as per the PPA terms agreed to between PTC and
the developer, namely, DBEC and in consultation between
TNEB and other beneficiary states. The company has drawn
the Prime Minister’s attention to the signing of the Joint
Development Agreement on 14 September 2000 in
Washington, giving the Ennore project special status by
both the American and Indian governments. The agreement
sought completion of the Payment Security Mechanism
(PSM) concept by 15 December and full PSM
documentation by 31 March 2000.
The government is targeting to generate 10 per cent of
the power requirement from renewable energy sources and
plans to set up additional generation capacity of 10,000
MW and a target for electrifying 18,000 remote unelectrified
villages by 2012.
Andhra Pradesh leads in power generation from bio-mass
such as bagasse, rice husk and agricultural waste. Fifty
plants of 6 MW range each had been sanctioned, of which
five had been commissioned and 25 had been sanctioned
loans. All the plants are expected to be fully operational in
two years, accounting for a total of 300 MW of additional
power.
Private entrepreneurs now produce wind electricity in
nine states. Together, they have a total installed capacity of
over 1100 MW — Karnataka has 40 MW, Andhra Pradesh
 The Infrastructure Sector in India, 2000–1
over 90 MW and Tamil Nadu over 800 MW. During the
2000–1 fiscal year, the 40 MW installed capacity in the state
produced 71.1 MW electricity, 8 per cent of the 882.6
million units from renewables sources (solar, bi-product
steam from sugar companies, biomass and small hydel).
OTHER SECTORS
Upstream Hydrocarbon Regulatory Authority
The Union government has almost reached a consensus to
constitute a separate regulatory authority for the upstream
hydrocarbon sector. This has become all the more important
in view of the recent round of bidding under the new
exploration licencing policy. The upstream hydrocarbon
regulatory authority (UHRA) would be set up once the
operational framework is finalized. A bill to this effect is
expected to be introduced in Parliament.
It is mooted that UHRA should not be subservient to
the government in its daily functioning and that government
interference should be minimal, along the same lines as the
Telecom Regulatory Authority of India (TRAI). UHRA
should have full operational and functional autonomy within
a framework of set rules and regulations laid down by the
government. Public overseeing of the institution could be
ensured through annual review by the government and
auditing by CAG (Comptroller and Auditor General of
India).
Roads
Besides telecom, construction activity of arterial roads has
been the most visible sign of the ‘new’ infrastructure.
The road widening (four lane) projects on the Golden
Quadrilateral are being expeditiously implemented by NHAI
with funds being raised from a variety of sources—budgetary
resources, multi lateral borrowings (World Bank/ADB),
market borrowings by NHAI and private participation.
The first major BOT project on national highways using
the annuity approach, four laning of the Panagarh Palsit
stretch on NH 2 received better response. Six other four
laning projects have been offered to the private sector on
the annuity format. Several applicants have qualified to bid
for these projects. IDFC has been involved in this initiative
as an advisor to NHAI from the onset, defining the concept,
finalization of the evaluation parameters for qualification
and final selection, procuring documentation, managing
the procurement process, finalizing the BOT concession
structure and concession agreement, and negotiating with
bidders.
The first major BOT project on National Highways
using direct tolling approach—six laning of the Jaipur
Kisangarh stretch on NH 8 received poor response with
45
only one bid. Moradabad bypass, implemented by a wholly-
owned subsidiary of NHAI, started functioning in 2001.
The recently commissioned first phase of the Moradabad
bypass has received enthusiastic response from users, with
toll collections over Rs 1 lakh per day in less than a month
since the road was opened to the public. A few more BOT
projects which became operational during the year were the
Delhi-NOIDA toll bridge, Wainganga bridge project near
Nagpur, and Baroda-Halol four laning project.
Several state governments, such as Maharashtra,
Karnataka, Kerala and Punjab, are pursuing initiatives for
road development, some of them through dedicated road
development or infrastructure development corporations.
Motorists will now have to pay for driving on newly-
upgraded Indian highways. The government plans to toll
the entire NHDP in perpetuity. This means that BOT roads
are likely to be tolled even after the end of the concession
period. The government has fixed a rate of 40 paise per
kilometer for cars and an upper limit of Rs 1.40 for heavy
vehicles. NHAI is to finalize the toll for different stretches,
including bridges. It is estimated that NHAI will mop up
annual revenues worth Rs 20 lakh per km through tolling
of every completed kilometre of highway along the Golden
Quadrilateral linking the four metros of Delhi, Mumbai,
Kolkata and Chennai. Taking into account a construction
cost of Rs 4 crore per km, this works out to an average
recovery of about 5 per cent of the total funds invested for
developing the Golden Quadrilateral.
The SPV route appears to be the new buzzword fuelling
India’s great highway dream. This new financing route is fast
catching the fancy of the NHAI. The authority is considering
the option of taking up projects through the SPV route on
the Ahmedabad-Vadodara Expressway and plans to connect
12 ports including Kandla, Cochin, Paradip, Tuticorin,
Haldia, JNPT, Vizag and Marmugao. In future SPV projects,
NHAI proposes to invest 30 per cent of the equity of the
project with the EPC contractor contributing a minor 5–
10 per cent so that there is a sense of ownership towards
the project. However, the success of the SPV route, would
depend upon identification of commercially viable projects.
NHAI hopes to take up projects worth Rs 2,500 crore via
the SPV route.
The Central Road Fund
It is hoped that the Central Road Fund will ensure funds
raised through the cess will be used for road development.
The act, however, does not provide for complete ring fencing
of the cess fund. Establishment of a road board to manage
funds professionally is not mandatory in the act. The
government has lost the opportunity to ensure that ‘users’
get the quality of roads they pay for. A critical assessment
of the act is given in Box 3.1.2.
46 India Infrastructure Report 2002

Box 3.1.2
The Central Road Fund

The Central Road Fund Act 2000 gives statutory power to establish a Central Road Fund for development and maintenance of
national highways and state roads, development of rural roads, construction of under- or over-head railway bridges, erection of
safety works at unmanned rail-road crossings and other prescribed.
The cess on petrol and high-speed diesel (HSD) will be levied and collected at the rate of rupee one per litre. The proceeds
of the cess shall first be credited to the Consolidated Fund of India; the central government may credit proceeds to the fund e xtend
grants and loans. Any fund provided by the central government for the development and maintenance of state roads is also to
be credited to the fund. The balance to the credit of the fund is not to lapse at the end of the financial year.
The fund is to be administered by the central government and is to allocate and disburse money to concerned departments.
Projects of state roads, approved by the central government using set criteria to be financed out of the share for state roads shall
be monitored by the central government.
Fifty per cent of the cess on HSD is to be allocated for the development of rural roadsand the balance as follows: 7.5 per cent
shall go for the development and maintenance of national highways; 12.5 per cent for the construction of under- or over-head
railway bridges; 27 per cent on development and maintenance of state roads; and 3 per cent on central government approved speci fic
state road projects.
The salient features of the Act are:
• Cess collected from users shall be spent on development and maintenance of roads.
• All the central government funds earmarked for road sector shall be channelized through the fund. State road projects financed
from the fund shall follow established criteria.
• Regulation and control of motor vehicles throughout the country come within the jurisdiction of the central government.
• There is no provision for a cess drawback for off-road usage of HSD which will keep the administration of the fund simple.
• Money from the fund cannot be allocated for the maintenance of an expressway.

CRITICAL ASSESSMENT OF THE ACT

• The administration of the fund remains with the central government and there is no statutory provision for an oversight
board having user groups representation.
• The proceeds of the cess are not completely ring-fenced; the central government is required to credit the proceeds to the
fund from time to time after deducting the expenses of collection.
• The fund has no budget constraint as the government may credit money by way of grants or loans. The government has
powers to disburse funds to any prescribed project.
• The fund remains under political control except that proportion of money to be spent on development and maintenance
of national highways is fixed.
• The act provides a weak legal basis to the fund but it will have published financial rules and regulations. The fund shall
not be subject to independent, technical and financial audits.

Annuity vs EPC considered the most risk-free variant of BOT highway

In public-private partnership for infrastructure financing,
received wisdom is that the contract should be such that
risk ought to be borne by the party that is best able to
mitigate it. Annuity is one such instrument. Soon after
NHAI received the bid for the first annuity project, it
received extremely sharp criticism from financial circles
and analysts. Criticism of the popular press was based on
prices quoted by the Gaumuda–WCT combine of Malaysia
for Rs 69.8 crore (half yearly payments) for the Panagarh-
Palsit pilot project. This was for a stretch of only 65 kms.
They compared the annuity to the cost of four-laning a
two lane highway at approximately Rs 4 crore per kilometer.
However, one needs to consider the price to be paid for
implementing a pilot project. It was expected that the
prices would be lower once private entrepreneurs gain
confidence in the concept. The annuity method is
projects with private sector participation. However, analysts
objected to annuity concept on the following grounds
(Haldia, 2000):
• Annuity payments essentially entail budgetary funding
on a deferred basis. Tight budget constraint, implies that
only a fraction of the development programme can be
sustained.
• Price at which a private company can raise funds
from the market will be higher than that of the government.
• Dichotomy arises when user pays toll only on some
roads. Political justification for a toll road at one place and
annuity payment at another place will be difficult to
sustain.
• To support annuity payments by the state government
for state roads, it is not easy to impose another cess to
support a state road fund.
 The Infrastructure Sector in India, 2000–1
• The developer demands a traffic guarantee or even
a revenue guarantee which goes against the philosophy of
private enterprise6.
The annuity programme is a logical way of getting better
management control into the public sector. The government
still manages virtually the entire road sector and has the
option to collect toll on these roads7.
Subsequent bids for annuity based projects have countered
criticism from the popular press.
The annuity prices quoted by the Hyderabad based G.
Mallikarjun Rao (GMR) group for three projects has again
suggested that this is a viable alternative. The GMR group
has quoted Rs 29.48 crore for the Tuni-Ankapalle project,
Rs 37.59 crore for the Dharwad-Belgaum project and Rs
41.85 crore for the Tindivanam-Tambaram project. The
internal rate of return (IRR) works out at about seven per
cent.
In conclusion, whereas the BOT route tilts the burden
of project risks and responsibilities towards the private
developer, the annuity route provides for a more balanced
approach to risk and responsibility allocation between the
project participants. The government has been able to strike
the right balance so far by adopting the annuity scheme on
seven stretches totaling nearly 450 kms.
Toll Roads
The first BOT project (Rs 673 crore six lane highway
project between Jaipur and Kishangarh on NH 8 in
Rajasthan) under the direct tolling method is likely to be
awarded to Larsen & Toubro and Joannou & Paraskevaides
(Overseas) Ltd of Cyprus. The bare construction cost of the
project is estimated at around Rs 493 crores. However, the
total project cost is expected to rise to Rs 673 crore after
factoring interest during construction (IDC).
The successful bidder will develop the highway and recover
costs by collecting tolls from the users directly during a
concession period spanning 15 years. The agreement provides
for a 100 per cent indexation to the wholesale price index
(WPI) while revising the toll fees annually. Accordingly,
increase in inflation will be passed on to the users fully at
the time of annual revision in toll.
Rural Roads
The Pradhanmantri Gram Sadak Yojna was launched in
August 2000. The Prime Minister has reiterated the
government’s commitment to this programme. The scheme,
6 For the argument that the larger gains from involving the
private sector are in allocative efficiency, see section 6.1.
7 Annuities though may not lead to better allocative efficiency,
because governments still decide the road location. They still do have
the benefit of private construction, maintenance and management.
47
expected to connect 1.4 lakh habitations with the highway
network, has a total outlay of Rs 58,200 crore over the seven
year period.
Approval from the Planning Commission has been waived
for this scheme. The programme would be fully funded by
the Centre on the basis of state government project reports.
Under the programme, unconnected habitations in rural
areas with a population of 1,000 or more is planned to be
connected with all-weather roads in three years. In the
second stage all habitations with a population of over 500
persons are to be covered by the end of Tenth Plan. The
third stage extends to northern-eastern states, Sikkim,
Himachal Pradesh, Jammu and Kashmir, Uttaranchal and
the desert areas. The objective is to connect habitations with
a population of 250 persons and above.
The roads constructed under this programme would be
maintained by panchayati raj institutions. The ministry of
rural development will be the nodal implementation agency
to raise additional financial resources from the World Bank
and the Asian Development Bank to complete the
programme by 2007. The ministry of rural development
has been asked to set up a Rural Road Development Agency
to provide advice on technical, quality control, and
management aspects of the projects. The present source of
funds comes from the 50 per cent share of cess on high-
speed diesel totaling over Rs 17,500 crores during the seven-
year period.
Ports
Following the issue of guidelines in June 1988 for the
formation of joint ventures by major ports with foreign
ports, minor ports and private operators, necessary
amendments to the Major Port Trusts Act 1963 have been
effected and enforced. The government has also decided to
initiate the process of phased corporatization of major ports
to enable them to operate in a market-oriented economy
with adequate flexibility. Steps have been initiated for the
corporatization of the Jawaharlal Nehru Port at Navi Mumbai,
New Mangalore Port, Mormugao Port and Tuticorin Port.
The government has also planned to develop hub ports,
one in the east at Chennai Port and one on the west coast
at Navi Mumbai. With the globalization of the Indian
economy, creation and upgradation of port and shipping
services to international standards is essential. By allowing
joint ventures, the government intends to attract new
technology, introduce better managerial practices, expedite
implementation of schemes and foster strategic alliances
with minor ports.
The Peninsular and Oriental (P&O) Steam Navigation
Ltd of Australia has taken over the Rs 400 crore container
terminal project at Chennai port. P&O was selected as the
preferred bidder in 2000, but took control of the facility
48 India Infrastructure Report 2002

only in 2001. The terminal will be constructed on BOT arrangement continues, the prescription of an accounts
basis. The mandate includes developing and managing the format and CAG audit are necessary.
terminal for a 30-year period, with construction scheduled TAMP has also urged the government to hold prior
to be completed in two years. P&O Ports anticipates consultations with the tariff regulator before making
investments to the tune of $130 million in the first five years investments and awarding BOT concessions to the private
of the concession period for promoting Chennai as India’s sector, as the royalties paid to major ports and the revenues
leading east coast box port. shared with them will affect the tariffs of BOT operators.
First major corporatized port at Ennore (Phase 1, Coal Besides, the creation of assets will have significant tariff
handling berth) was completed this year. Tamil Nadu implications.
Electricity Board (TNEB) is installing coal handling
equipment. The Jawaharlal Nehru Port Trust (JNPT), which Inland Waterways
has attained super-port status because of its efficiency and
India has 14,500 km of navigable waterways of which 5,700
productivity, is now focussing on marketing internationally.
km are navigable by mechanized vessels. There are three
It was handling around 1.2 million containers annually and
national waterways. These include Allahabad-Haldia,
is expected to touch 1.4 million containers by December
Dhubri-Sadiya over Brahmaputra and Kottapurram-Kollam
2001. The efficiency and productivity of the port has visibly
on the west coast canal.
improved over the past three years. International shippers
The cabinet has approved the Inland Waterways Authority
earlier preferred Colombo or other parts in west Asia.
of India (IWAI) Amendment Bill 2001 to enable it to
However, JNPT is now receiving cargo from Karachi to be
constitute the IWAI. The policy package for the sector will
further dispatched. The port has also attracted cargo from
allow the authority to form joint ventures with private sector
the gulf countries, which were earlier going to Dubai. JNPT
companies. The new policy also allows equity participation
is further augmenting its facilities to cater to international
for joint ventures upto 40 per cent for BOT projects and
shippers. The port has a linear quay length of 680 metre,
grants tax exemption as offered in the infrastructure sector.
six rail-mounted quay cranes, two super post panamax,
Major private and public sector companies, including
rubber-tyred and rail-mounted gantry cranes, and will be
Hindustan Lever Ltd, Indo Gulf Corporation, NTPC,
adding additional container berths. The port handles around
Numaligarh Refineries and Concor, have evinced interest in
70 per cent of the inland container depot products of the
developing inland water transport facilities in the country.
Concor at Nagpur. A study is underway to convert JNPT’s
four bulk berths into container berths.
Railways
The Mumbai Port Trust (MbPT) failed to receive bids
for licencing of the five terminals at Victoria Dock as The Railway ministry has opposed the idea of corporatization
multipurpose berths for cargo operations. Bids were invited of the organization as proposed by the Planning Commission’s
for licencing of the five terminals with 13 berths for five approach paper to the Tenth Plan. However, a beginning
years, extendable as may be mutually agreed. at restructuring seems to be in sight with the Railways
agreeing to corporatize some of its non-core activities. The
Transport Policy ministry feels that corporatization of the entire organization
would not bring significant benefits.
The 52nd Report of Parliamentary Standing Committee on
The Khanna Committee Report released in February 2001
Transport has recommended that there is no need for a
sharply criticized the role of the Railway ministry, especially
regulatory authority for ports such as the Tariff Authority
in not maintaining correct data on accidents and the action
for Major Ports (TAMP). In the present scenario of
taken on the reports of the enquiry committees. Its
modernization and corporatization, major ports should have
recommendations included merger of departments, closer
the liberty to fix port tariff. Major ports also face competition
interaction with overseas research agencies to improve crash-
from minor and state ports.
worthiness of coaches, closure of railway lines where state
The proposal to convert TAMP into an appellate tribunal,
governments are unwilling to bear losses, dropping projects
as suggested by the C. Babu Rajeev Committee, has evoked
for which only token allocation of funds has been made,
stiff resistance from none other that the TAMP Chairman
total freeze on gauge conversion projects and reduction of
himself. TAMP has also sought legislative powers from the
staff strength by 25 per cent over the next ten years.
union government to levy fees for services provided. It has
urged the government to formalize the arrangement of
The Rakesh Mohan Committee Report
audit of its accounts by the Comptroller and Auditor General
of India (CAG). At present, TAMP is totally dependent on The Rakesh Mohan Committee comprising 17 members,
the government for budgetary support. As long as this was constituted on 31 December 1998. It submitted its
 The Infrastructure Sector in India, 2000–1 49

final report, outlining among other things, a financing plan
to make the Railways a commercially viable organization.
The committee has recommended major restructuring
followed by eventual corporatization of the Railways. This
includes disbanding of the present Railway Board, forming
an Indian Railways Corporation to be governed by the
Indian Railways Executive Board, and constituting an Indian
Rail Regulatory Authority. The group has challenged the
monopoly of railway officials over the transportation
monolith by recommending lateral induction of experts
other than railway officials into the executive board. It does
not appear that this measure will be implemented. Broad
suggestions made in the report are given in Box 3.1.3.
Pipelines
The pipeline sector has been creating new capacity away
from the public gaze. The private sector is willing to invest
here even though it is inherently a monopolistic sector.
However, no big player wants to be left out even though
a regulatory framework is not in place.
An interesting tussle has brewed between Gujarat, which
has passed an act and Gas Authority of India Limited—a
central government PSU—is disinclined to be regulated by
a state regulator. Gujarat enacted the Gujarat Gas (Regulation
of Transmission, Supply, and Distribution) Act in March,
20008. This has enabled the state to start a Rs 3,000 crore
gas grid project of the Gujarat State Petroleum Corporation
(GSPC). The project involves setting up a 2,500 km grid
for the transportation of indigenous gas and imported
liquefied natural gas (LNG) throughout the state. For this
purpose GSPC, in which the state government has an 80
per cent stake, acts as the nodal agency. A special purpose
vehicle, the Gujarat State Petronet Limited (GSPL), has
been floated to own the assets. The grid will connect the

Box 3.1.3
The Rakesh Mohan Committee Report

Within the Indian Railways (IR), there is no controversy on rationalization of passenger fare and making it immune from political
interference. However, the high growth targets set by the committee do not seem to be palatable. The committee has emphasized
that competition has been increasing in the transportation business. In the 1980s, road transportation grew rapidly, eroding the
share of the Railways, including the area of commodities where the Railways had traditional stronghold. The annual growth rate,
measured in ‘net tonne kilometres’, averaged 5.33 per cent between 1984 to 1991 and dropped to 1.86 per cent during the next
eight years (1992–9). Road dominance is likely to increase even further after the four-laning of the ‘Golden Quadrilateral’ and
the development of new expressways in the country. The increasing use of pipelines for the transportation of POL products is likely
to further reduce demand for their transportation. These developments call for a basic change in IR’s approach to freight transportation.
Total passenger kilometers (pkm) had been growing at a trend rate of about 4.5 per cent over the last 15 year period, and the
last five years have seen an acceleration to about 5.8 per cent. The patterns for physical volumes show a significant increase in
the share of the upper classes, particularly after the 1980s, but the overwhelming share remains in the lower classes. The ratio of
average passenger fare to the average freight tariff is amongst the lowest in the world.
The railways, therefore, has to invest and reorganize in a significant fashion over the next few years in order to meet the rising
demand of passenger business and, growing, but intensely, competitive freight business. Wrong pricing policies, inefficient public
enterprise operations and other difficulties have all contributed to this situation. But the solution does not lie in borrowing funds,
without improvements in returns.
Expansion of traffic on high density routes to raise the speed of freight trains significantly requires both managerial action and
investments in new technology. The existing managerial, financial and accounting systems are inadequate to meet the challenges
ahead. IR also has to undergo major structural change in its organization if it is to serve the emerging needs of the country; this
is the considered view of the expert group. The group has estimated that if there are no significant changes in performance, it
would have an operating deficit of Rs 3700 crore by 2003.
The challenges and concerns that lie ahead are:
• Growing customer needs and rising expectations
• Lack of goal and task clarity
• Outdated organizational structure
• Lack of autonomy
• Undue political influence at all levels of decision making
The expert committee particularly stressed the need for organizational change. The overwhelming sentiment is that action is
overdue and ‘business as usual’ would be disastrous.
The view of the expert group is that the potential exists to double the underlying rate of growth of IR. The stage of development
favours the growth of rail especially freight. Accepting anything less would be a loss to the nation. The rail system is too important
to permit its withering away.

8 On salient features of the Act and on its hopefully not ‘still’ birth pangs see Section 6.2.
50 India Infrastructure Report 2002
state’s gas-supplying centres with users, chiefly power plants.
The act also envisages setting up of a regulatory authority.
The Ministry of Petroleum and Natural Gas has taken up
cudgels on GAIL’s behalf and has asked the state to re-
examine the act on the grounds that would not only make
the hitherto unanswerable GAIL comply with more than one
regulatory authority but would also conflict with its interests.
The central government is taking a myopic view of the
real import of the Gujarat Gas Act. The main purpose of
the act is to ensure the growth of the gas industry in the
state. But since most of the LNG terminals are being
conceived and built in Gujarat, the act would ensure the
growth of the gas industry of the country as well. It also
lays down a well-defined structure for the evolution of the
gas industry, as well as the principles of regulation. And
contrary to GAIL’s misplaced fears, the regulatory framework
being introduced in the state is a light-handed one and does
not regulate the price of gas. This has been rightly left to
the market to decide as there is already a competition
among gas sellers, and between gas and other fuels. The
regulator would only regulate gas transmission charges.
With regard to GAIL’s apprehensions that its existing
infrastructure would become available to third parties, GAIL
ought to realize that gas pipelines are a natural monopoly
and hence should be regulated on the basis of the common
carrier principle where all the companies should have open
access at a fair price. Accordingly, the Gujarat Gas Act has
been formulated to provide for regulation of gas transmission
and distribution on an equitable basis.
Airports
The government is planning to introduce an integrated civil
aviation policy which will incorporate guidelines on transport
and tourism. It has been decided to club transport and
tourism with aviation policy as good road and rail
connectivity with airports would help both tourism and
trade. The centre is also considering the appointment of an
independent economic regulator for airports to fix airport
tariff and safeguard public interest. An autonomous statutory
Airports Economic Regulatory Authority (AERA) has been
proposed as a long-term measure for the limited economic
regulation of airports in view of the inherent monopoly
characteristics of airport services. The regulator will be
delinked from government control.
The issue of setting up a regulatory authority has come
in the wake of the government initiative of permitting
complete foreign investment in airports. The government
has approved the construction of new airports at Devenhally
in Bangalore, Shamshabad in Hyderabad and Mopa in Goa,
with majority private sector participation.
The government decided to give major airports on long-
term lease to private operators. The bidding process is well
underway. There still needs to be the requisite amendment
to the Airports Authority Act 1994. The aviation
establishment has broadly come to an understanding that
it would adopt a dual-component scheme of leasing. The
first would be a one-time, fixed payment for the entire
duration; and the second, a variable annual payment. It is
estimated that the revenue from the leases of the four major
airports would be sufficient to sustain the development and
maintenance of the remaining 119 airports across the country.
The Airport Authority of India (AAI) presently earns an
annual revenue of approximately Rs 1,800 crore; of which
nearly Rs 1,000 crore is generated by the airports at Delhi,
Mumbai, Chennai and Kolkata.
The AAI has been privatizing other airport services as
well. The operation, maintenance and management of the
centre for perishable cargo for exports at the Indira Gandhi
International Airport has been given to a private operator
last year.
Integrated Transport
NHAI is now looking at linking the high-density Golden
Quadrilateral to points of high economic potential. To start
with, the authority is interested in connecting 12 major ports
to the highway network in a bid to attract more traffic. NHAI
is in the process of establishing SPVs for the Haldia, JNPT
and Vizag ports. The other ports that have been identified
for connectivity are Kandla, Cochin, Paradip, Tuticorin and
Marmugoa. NHAI is keen on the SPV route after it successfully
implemented its first SPV project in the Moradabad bypass
last year. It plans to invest 30 per cent in each project and
raise the balance from the market. In the future, NHAI
proposes to offload its stake in the SPV Company and generate
earnings. The idea is to create a ‘rolling stock’ of earnings via
disinvestment. The proceeds would be reinvested in future
projects where NHAI proposes to take equity.
The Container Corporation of India (Concor) is planning
to launch dedicated freight trains with fixed time schedules
for arrivals and departures between Shalimar (Howrah) and
Mumbai, and Shalimar and Nagpur. The launching dates
are yet to be finalized as demand estimates are being worked
out. Concor has already launched similar dedicated freight
trains with fixed time schedules between Shalimar and
Chennai (July 2000), Shalimar and Hyderabad (November
2000) and Cossipore (Kolkata) and New Delhi (March
2000), for domestic traffic; and Cossipore and Haldia dock
(May 2001) for international traffic. All services, but for the
last, are doing well.
Urban Infrastructure
Urban infrastructure is particularly neglected. The dete-
riorating infrastructure for drinking water compelled the
Eleventh Finance Commission to sound a cautionary note
 The Infrastructure Sector in India, 2000–1 51

on the inadequate maintenance of civic services and the
need for rationalization in pricing of urban services. It has
called for increase of tax revenue and user charges to cover
operation and maintenance expenses. The commission also
mentioned the need for speeding up devolution of funds
and a concomitant transfer of staff from state governments
to local bodies in line with the 74th Amendment.
Progress along better quality private participation and
investments has been slow due to inadequate revenue streams.
However, a few states have been attempting innovative ways
of construction and financing.
The progress in municipal bond markets has been very
little. The credibility of urban local bodies (ULBs) which
had raised money earlier has come under cloud as ULBs lack
financial management skills. Their accounting is not in line
with generally accepted practices. For example, the Nashik
Municipal Corporation failed to open an escrow account (a
key bond issue condition) even two years after the bond
issue, setting back the nascent market.
The deliberations on National Water Policy and Report
of the Sukthankar Committee were two important policy
initiatives last year. Whereas the first raised the important
issue of sharing of water resources—mainly surface water—
among different states for different usage, the second one
detailed the complexity of drinking water in urban and rural
areas. The latter also highlighted complex institutional

Box 3.1.4
The Sukthankar Committee Report

The Government of Maharashtra (GOM) established a committee to prepare a roadmap for improved provision of water and sewerage
in rural and urban areas under the chairmanship of Mr. D.M. Sukthankar, former chief secretary of Maharashtra (GOM 2001c).
The committee was to suggest future strategy for O&M for existing and new schemes, the framework of an institution for tariff
setting, feasibility and means of private sector participation in the water sector and to suggest effective implementation of the Ground
Water Act 1993.
The government had perceived the problems as the non-collection of water tariff, funds not being allocated for O&M, and
lack of trained manpower with ULBs. The committee however, found that allocation of funds for O&M through budgetary process
had completely failed and local government accounts are not maintained properly. There was lack of accountability within ULBs.
Water leakages are as high as 50 per cent, new water schemes do not meet local needs. There was an emphasis on construction
rather than O&M, and at best they supplied ‘some’ water rather than good quality water in adequate quantities.
The Committee made many suggestions, of which the important ones are:
• Villages should have self-sustainable single village schemes. In smaller rural areas, community driven approaches need to
be initiated. The government should empower local institutions (zilla parishads and gram panchayats) and user groups (village water
committees) to assume the lead role in decision making and operations. Village schemes should be integrated water resources
management (90 per cent of rural water schemes depend on ground water) ensuring source sustainability at local level. The funds
from the state government must be directly transferred to village water and sanitation committees, who should have freedom to
procure the services from the community and market. Multi-village schemes should be constructed where sustainable source of
water is not locally available.
• Larger urban areas generally require larger piped water supply schemes. There need to be a commercial orientation. City water
and sewage establishments (CWSEs) should be set up independently (as a municipal undertaking, company under the Companies
Act, or co-operative societies under the Co-operative Society Act). The CWSEs should enter into long-term concessions (25–30
years) with private firms, selected on a competitive basis. CWSEs should mobilize their own investment resources from the market
on a commercial basis (through capital market, domestic financial institutions or the proposed state revolving fund or bond bank).
• Maharashtra had enacted the Ground Water Act 1993, which gave priority to ground water for drinking use. The Act primarily
relates to drinking water, but the state lacked political will to enforce it. Hence, the state needs to set up a Maharashtra Gr ound
Water Regulatory Authority (MGRA) with provision for regulation of all uses of groundwater including irrigation, establishment
of independent local watershed management units, and community management.
• The report points out that over extraction of ground water is a direct result of free electricity provided to villagers. The
government should change the economic price of electricity for pumpsets so as to prevent over-drawing of ground water. As
groundwater rights are chattel to land ownership, it would be useful to explore the introduction of a community rights framewor k
for water resources, including ground water.
• The committee strongly recommended the establishment of an independent Maharashtra Water and Wastewater Regulatory
Commission so that abuse of the local monopoly of the CWSEs does not take place. The Commission could also regulate the
existing local bodies (both urban and rural) to create incentives for restructuring at the local level.
• The Maharashtra Jeevan Pradhikaran (MJP), a state parasatal body responsible for design and construction of water and wastewater
schemes in urban and rural areas and mobilization of resources on behalf of local bodies, must be restructured. MJP needs to establish
independent corporate entities. The main (future) role for MJP should be limited to project design and construction supervision.
The committee recommended incentive based disbursement of state funds to urban, local and village bodies.
52 India Infrastructure Report 2002
arrangement in Maharashtra, which is similar to many
other states.
Draft National Water Policy 1998: The National Water
Resources Council did not accept the Draft National Water
Policy in its meeting held in July 2000. The working group,
set up to study the draft, consisted of water resources ministers
from all states. It discussed the draft and guidelines for
water allocation among states. The states were vertically
divided with regard to River Basin Organizations (RBOs).
The issues remained unresolved for the following reasons:
• Participants did not want RBOs with statutory powers
as they did not find them in consonance with the
constitutional provisions and the spirit of the federal
structure.
• Some states felt that the priorities with regard to
water allocation should be drinking water, irrigation, hydel
power, aquaculture, agro-industries, non-agricultural
industries and navigation and other uses. They felt that the
Inter-state Water Disputes Act 1956 could be suitably
reviewed and amended to provide for conciliatory powers
in Section 4 (1), timeframe for constitution of tribunal,
completion and adjudication by the tribunal and for
publication of award by the union government.
• A few states are of the opinion that the policy and
guidelines appeared to have been drafted to accommodate
the narrow interests of a few privileged states.
• Some states felt that the centre was trying to take
control over the rivers and other water resources through
this policy.
The working group eventually decided to constitute a
core group of ministers under the chairmanship of the
Union Minister of State for Water Resources to go into the
details of water allocation and the setting up of an RBO.
The final definition of provisions coined by the core group
relating to water sharing is:
The water sharing/distribution amongst the states should
be guided by a national perspective with due regard to water
resources availability and needs within the river basin.
This statement is open to several interpretations. The
group also decided not to empower the proposed RBOs
with statutory powers.
Water conservation, its importance and limitations: One of
the main proponent of water conservation, Rajendra Singh,
who strongly believes in community rights of water, water
harvesting and water conservation received the Magsaysay
Award in 2001 for his work in Alwar, Rajathan. His work
is a good example of integrated water system at village/
community level which is also an economically efficient
solution for drinking water. It has proved that systematic
development of village level watershed can change the
economics of the village community. The strategy of water
harvesting and surface water development was through a
series of check weirs and earthen dams, soil conservation
through series of gully plugs, afforestation and agro-forestry
to meet the requirement of fodder, fuel and fruit as well as
for soil conservation. There are many other successful
examples of water harvesting in Madhya Pradesh, Andhra
Pradesh and Maharashtra at village/community level.
A few state governments have extended the concept of
water harvesting to a city level and have passed resolutions
that all new dwellings should have water harvesting devices
on their roof. These are simple devices. The seasonal
availability of water limits its use but this will help in
recharging the groundwater table.
Development at state level: The chosen method adopted by
states to build urban infrastructure is ‘partnership’ with the
private sector. State governments short of funds have taken
initiatives to establish infrastructure fund/project develop-
ment companies in partnership with private sector financial
institutions. The role of these institutions is to bridge the
gap of risk perceived by a private promoter and the risk
perceived by the present provider of the service. These are
developments in the right direction. Not all the institutions
are of the same genre, nor is it proposed that they have
similar functions. Table 3.1.3 captures succinctly different
types of institutions. Generally, these institutions are referred
to as Infrastructure Initiative Funds (IIF).
Infrastructure for the Agriculture Sector
The government has finally realized that the value addition
in agriculture sector is constrained by poor infrastructure.
To mitigate this constraint, it announced the first ever
National Agricultural Policy and set a target of more than
4 per cent per annum growth over the next two decades. A
significant development has been the announcement of a
National Policy on Handling, Storage and Transportation of
Food Grains with the objective to harness efforts and resources
of public and private sectors, both domestic and foreign, to
develop the requisite infrastructure. The government accorded
‘infrastructure status’ for bulk grain handling and
transportation, and incentives have been extended. Further,
the government guarantees utilization of this infrastructure.
Twenty locations have been identified in grain producing
centres, consuming centres and port towns for integrated
bulk handling and storage along with testing facilities and
quality control. Punjab’s agro marketing co-operative
Markfed, has prepared a blueprint to provide adequate storage
for 10 million tons of wheat by setting up hi-tech modern
silos. Private sector participation is also envisaged.
India is the world’s second largest producer of fruits and
vegetables. However, more than 30 per cent of the produce
 The Infrastructure Sector in India, 2000–1 53

Table 3.1.3
Some Examples of Infrastructure Initiative Funds (IIFs)
Model (Main Pupose) Examples and Applicability and Implications
Partner Agency

Dedicated IIF Pure APIIF (in partnership with

Project Development
Integrated IIF Project
Development & Funding
State Owned Project
Development Company
(PDC)
Other Forms
• Necessary where project definition processes of
IL&FS) UPIIF PIIF
departments are inadequate
• IIF can take proactive role in identifying projects
and developing them on its own initiative
• State government should be willing to allocate funds
to IIF without seeking significant returns
• Mechanism must exist for IIF recommendations to
be implemented by respective state government
departments
• Viable developed projects to be supported by purely
private funds. Non viable projects will devolve on the
state government
I-DECK
• Fund may be useful for credit enhancement of
TNUDF
developed, support worthy projects
• Funding support to projects independent of project
development. Development of a project by IIF does not
automatically entitle it to funding support by IIF
• Required in situations where even beyond
development, availability of funding for developed
projects is a constraint
I-KIN
• Impetus and motivation to initiate project
I-WIN
development exercise must come from departments
PDCOR
• State departments to reimburse PDC for expenses
with suitable profits
• PDC recommendations may be adopted by
departments at their own discretion
FFUIDC (Feedback Finance
• Identify projects and develop them
Urban Infrastructure
• Secure concessions from government
Development Company)
• Implement projects through JV and invest in the
equity of the JV

is apparently ‘wasted’ in the absence of proper storage and CONCLUSION

processing facilities. A subsidy of Rs 78 crore for setting up
cold storages for perishable commodities was provided during
2000–1. It is now proposed to extend the coverage of the
scheme to cover rural godowns. The subsidy to be provided
by the government would be suitably enhanced to take care
of this.
The 2001 Budget proposed a number of initiatives.
Important among them was: total exemption of excise duty
on processed fruits and vegetables, credit linked subsidy
schemes for construction of cold storage in villages and
establishment of agri-business centres and agri-clinics.
Notwithstanding the new government initiatives, the
sector remained moribund by wide ranging restrictions that
have been imposed on inter-state movement, storage and
stocking of food grains and agriculture products.
During the past year, many beginnings have been made.
The transport sector—roads, ports, airports, and connectivity
with ports—witnessed a flurry of activity which will improve
infrastructure and reduce transport time. This could have
major positive feed back effect on the economy. Railways
have been provided a robust framework for change but have
yet to respond positively—it is clearly caught in the cross-
connections of vested interests. Power remained in the
limelight, but without any physical improvement in the
sector. Some cobwebs have hopefully been cleared and it is
generally accepted that adequate user charges have to be
levied, billed and collected if the sector is to see any
improvement: the role of the government has to diminish.
The telecom sector has demonstrated that competition can
54 India Infrastructure Report 2002
do what regulation and state control cannot. Deregulation
brought cellular tariffs to nearly a tenth of what they were
two years ago. Urban infrastructure remained long on
promises and short on delivery.
We are seeing emergence of new realism at the state
level. What we are witnessing among the states is
3.2 WLL, GOVERNANCE, CORPORATIZATION, AND SWANS:
A REVIEW OF INSTITUTIONAL DEVELOPMENTS
The telecom sector witnessed several developments over the
year. The government decided to allow ‘limited’ mobility in
the wireless local loop (WLL). This brought the jurisdictional
boundaries of various fixed service providers (FSPs); agencies
such as the Telecom Regulatory Authority of India (TRAI),
Department of Telecom (DoT), and the Prime Minister’s
Office (PMO) over the issues of policy, pricing and allocation
of spectrum (a scarce resource) into sharp focus.
The Department of Telecom Services (DTS) and
Department of Telecom Operations (DTO) were merged to
form into a public sector company called Bharat Sanchar
Nigam Limited (BSNL) with effect from 1 October 2000.
The process of corporatization highlighted the need for
prior ground work in evolving a road map and a blueprint
of the strategy.
The draft of the Convergence Bill which had been
announced last year was made available to the public. The
bill proposed setting up of the Communications Commission
that was to be responsible for regulating both telecom and
broadcast sectors. The bill did not specify the regulation of
competition issues, and role and scope of the appellate
board, a gap that could result in delays in resolving disputes.
Other practical issues in implementing the Convergence
Bill also arise.
Several state governments—Gujarat, Andhra Pradesh,
West Bengal and Rajasthan—have gone for stateswide area
networks (SWANS). Others are likely to follow suit.
Dedicated physical facilities especially cable links for SWANS
need a re-examination, given the growth of the internet, the
networking of Internet Service Providers (ISPs), and the
resulting possibility of virtual networks.
Even after the setting up of TRAI in 1997, the policy
and part of the regulatory function continued to be with
the Telecom Commission. The creation of TRAI should
have also led to redefinition of the role of Telecom
Commission and DoT, but this was not done satis-
factorily.
‘institutional competition’. As states compete, and some do
visibly better than others, rulers and administrators would
have to mend their ways to move forward. All state
governments have come to realize that there is no alternative
to competition and public-private partnership in infra-
structure.
Rekha Jain
In the creation of various departments (DTS and DTO)
from the DoT), the department had attempted to separate
the policy functions from the operations9. Amalgamation
of DTS and DTO and the subsequent corporatization led
to the creation of BSNL and the DoT, the erstwhile Telecom
Commission. This streamlined the structure by a separation
of the policy and regulatory function (responsibility of DoT)
and the actual operations (BSNL).
Thus there is still much overlap between TRAI’s and
DoT’s defining rules. Currently DoT is responsible for
policy formulation, licensing, spectrum management,
administrative monitoring of public sector undertakings,
research and development, and standardization/validation
of equipment.
Spectrum management and equipment standards are areas
that are usually under the regulator’s purview in many
countries. While the TRAI Act 1997 had precluded it from
spectrum management, the TRAI Amendment Ordinance
2000 gave it only a recommendatory role for spectrum
management and standards. The overlapping jurisdictions
of TRAI and DoT has led to delays in the past as in the
formulation of guidelines for opening up the domestic long
distance market or resolution of issues arising out of the
WLL (with limited mobility) case.
Political Interventions
In order to give the telecom sector a boost, the Prime
Minister, Atal Behari Vajpayee set up a high powered group
on telecom (GOT) in 1999 to evolve a policy framework
for the sector. This was possibly done outside the DoT as
it was felt that it may not be able to conceive radically
different roadmap, or it may even thwart involvement of
9 This was not done as a part of any overall sector restructuring
plan but under pressure from both Indian Telecom Service and
Indian Administrative Service cadres to head DoT. The government’s
inability to handle this issue effectively had resulted in the creation
of these departments. (3iNetwork 2001, Section 8.1).
 The Infrastructure Sector in India, 2000–1
private sector or deregulation in its own limited vested
interest. The GOT drafted the National Telecom Policy
1999.
Another example of political interference was in a recent
case when BSNL billed advance rental to its customers. The
telecom minister intervened to say that it was a mistake and
that these would not be charged. Such political interference
in organizational issues would create impediments to an
independent functioning and the fixing of responsibility for
decisions. On its part BSNL did not inform the customers
in advance and/or suggest alternative payment methods. For
example, it could have suggested staggered payments or
provided incentives to those who paid the entire amount at
one go, thus smoothening the interaction with the customers.
Role of regulatory agencies in the convergence bill: Even as
the debate regarding the functioning of TRAI continues,
the draft of the Convergence Bill provides for significant
reorganization of the existing policy and regulatory
institutions. The setting up of the Communications
Commission would necessitate requisite review and redesign
of the existing institutions such as TRAI and Prasar Bharti10.
The Bill also envisages important changes in the powers of
the existing bodies in areas such as licensing. For example,
currently, while Ministry of Information and Broadcasting
(I&B) is the licensor for broadcast licenses, DoT under the
Ministry of Communications is the licensor for telecom
licences. The Convergence Bill gives such powers to the
Commission, thus significantly enhancing the scope of the
proposed regulatory institution.
In comparison, under the existing TRAI Amendment
Ordinance (2000), TRAI has a recommendatory role in
licensing with respect to the following: (a) need and timing
for introduction of new service provider (b) terms and
conditions of licence to a service provider; and (c) revocation
of license for non-compliance of terms and conditions of
license. Further TRAI’s function is to ‘ensure compliance of
terms and conditions of license’. From this it is obvious that
it has been hard for the government and the incumbent to
give significant authority to TRAI despite its reorganization.
It remains to be seen how the provision in the bill that gives
even greater powers to new institutions than those currently
existing would be accepted by the government. The bill
itself has not been actively pursued for passage in parliament,
as there has not been significant legislative activity in general
10 Prasar Bharati is a statutory autonomous body established
under the Prasar Bharati Act. The Board came into existence from
23 November 1997. The Prasar Bharati is envisaged to be the public
service broadcaster of the country. The objective of public service
broadcasting is to be achieved through All India Radio and
Doordarshan which earlier were working as independent media units
under the Ministry of I and B. http://mib.nic.in/information&b/
AUTONOMUS/frames.htm.
55
since the inception of the bill. The lack of progress has been
due to pressures from the opposition parties on the
government’s handling of the situation arising out of the
disclosures of the Tehelka tapes.
Telecom and competition regulation: The key issue in telecom
regulation is to design appropriate interventions that achieve
both static and dynamic efficiency. Under the current
regulatory framework, static efficiency is achieved through
ex ante sector specific regulation (such as those related to
licensing) and dynamic efficiency is aimed through ex post
competition policies.
While the ex ante regulation regarding licensing is in
place and significant experience exists in this domain, the
ex post regulation regarding competitive processes has yet
to evolve. In the current multi-service provider regime,
there are likely to be several mergers and acquisitions and
scope for vertical integration in service provision. For
example, Zee Networks and Siti Cable are business entities
that provide various elements of what may become a vertically
integrated service provider covering both telecom and
broadcast service as well as content. This could lead to anti-
competitive practices by their bundling of set top boxes,
network and content to subscribers, effectively eliminating
choice.
Technological convergence also has implications for
regulatory institution design. While on one hand convergent
services require that boundaries of sector specific regulatory
agencies be expanded, on the other it implies that general
competition policy would play a greater role in the regulation.
The other issue is the trade off between regulatory capture
and sector specific skills (IIR, 2000, p. 69). A ‘convergent/
competition’ regulator is less prone to capture by players in
a specific sector, due to the diversity of interests across
sectors that is represented, although it may lack the technical
expertise for managing the sector specific issues.
Under the current regulatory regime issues related to
monopolistic, restrictive, and unfair trade practices are to
be handled by Monopolies and Restrictive Trade Practices
Commission (MRTPC) established under subsection 1 of
Section 5 of the Monopolies and Restrictive Trade Practices
Act 1969. While the MRTPC itself has little teeth and is
to be replaced by a Competition Commission, this framework
recognizes the importance of managing competition. On
the other hand, while the Convergence Bill provides for an
Appellate Tribunal, it does not specify its scope. On this
aspect the bill’s focus is procedure oriented as for example,
in specifying the details of the procedures for handling cases
that come before the Appellate Board.
While appropriate regulatory institutional design is one
possible way of dealing with competition and anti-
competitive practices, the other could be through designing
of licensing conditions. Such conditions could be ‘effects
56 India Infrastructure Report 2002
based’ general competition related conditions so that the
onus of not indulging in anti-competitive practices is with
the licensee.
There are several examples of how competition related
issues are handled in different countries. There are instances
of sector specific regulation handling these issues (as in
Canada) or sector specific regulator handling it along with
competition specific agencies (as in UK, where Office of
Telecommunications (Oftel) and Monopolies and Mergers
Commissions as well as the Department of Trade and
Industry, the policy making body for telecom have a clear
role and authority in competition related issues). (3iNetwork
2001, pp. 63–5)
Independence of regulators: Currently both TRAI and Prasar
Bharati have budgets allocated from the Consolidated Funds
of India. This requires them to follow the employment,
promotion and other rules and regulations as applicable to
government departments, reducing their autonomy and
restricting choices for appointments. TRAI has been perceived
as following the government’s perspective rather than having
an independent view. This has led to weakening of the
regulatory process.
Despite this lack of independence in TRAI the
Convergence Bill has proposed that the Commission be
dependent on government funding. The funds generated by
the Commission by way of fees are to go to the Consolidated
Fund of India and its budget is to be passed by Parliament.
Further, the employees of the Commission and the Appellate
Tribunal are to be appointed, as well as their salaries and
other conditions of service are to be determined, by the
central government. In addition, the Secretary General,
who will play a very important role in the functioning of
the Commission will be only on deputation from the central
government. These points seem to compromise the
independence and autonomy of these two bodies. The Bill
needs to specify the creation of a ‘Convergence Fund’ that
would have contributions from the service providers for
financing the Commission’s operations.
In USA, Canada and UK, regulatory agencies do not have
independent sources of income. In USA, the FCC (Federal
Communications Commission), which is funded by the
Congress, has traditionally been sensitive to its wishes.
However Commissioners have been known to take decisions
contrary to Congress when they have felt that the President
or the courts would support them. Independence in views
is also brought about by requiring that not more than three
out of five Commissioners be from a single political party.
In UK Oftel’s budget is approved by the Parliament, whereas
running costs are met from license fee which are roughly
proportional to the operators turnover. Despite dependence
on the Parliament, Oftel has shown considerable
independence in decision-making.
Besides overlooking the provision of financial autonomy,
the bill also provides for the central government to issue all
sorts of specific directives relating to licensing that will be
binding on the Commission, thus further compromising
the independence of the Commission. The role of the
government ought to have been limited only to the issue
of general policies and the Commission should have been
able to determine the implementation.
Spectrum management: TRAI and DoT have to work out
an equitable method of allocation of spectrum between
fixed and cellular services. In addition, there is a need to
put in place a mechanism for spectrum allocation that is
applicable to different types of sectors such as telecom,
broadcast and Information Technology (IT).
Traditionally most regulators have different allocative
mechanisms for telecom and broadcasting sectors. Spectrum
for broadcast in the United States was allocated freely owing
to the ‘public interest’ component embedded in such services.
This had enabled a certain kind of regulatory oversight over
television, which may not have been possible otherwise. The
advent of the internet and new models of service provision,
such as bundling of telecom, cable, and internet services,
requires an examination of these regulatory policies. The
lower levels of content regulation on the internet are likely
to put pressures on regulatory agencies to lower content
supervision over television. As a consequence it may become
necessary for the government to review its broadcast spectrum
allocation processes. This need becomes more critical in a
fast changing technological scenario in which broadcast
services turn digital and internet becomes the delivery channel
for different types of services including telecom. By treating
spectrum for these services differentially, the government in
effect dictates the technology for services thus preventing
the market from making those choices.
The issue of service specific licenses can be dealt with by
having two level licensing––infrastructure license and
spectrum license. The idea is to delink particular bands of
spectrum from specific types of service.
For efficient management of spectrum, the Wireless
Planning and Coordination Wing should evolve a time table
for moving government agencies currently using spectrum
in the commercial bands to other bands. Further, all agencies
whether government or private, should pay for the spectrum.
The governments’ payment of such charges will make explicit
the subsidies inherent in the provision of those services that
use spectrum. It will also tend to allow for more efficient
use of spectrum and help find alternative technologies for
services that do not necessarily find wireless to be cost effective.
STATE WIDE AREA NETWORKS FOR GOVERNANCE
Although SWANs were designed with the objective of
providing e-governance, the slow pace of development of
 The Infrastructure Sector in India, 2000–1
applications had led to its limited use predominantly for
voice and video conferencing.
While the build operate transfer framework is useful for
infrastructure development, the basic issue of developing
dedicated infrastructure to serve the objectives of a SWAN
need to be questioned. With the proliferation of internet
usage and internet service providers, achieving the same
objectives through internet would be possible. However, the
need for appropriate application interfacing and last mile
access would still remain.
The current application development process that drives
the e-governance initiatives should include more citizens’
participation and be more citizen centric. It should also
span across departments. Data validation and maintenance
are critical tasks that need to be undertaken in a systematic
manner. A usability review could be helpful in evolving a
portfolio of applications for maintenance. Currently very
few applications are available on SWANs.
Given the current status of application development,
project structures that include stringent service level
agreements drive the cost of implementation high. Currently
state governments bear all the revenue risk. By explicitly
sharing such risks, the focus would turn towards those
applications that citizens are most willing to pay for. The
government may also be required to provide applications
that do not generate revenue (access by poor people). By
explicitly stating such requirements, the costs and subsequent
subsidies can be better targeted.
A realistic demand assessment for bandwidth for such
networked applications, based on the nature of applications
(several types of applications do not necessarily need a
network e.g. land record applications) needs to drive the
requirements.
CREATION OF BSNL
Although Mahanagar Telephone Nigam Ltd. and Videsh
Sanchar Nigam Ltd. were corporatized in 1986 and there
had been talk of corporatization of DoT since the submission
of Athreya Committee report in March 1991, the process
of corporatization of BSNL was done in a hurry. The
consultants were given a very short time to prepare a report.
They have been subsequently retained to help in the
restructuring. The corporatization process was not smooth.
Prior to the corporatization, the employees, both in the
workers and officers categories went on strike, paralysing
the service provision and managed to get their demands
met. The demands included salary increases, a ‘no
retrenchment policy’ and the requirement to pay their
pensions from the Consolidated Fund of India and not a
general fund set up for this process as is normally done for
other public sector organizations.
57
In several countries, corporatization has been brought
about after enactment of law/s that created the organization,
specified the functions and defined the corresponding
regulatory framework. Often this has required concurrent
changes to other Acts so as to bring about a smooth
transition11. The corporatization of BSNL was affected
without legislative changes. The employees concerns
regarding the provision of provident fund led to prolonged
strikes.
The organizational structure of BSNL consists of a
Chairman and Managing Director, supported by a board
consisting of five members—finance, planning, operation,
human resources, commercial and network services.
Additional external members are yet to be inducted. The
full time board members are from within the erstwhile
DTS/DTO/DoT. It is well recognized that external ( to the
government and the company) board members can bring
in the required differences in perspective necessary for growth.
The requirement of external directors is mandatory as per
SEBI (Securities and Exchange Board of India) guidelines
for large companies. However, no time frame has been
stipulated by the government for this induction on the
BSNL board.
The corporatization process had little immediate impact
as few changes had been made in the existing administrative
structures. The many levels of hierarchical structures need
to be reviewed, and a flatter structure that could be more
responsive needs to be devised. The consultant’s task is to
suggest the appropriate organizational form and process12.
After corporatization BSNL has been structured as a
single organization. For administrative ease, it has been
divided into circles, roughly corresponding to state
boundaries. However, if privatization is to take place
BSNL would need to be divided either along business lines
or along geographical regions, as otherwise it would be
difficult to find investors with the requisite financing. The
separation could create problems as some of the resulting
units (such as the local business when divided along business
11 For example, in Malaysia legislation was enacted in 1987 to
separate the Jabatan Telekom Malaysia (JTM), the government
department responsible for telecommunications into two parts—the
regulatory unit called JTM and an operating company called Syarikat
Telekom Malaysia (STM), a government owned company. STM was
later privatized into Telekom Malaysia by selling off its stake to
private and institutional investors. Suitable amendments were also
made to the Employees Provident Fund Act and Pension Act to
protect employees’ interests and enable them to continue with
provident fund facility in the new organization.
12 In contrast, in UK, the corporatization and the subsequent
privatization were preceded by changes in the board composition.
Several other changes were made to BT’s structure within the
framework of a white paper that outlined the roadmap for the
privatization. This plan was reviewed periodically.
58 India Infrastructure Report 2002

lines or the eastern region when divided geographically)
may not be attractive to investors. As the road map of
privatization has not been spelt out, it is difficult for the
organization to prepare itself for the future. This uncertainty
has led to a low morale of the employees.
BSNL plans to get into cellular service provision. But
its roll-out seems hesitant. In this segment, private operators
have had a head start and have developed the marketing
expertise, customer databases and infrastructure. For example,
MTNL’s cellular services have been able to register only
10,000 customers in New Delhi and around 8,000 in Mumbai
compared to Bharti’s nearly 33,000 in Delhi for Bharti and
BPL’s 27,000 in Mumbai (as of April 2001), the dominant
operators in the two cities (see the COAI website). Therefore,
to make a success of the cellular operations, BSNL may
need to create a separate entity that could be staffed by
people with a greater market orientation than that available
in BSNL. Such an entity would need to work on a
commercially-oriented manner with management having
the autonomy to give commissions to sales staff; flexible
payment structures; ability to price competitively; give
discretion and responsibility to staff; salaries linked to
performance or targets––attributes that are absent in BSNL’s
operations today.
International long distance could be an area of expansion
for BSNL. Exploiting value added services would require
cultural, overhaul in the organization.
As BSNL changes towards becoming a corporate entity
in practice, a key requirement would be the implementation
of commercially oriented accounting systems including
management control systems. Such a system would require
not only basic changes to the existing accounting systems
right down to the field level, but also training and significant
computerization to implement the system. Given the long
decision cycles in the government, and the massive
investments required, such a system will require a dedicated
project team that would have to have the requisite financial
powers and technical understanding of the management
issues in computerization.
Corporatization thus far has not changed the earlier
decision making structures and processes. There is a need
to train managers to have a business perspective and build
accountability for performance, an aspect that is lacking
in most government departments. For example, it will
have to develop performance norms as per the new
technology inducted and move away from an earlier culture
where employees demanded to be evaluated on performance
as per the norms of older technology, causing low
productivity and additional costs for the network. For
example, the number of DELs (Direct Exchange Lines) per
employee in BSNL (Table 3.2.1) is low, not only in
comparison to developed countries but also in comparison
to countries such as Indonesia and Philippines.
From a monopoly mind set where BSNL was used to
treating customers as though doing them a favour by
providing services, it will have to change to being more
sensitive to customer needs. This change is very critical and
is going to determine whether BSNL continues to be a
profit making entity. Appropriate systems need to be
designed for facilitating customer interactions. For example,
instead of expecting customers to come to its premises to
pick up forms, these could be widely distributed through
retail channels and the web. While it has started distribution
of some forms through the web, it needs to do so for all
its services. Similarly, a variety of options for payment of
bills could be offered. Such systems need to be designed
for the different elements of service.
With corporatization costs are being treated and reported
more appropriately. The costs of its inefficient operations
were hidden and paid for by the tax payers are now revealed
in its lower profits.
BSNL does have tremendous strengths vis-à-vis

Table 3.2.1
Comparison of Telecom Indicators in Different Countries
Country Year No. of Lines No of Employees Number of Lines Source
per Employee

Denmark 2000 3735000 18363 203.40 www.teledammark.dk

TDC Tele Denmark 2000 3400000 10900 311.93 www.telkom.co .id
Indonesia 2000 6662065 37705 176.69 www.pldt.com.ph
Philippines 2000 1999922 13285 150.54 ww.francetelecom.com.fr
France Telecom(10 countries) 2000 3.9E+07 188866 207.55 ww.francetelecom.com.fr
France (France Telecom) 2000 3.4E+07 148846 229.19 www.telkom.co.za
South Africa 2000 5075417 60613 83.73 www.telecom.com.ar
Argentina 2000 3723936 10259 362.99 www.sinftel.com
Singapore (Singtel) 2000 NA NA NA www.ntt.co.jp
Japan(NTT) 2000 224000
India(BSNL) 1999 2.2E+07 431874 50.00 ww.dotindia.com
 The Infrastructure Sector in India, 2000–1
competition, in terms of its reach and trained personnel.
But to build upon it would need full autonomy. That could
prove difficult.
CONVERGENCE BILL HIGHLIGHTS
Key highlights of the Convergence Bill drafted by a
committee under Fali Nariman:
• Formation of a single commission that would address
both content and carriage regulation.
• The enactment of this Act would lead to a repeal of
the Indian Telegraph Act 1885, Indian Wireless Telegraphy
Act 1933, Telegraph Unlawful Possession Act 1950 and the
Telecom Regulatory Authority of India Act 1997.
• Licensing as a key function: (The Ministry of
Communications for telecom; and the Ministry of
Information and Broadcasting for FM Radio.
MAJOR FUNCTIONS OF THE REGULATORY
COMMISSION
• Licensing
REFERENCES
3iNetwork (2001), India Infrastructure Report 2001: Issues in
Regulation and Market Structure, Oxford University Press,
New Delhi.
COA/(2000) http://www.coai.com.
Government of Gujarat (2001), The Gujarat Gas (Regulation of
Transmission, Supply and Distribution) Act 2001, Gandhinagar.
Government of India (2000a), Draft Integrated Transport Policy,
Planning Commission, New Delhi.
—— (2000b), Draft National Water Policy (1998), Ministry of
Water Resources, New Delhi.
—— (2001a), Report of the Expert Group—Settlement of SEB
Dues, Planning Commission, New Delhi.
—— (2001b), Report of the Expert Group—Restructuring of SEBs,
Planning Commission, New Delhi.
—— (2001c), The Electricity Bill 2001, New Delhi.
—— (2001d), The Indian Railways Report: Policy Imperatives for
Reinvention and Growth, Expert Group on Indian Railways,
Indian Railways, New Delhi.
59
• Determination of tariffs
• Formulation and determination of conditions of fair
and equitable access
• Promotion of competition
• Protection of consumer interests
• Promotion and enforcement of universal service
obligations
• Formulation of advertising codes for content
application services
• Formulation of commercial codes in respect of
communication services and network infrastructure facilities
• Taking steps to regulate or curtail the harmful and
illegal content on the internet and other communication
services
• Formulation of codes and technical standards and
norms to ensure quality and interoperability of services and
network infrastructure facilities (including equipment)
• Carrying out any study and publishing findings on
matters of importance to the consumers, service providers
and the communications industry
• Institutionalizing appropriate mechanisms and
interaction on a continual basis with all sectors of industry
and consumers so as to facilitate and promote the basic
objectives of the Act.
—— (2001e), 52nd Report on the Ministry of Shipping, The Par-
liamentary Standing Committee on Transport and Tourism.
Government of Karnataka (2000), Report of the High Level Committee
on Escrow Cover to IPPs to Government of Karnataka, Banglore.
Government of Maharashtra (2001a), Report of the Energy Review
Committee Part I, Mumbai.
_________ (2001b), Report of the Energy Review Committee Part
II, Mumbai.
_________ (2001c), The Sukthankar Committee Report on
Operation, Maintenance and Management of Rural and Urban
Water Supply Schemes, Water Supply and Sanitation
Department, Mumbai.
Haldia Gajendra (2000), Indian Highways: A Framework for
Commercialisation, National Council of Applied Economic
Research, New Delhi.
Singhal Rajrishi, Malini Goyal and Arindam Sengupta (2000),
‘Tomorrow’s CEO must be a Coach, Not Power-Base’, an
interview with Jack Welch, Economic Times, 18 September.