Overview 1
1 OVERVIEW
Sebastian Morris
CHALLENGES FOR GOVERNANCE AND
POLICY-MAKING
The liberalization of the early 1990s, if it is to prove anything
more than episodic raising of expectations, has to ensure
high growth for several decades to come. In Chapter 2 it
is argued that while conservative economic policy including
tame pricing of the currency has brought about recession,
continued fiscal conservatism deepens it. The more recent
downward pressure on consumer expenditures in the US
following already existing recessionary conditions can be
expected to put a brake on world expenditures1 and hence
bring world down incomes. This spells difficult times for
India, already in the midst of an industrial recession. The
scope of increasing demand through monetary expansion
which was there until the latter part of 1998, is now most
certainly absent. Nothing short of a fairly large fiscal boost
accompanied by a relative decline in the real value of the
rupee will work. The current fall in the value of the rupee
against the dollar needs to be actively accelerated, since in
the world economy with shrinking demand, India must try
to match the structurally undervalued currencies of China
and the East Asian economies. The currency crisis has pushed
the already structurally undervalued currencies of Thailand,
Korea and Taiwan even further down.
This is not the time for ideological histrionics. The undue
fear of fiscal deficit and inflation has to be overcome. With
an expenditure multiplier of around two and half over the
year, and a tax to GDP elasticity much in excess of one, the
danger of a ballooning fiscal deficit with some (controlled)
boost in government expenditures is greatly exaggerated. In
any case, the industrial sector, more than others, is in deep
1 Unless the war results in major expenditure increases.
recession. Taxes have a large base in industrial output, and
it is industrial output that would rise steeply with a fiscal
boost. Consequently, the fiscal position of the government
would not deteriorate much. The need of the hour is therefore
a coordinated fiscal and monetary expansion with a sharp
depreciation of the currency2 and major and quick reform
of infrastructure policies especially in the power sector to
draw in private investment once the economy restarts and
the private sector needs to meet demand.
Unfortunately the move in that direction by the Prime
Minister’s office has been watered down by conservative
economists who currently monopolize macroeconomic
policy-making, both within the government and the RBI.
They refuse to recognize that the limits to reducing the
fiscal deficit via active reduction of the primary fiscal deficit
have long been reached, probably by the end of 1999–2000.
The only realistic measure now is to grow out of the fiscal
deficit, and (in a smaller way) inflate away part of the debt.
The faster this begins the better it would be for the economy.
The task of pursuing high growth without bringing about
fiscal crisis is the first challenge today.
The large buffer stocks of food also ought to bolster
confidence to increase fiscal expenditures. There is, of course,
the fear of fiscal boost bringing in wastage inherent in
government expenditure. This is true even in the case of
investment expenditures. The fear is shared even by those of
a more Keynesian persuasion. Despite this, unless the economy
is lifted up in the next year or so there is a very high chance
that benefits from the reforms so far are lost. As support for
reforms vanishes among the industrialists and the poor, who
have to face the situation of stagnancy or decline in the
2 Instead of waiting for speculators to beat it down.
2 India Infrastructure Report 2002
number of jobs, the danger of a political backlash and the
end of privatization is real. Many structural reforms, awaiting
the scope that is there in a growing economy may be lost
for another decade at least. These are reforms in the labour
markets, administration of subsidies and introduction of
user charges in many publicly provided goods.
The opportunity to bring about changes in subsidy
administration in electricity, water, food, fertilizer and fuel
was never better. Chapter 2 outlines the vast benefits in
right administration through direct subsidies. Most
importantly, it would cut the Gordian knot that has hindered,
true reform in water and electricity. Here it is important
to recognize that the mountains of food could be turned
into infrastructure, alleviating hunger and poverty if the
right structure of administration and governance for an
efficient and productive food for work programme could be
found. (The starting point really is direct subsidization).
This is the second challenge today. If met, it has the potential
of making policy, organizational development, and
governance itself the leverage points of change.
In IIR 2001, it was emphasized that the demand
(depressionary) effects of declining infrastructural investments
had been one of the reasons for the slower growth of the
economy as a whole. Budgetary cuts on public investments
which largely hurt physical infrastructure like power and
irrigation, in so far as their expenditure effects were concerned,
had been more than compensated by the rising private
investments in manufacturing which continued right up to
1995–6. The only way private investment could have kept
its higher pace of growth would have been through
infrastructure investments. But lack of regulatory clarity
and policy risks kept the private sector away. The problem
continues perhaps with even more severe depressionary effect.
Since then, important positive developments have come
about but they are not adequate to bring large-scale private
entry into infrastructure. The notable achievement, as
Anupam Rastogi brings out in Chapter 3, has been the
creation of a road fund and the commitment of the
government to complete and modernize the golden
quadrilateral and the north-south and east-west corridors.
The Draft Bill on Electricity although in the right direction
of open access and towards a market for generation, has
many problems that are brought out by Ajay Pandey in
Section 9.4. The bill while necessary, given the inevitability
of the decentralized and plural mode of the electricity system,
is not adequate by itself. Unless the problem of cross subsidy
and agency failure that it creates in distribution entities,
whether public or private, is overcome via direct subsidization,
private investments would not flow into the sector. In the
telecom sector after National Telecom Policy, 1999 (NTP
99) and the promise of the convergence bill, the retrograde
step of wireless in local loop (WLL) and the limited mobility
WLL that followed, while restoring a fair equilibrium between
the players in the industry is patently against the consumer
interest. Denying the technological benefits of WLL via
code division multiple access (CDMA), group special mobile
(GSM) or corDECT (DECT of Tenet Corporation) is not
right at this juncture when the network (given network
economies) is poised to expand rapidly.
These developments apart, there is little that has taken
place along the direction of bringing about regulatory and
policy clarity that was highlighted in the previous issue.
Why have developments been so weak or slow? Closer
examination shows that the working of the government
particularly in its detailed policy, rule and law making roles
has been maimed by inadequate skills, knowledge and
activism, and perhaps most by the systemic ills which we
discuss in Chapter 2 in a generic fashion and cover in many
of the papers in specific contexts. Besides competency, the
power of vested interests, graft and corruption, and turf
wars between specialist catalyst organizations like the Gujarat
Infrastructural Development Board (GIDB) and the rest of
the governmental system have been responsible. The third
challenge today is therefore to improve the governance of
economic institutions, be it the financial sector, industrial
development boards or courts dealing with economic issues.
It is a challenge of governance in the usual sense of the term.
And much of this report is concerned with that task i.e. the
challenge of governance in the context of commercializing
infrastructure. At its core this task is one of better design,
writing better contracts, bringing clearer, and transparent
rules, avoidance of internal contradictions in policy and
laws. It also means right manning of key regulatory and
governance institutions, better and appropriate incentive
structures, and working with newer and potent institutions
and laws that bring in the citizen and the consumer into
governance as a participant, evaluator and user.
AN OPPORTUNITY FOR CHANGE
Liberalization, precisely because it succeeded in the sense of
creating a more open and market oriented economy, has
resulted in the present situation, where the three challenges
mentioned earlier arise and need to be overcome. The first
is a challenge for economic policy, the second for both
policy and organizational development and governance, and
the third is essentially a challenge of governance. Policy-
makers and people with the power to take decisions are
today in the enviable position of having a particular
autonomy. But this window of opportunity is narrow and
the constraints will soon reassert to deny any leeway. More
usually, the scope of decision making is limited to the small
decisions that help to maintain the system and any attempt
at bold decisions to make significant change is usually

frustrated. But today there is a difference. Politically and in
an economic sense the moment is right to take the big
decisions that would change the course of the economy and
the society for many years to come. In other words we are
at the crossroads and there is autonomy for action. Such
opportunities have been few and far between. The period
immediately after independence, the period following the
crisis of the late sixties, the year after the second oil shock,
and the crisis year of 1991–2 have provided such
opportunities in the past. Our economy and society is what
it is today because of the particular decisions that were taken
(or avoided) then.
Unfortunately we do not see a coherent response to the
situation today. As already mentioned, the bind of orthodoxy
on the economy has been particularly severe. The costs of
learning imposed by the Reserve Bank of India (RBI), the
Securities and Exchange Board of India (SEBI) and the
electricity regulators and policy makers have been onerous.
There is no discussion as yet on the opportunity and need
to right structure subsidy administration, not even in the
crucial electricity sector. Neither is there the appreciation
that transparency (necessary in commercialization and
privatization) would demand that ‘clever’ sections inserted
by the bureaucracy do not take back the power that is
‘granted’ in the very same law to the independent regulator.
The problems of governance today are severe and solutions
are not easy. The task is really to go under the skin of the
general tenets of transparency, accountability and consumer
interest (and often participation of citizens), to be able to say
how these can be brought about. In this report we do not
pretend to have the final answers. In the last report on
regulation and market structure our studies lead us to
somewhat definitive conclusions. In this report besides certain
definitive conclusions and suggestions, we have also raised
basic issues, questioned fundamental assumptions that are
often made in discussions of governance and its role in
development. We hope to highlight interesting and thus far
underplayed aspects of law, policy, administration, structure
of organizations and institutional arrangements. The
overarching design of political institutions can constrain
regulatory organizations. Political economy naturally cannot
but be a part of the discussions. For the specific and contextual
understanding which would lead to recommendations for
improvement, sectoral and specialist knowledge is also
necessary. As such the papers cover a wide range from the
social and political situation, to sector specific descriptions,
to institutions in general. The focus in most papers is on the
constraints that stand in the way of the development of
infrastructure in the country, and on how they can be
overcome. As such, despite the detours into theory and concepts
and case facts, the purpose is pragmatic. In some very basic
problems we do not have ready solutions but nevertheless
Overview 3
since they are very important we have discussed them. One
such problem is of deprivation and extreme inequality in the
country, correction of which is a larger problem.
GOOD GOVERNANCE IN AN INEQUITIOUS SOCIETY
The limitation of the very notion of good governance in
societies with extreme inequalities and severe deprivation is
a theme that runs through Chapter 2 and is also picked up
again by Keshab Das in the discussion of the problems with
rural infrastructure (Section 7.1). It is also covered by
D’Mello in the discussion on why social impact and
environmental impact analysis thus far have been farcical.
Similarly, in the story of the brutal evictions of industrial
workers and slum dwellers from Delhi (Delhi Janwadi
Adhikar Manch, Section 5.2), the facts of repression and
denial of living spaces are brought out without much
comment. The authors’ pessimism in these cases is not
difficult to understand. They justifiably take the position
that it is capitalist development which is at the root of this
oppressive behaviour of the state, and the experience in
India as also possibly in many other countries, including in
England during its industrialization, are testimony enough.
Nevertheless late industrializing East Asia has been able to
avoid such exclusion through the egalitarian income
distribution that they started with, thanks to their land
reforms. So it is not growth per se through the market, but
the fact that we have started out on the wrong foot in not
ensuring basic endowments to all, that is the source of the
problem. We underscore this theme in Chapter 2. The
pathos of the poor in India is not the suffering per se but
its futility. If through that suffering a capital strong enough
to unambiguously carry through the industrial transfor-
mation could have been assured then that suffering, however
unfair would not have been in vain, since at least future
generations would have gained. So today praxis, whether
arising out of guilt, or hope and confidence, demands the
assurance of endowments to those without it, to bring them
into the market. Without that all infrastructural effort
including those directly targeted at the poor and otherwise
neglected villages would come to naught. Das (in Section
7.2) brings out the fate of the much touted rural
infrastructure project of the Gujarat government, the
eventual failure of which could have been anticipated given
a reasonable familiarity of such target-oriented schemes,
and the rural situation.
DISPLACEMENT, RESETTLEMENT, REHABILITATION,
AND THE LAND CONSTRAINT
It is a moot point that today the concern for displacement
and the poor arise because of the risks they impose upon
4 India Infrastructure Report 2002
infrastructure projects, the so called land acquisition and
environmental risks. Even then it is good that the matter
has come out into the open. Private and accountable financial
institutions like Development Finance Institutions (DFIs)
rather than governments and their parastatals, have brought
these issues to the fore, even if for their own enlightened
self interest.
So justice may still be possible, if only to expand the
railways and provide better roads. The way ahead as we had
brought out in IIR 2001 was in replacing the existing
colonial land acquisition act with one that defines the public
purpose, and creates the space for negotiated settlement,
and involves the displaced in the projects. In the cities it
lies in less of master plans and more of land markets, less
planning and more adherence to basic rules relating to land
use. Nothing could help slum dwellers and others facing
eviction better than higher floor space indices (FSIs). Elitist
abhorrence of concrete jungles apart, it is the growing and
densely built up cities that cheapen and make feasible the
task of infrastructural coverage for the majority of the
population. These are ideas that need to be brought out
with greater force and discussed, hopefully, in a future issue
of the IIR.
In the present report the solution to the problem of
urban land for the poor has been only sketchily discussed.
Transfer of development rights (TDRs) (see Kothari, Section
8.2) which allows public services to come up quickly is one
important possibility in large cities with considerable
difficulties in acquiring land due to both valuation asymmetry
and contingent titles—illegal squatters, slums etc. The
appreciation that results through TDRs (the social or external
gain) is rendered internal through the allowed higher densities
in the transfer location. In growing cities subject to severe
distortions, and unscientific land use, TDRs can help to
correct these distortions.
A less general but eminently practical solution to some
of the slums that stand in the way of vital infrastructural
development is provided by the story of Mumbai’s railway
slums, covered by Nandini and Prem Kalra (Section 5.3).
The essential value of the approach lies in giving up the
pretence of the legal title and recognizing the de facto rights
of slum dwellers to some urban space. With that approach
the railway slums could in fact be removed or circumscribed
in a manner that allowed railway operations to be conducted
smoothly and to even expand, for the benefit of all. It is
this exploration and pursuit of win-win solutions that is the
key to all problems of social existence. There are of course
better and more global solutions which can come through
development that is labour absorbing at the same time.
Slum clearance when combined with TDRs can be a potent
force if there is clarity on the objective and functions of a
city and the elitist hijack of land use as in Delhi is avoided.
Delhi’s land has been preferentially allotted to institutions,
defence personnel, and upper middle classes with very little
or none of the land being earmarked for the working class.
This exclusion by design would most certainly make land
beyond the reach of all but the very wealthy and corrupt.
Absurdly small floor space indices have brought about a
virtual vacuum in the middle. A strange, monstrous and
other-worldly city with the president having an airfield in
front of his residence and most of the powerful having acres
of garden space around their spread out bungalows, hogging
vital central space, has grown. The rest of the people have
to spend vast amounts of fuel, time and effort criss-crossing
this centre of gardens and palaces every day. It is important
for radical scholars to understand that monstrosities such
as Delhi or Bombay are not a necessary creation of capitalist
development. Successful transformations in the West and
elsewhere in East Asia have created London, Philadelphia,
New York and what is of greater relevance to us Shanghai,
Seoul and Kuala Lumpur with spaces for all, unconstrained
by elitist architectural considerations and monopolization
of central places. Similar dysfunctional cities though none
on the scale of Delhi are to be found in societies that have
not successfully carried out the industrial transformation—
much of Latin America, Mexico and the Philippines. Extreme
inequality in these societies creates spaces for vast informal
sector and so slums as also for palaces in city centres. When
the exclusivity inherited from colonial rulers in the
administration of the country is additionally located in such
cities a Delhi results. Had Islamabad been created in
Rawalpindi, a Delhi would have resulted.
In Section 5.4, Rath and Ramakrishnan bring out their
vast experience with resettlement and rehabilitation (R&R)
with power and other large projects. The National Thermal
Power Corporation’s (NTPC) record of R&R is far better
than that of government parastatals because of a certain
degree of professionalism, a seriousness with regard to the
laws of the land, and an ability to afford the costs of R&R.
Much more though is desired especially with regard to the
management of ash pits. Recently as activism among those
affected has increased and the expectations of the displaced
have gone up, the attempt has been to minimize
displacement. This has large negative consequences. The
lands acquired are such as to leave large pockets of people
without a sufficient buffer between them and the project.
Negative externalities have therefore to be borne by those
who are technically not displaced but who hardly have the
resources to mitigate the ill effects of these externalities.
This is the most abhorrent development and needs to be
corrected. In our discussion of a possible approach to land
acquisition in IIR 2001, I had argued that in land acquisition
there is a case for collective decision making—an all or none
approach with uniform base prices for all—since partial

acquisition for carrying out activities incompatible with the
prior activities in the area would impose heavy burden on
those whose lands are not acquired. Also such a process
would avoid the manipulation of the average price of
acquisition.
Very importantly Rath and Ramakrishnan stress the need
for professional bodies, perhaps organized as non-profit
organizations that can carry out R&R on behalf of companies
and enterprises investing in infrastructure. In unbundling
project related activities to professionalize a distinctly different
activity from the rest of the project the scope for specialization
and skill development is large. R&R is far too technical to
be left entirely to local non-governmental organizations
(NGOs). And is too different from the activities of managers
who are used to dealing with people in organizations and
consumers, not groups, organized or otherwise. Moreover,
the project affected people are from a strata of society about
whom they have little experience. Such arrangements would
not let the experience that worthy productive enterprises
like the NTPC and others have in R&R activities to go
waste. The experience could then be more widely available.
So should not NGOs, FIs, and companies like the NTPC
come together to set up specialist R&R organizations? They
also highlight the need for project affected people to be
involved in their own R&R especially in house construction.
The ritualization of the environment and social impact
analysis that goes on is the theme of D’Mello’s paper (Section
5.7). He goes on to argue why an environment impact
assessment (EIA) and social impact assessment (SIA) need
to go together. More substantially in a labour surplus
economy it would be wrong to assume that those displaced
with money compensation for their lands would be able to
restore their livelihoods. The actual practice of R&R today
is ‘antithetical to the values of a liberal and plural society’.
The fact that infrastructural projects, especially dams, have
attracted many public interest litigations (PILs) imply that
those affected and displaced are not being treated fairly. A
good E/SIA would according to the author have to necessarily
recognize the existence of different classes since they are
vulnerable in varying degrees. Typically poor peasants, tribals
and agricultural workers (unless they are able to migrate to
the irrigated areas) generally suffer most. An aseptic cost–
benefit analysis would not do. Given the current modes of
R&R, and the framework for land acquisition, PILs and the
courts have been the only solace for those affected by large
projects like the Narmada. Struggle was important in being
able to get the settlement, but the tide has turned. Courts
have turned away from judicial activism in the interest of
the poor. But courts cannot be expected to reflect much
more than the class orientation of the state of which they
are a part. Thus the judicial activism of the eighties and
early nineties has given way to rulings that have upheld
Overview 5
executive actions even when they have hurt the poor as in
the Delhi pollution-related evictions (Section 5.2).
Reacting to strong pressure from the environment groups
and with a concern for mounting levels of air pollution in
Delhi the closure of industries has hurt workers and the
poor. Pushed out from their original jhuggi–jhopris they
have no work in their new locales where they are forced to
resettle.
THE CONSTITUTIONAL AND LEGAL FRAMEWORK
We have a parliamentary democracy in which the separation
of the roles of the executive and the legislature is not as clear
cut as in the presidential form in the US. Anant and Jaivir
Singh (Section 4.1) discuss the implications of the
overarching constitutional framework for regulation and
governance in the context of commercialization of
infrastructure. Transparency of the regulator is particularly
challenging since unlike in the US, the separation of powers
between the executive and the legislature is not complete
and not subject to the concurrence of the judiciary in the
regular course. This carries over into the functioning of the
regulator. This means that regulators, to be effective, have
the onus of promoting voice and equity decisions. This
means that right structuring of the regulatory authority,
and appointment of the regulator are crucial tasks. If errors
are made therein, the consequences are likely to be severe.
This explains well the experience of regulation in the financial,
electricity and telecom sectors. The last case is discussed in
the paper. The government’s and the TRAI’s (Telecom
Regulatory Authority of India) powers are obfuscated in the
act itself. Moreover it has now become standard practice ‘to
construct [regulatory] institutions to include a wing that
acts as a court’. While this general trend has come about
because ‘civil courts are overwhelmingly clogged that it is
felt that special/tribunals will speed up justice …This
fragmentation of the court system might speed up cases but
surely lead to inefficiencies that are generated by ambiguous
jurisdiction. The key problem with such fragmentation is
that it inhibits the development of a unified legal system
[in this case] in an important area of contract law.’
The notions of public hearings and consultative papers
that the regulators go through do not in themselves amount
to giving voice or equity. There is nothing in the law that
makes regulators decide in favour of consumers or the
people. Most of the reform acts or the specific acts that have
created regulators do not start with the consumer interest.
Neither are the advisory, overseeing bodies specified under
the law representative of the consumer interest. Thus Ajay
Pandey’s study of the case of the first power tariff norms
fixation by the Central Electricity Regulatory Commission
(CERC) (Section 9.1) shows that despite the consultation
6 India Infrastructure Report 2002
studies, reports of the consultants, and the motion of inviting
the public to participate, the decisions as such were
circumscribed by its own limited understanding of the issues.
We cannot exclude the possibility that it may have been
influenced only by those who made themselves heard. All
parties involved were not equally vociferous and the CERC
did little to have the voice of the SEBs brought into the
discussions. Similarly, the Draft Bill 2001 which lays down
the membership of the selection committee that would
appoint the State Electricity Regulatory Commission
(SERC)/CERC members and chairpersons, indicates that
they are all officials of the government. This in itself is not
the problem, but the law allows the choice of the commission
to be a legal person—a retired judge, in which case the
conditions pertaining to skills and experience can be overruled
by the government. The danger of regulatory capture is also
highlighted by the Prayas Group (Section 6.7). Anant and
Singh also see much harm in judicial activism however well
intentioned the motives, since the judiciary is best at hearing
out competing claims to make a ruling, not prima facie
making a choice. Such activism is also violative of the
doctrine of separation of powers and as such long term
degradation of the institutions of governance is likely, if
such trends continue.
Anant and Singh in Section 4.1 discuss the functionality
of instruments of regulation especially for the control and
management of externalities. The choice between liability
rules and property rights would have to be made not
arbitrarily, but based on the nature of the damage or effects
that the externality in question can bring. When these are
not predicted then property rules or rights work better.
Thus, ‘The advantage of the liability rule is clearly related
to the ability to correctly assess average harm. If the system
(legal, administrative and procedural) systematically
underestimates harm then the liability principle can do
much worse than the property rule. If the problem at hand
is such that it involves idiosyncratic valuation of the resource
in question where the two parties have different private
valuations then property rules dominate over liability rules.
Under a property rule, transfers take place only if the
valuation of the owner is less than the valuation of potential
takers, and that too through a compensation acceptable to
the owner. If liability rules were used in such instances with
compensation being based on averages of values, more than
optimal level of takings or dispossession will take place.’
Joshi and Anuradha (Section 4.3) bring out the features
of an ideal framework for a law relating to commercialization
of infrastructure, and posit the existing legal framework in
several sectors, to point out their limitations and constraints
in bringing about private participation and ownership. Even
without laws through an executive order private sector can
be brought in, but the risks would tend to be high in such
cases, because executive decisions and policies can be reversed.
Some of the important lacunae in the existing laws are that
the law:
• may not allow for private interest to be created;
• may have only inadequate protection of private
investment;
• may not vest all relevant rights required for the
development of the facility;
• may not provide for due recognition and enforcement
of lenders’ rights;
• may not have provision for the imposition of tariff/
fee/toll;
• may not provide for an adequate independent
regulatory mechanism;
• may not provide for adequate dispute settlement
mechanism.
As several states go past BOT (build, operate and transfer)
laws for private sector participation, some of these but not
all are getting rectified.
ACCESS TO INFORMATION
Abha Singhal Joshi (Section 4.4) building on her report in
IIR 2001 on the freedom of information bill, makes a
comprehensive assessment of the same, concluding that the
bill does not go very far in ensuring that people will have
the right to information. Too many exclusions, many of
them of the blanket type, too many situations where public
interest can be used to deny information and the non-
inclusion of private companies with a large public aspect,
have all marred the bill. They would mean that while we
would have a law in form, in spirit it would hardly provide
for information the way the right to information provides
in the US and in a few other progressive countries. The
processes gone through by the Shourie Committee were not
laudable enough. Few people outside the bureaucracy and
the government were contacted before the draft was drawn
up. Many of the criticisms made against the draft do not
find recognition. The right to information is all the more
vital in India where, the law that has created regulators does
not give adequate independence to the regulator, and also,
there are no directions on the regulator specifying his
principal task to lie in ensuring the consumer interest. With
much privatization of infrastructure envisaged, disclosure to
users and citizens and to those being displaced, could have
been explicitly brought under the ambit of the law. What
is most strange is that there is no effective remedy in the
proposed law when the government denies a particular
information. All that the citizen can do is to appeal to the
designated officer within the government.
Citizens’ monitoring of infrastructure services, and more
generally of government functioning, is one way of putting

pressure on public bodies and civil servants to improve
performance and bring about accountability. The idea could
indeed be extended to monitoring and participation (even
in the design of various activities and facilities). One may
well ask why the media cannot carry out this function.
Media can be very useful in drawing attention and concern.
Its power therein is unchallenged but media has its own
constraints of what is news or worthwhile to report. The
Public Affairs Committee (PAC)—a Bangalore based civil
society organization reports (Paul and Gopakumar, Section
4.2) its pioneering experience in monitoring of public services
and more generally of providing feed back to local bodies
and others that have the responsibility of providing these
services. The success of their efforts whenever there has been
some interest on the part of the local bodies to improve is
indicative of the potential in the approach. Key to the
success is the objective assessment through reliable and
validated schedules. This objectification even if not entirely
justifiable is very important since it provides a yardstick to
measure the local bodies’ performance, and we know from
motivation theory that performance measurement on a
regular and objective basis can be a powerful motivator.
From the point of view of the citizen the institutionalization
of the feed back, and monitoring that the approach provides,
overcomes the free rider problem that is always there in any
such collective effort. And this is what makes the money
spent on building organizations like the PAC worthwhile.
In a very active democracy that has taken root very early
in our development these initiatives point to the right
direction for action.
Manikutty (Section 4.5) finds that active promotion and
creation of an institutional mechanism for community
participation can greatly improve the efficacy and efficiency
of public services. The case studied is of drinking water in
two different locales, one with and another without
community participation (CP). Not only the additional
local knowledge that CP brings in at the design stage but
also the sense of ownership and commitment that it brings
about are important. Cost and effort can come down
dramatically if monitoring of the service quality and levels
is done by the potential beneficiaries. They have a natural
incentive to correct failures once an institutional/
organizational framework that involves them is in place.
ENVIRONMENTAL POLLUTION
In IIR 2001 we had briefly touched upon the problem of
environmental pollution bringing out the dimensions of
failure in this aspect. India probably has one of the poorest
records on control of environmental pollution. We had then
suggested that in having bitten more than they could chew,
the pollution control boards of most states have more or
Overview 7
less failed completely. Very ambitious laws exist merely on
paper and even when there is some monitoring the
punishments have been too little. Recent court based closures
of polluting units have only compounded the problem since
they do not recognize the costs and benefits of mitigation
and ignore far better and appropriate approaches to the
problem. We had also suggested that some states like Gujarat
in widely dispersing polluting industries ostensibly for
backward area development have maximized their negative
externalities.
In this report we have taken the matter further. Atiyah
Curmally (Section 5.1) reviews the literature on approaches
to the control of pollution and makes that wide-ranging and
most relevant literature accessible to the policy maker. In
worrying about the choice of instruments like permits
(tradable or otherwise) and in general property rules, fines,
and liability rules under various situations and in
contextualizing them to the situation current in India, she
is able to lead to the understanding that there is much that
the state can do to reduce the effects of environmental
pollution. I have elsewhere argued that historically after a
certain stage in the transformation process when incomes
are high, the concern for the environment suddenly increases
leading to a flurry of changes in rules and governance to
result in a rather quick clean up of the environment. This
has happened in Japan and Korea and will soon happen in
China. Nevertheless it is possible, without much cost, even
before such a stage is reached, to mitigate the worst effects
of pollution if an economic and participatory approach is
adopted, rather than the blanket ban or the command and
control approach that is current today. The elements of
these would be to prioritize and distinguish between various
kinds of pollution and choose the instruments for tackling
the same carefully. In other words to worry integrally about
not only pollution but its differential effects—the costs of
mitigation, monitoring and policing, the value of punitive
measures and deterrent, and the appropriateness of the
instrument before instituting measures.
Experiences of other countries that have used some of
these alternative measures are also discussed. The paper also
comprehensively reviews the initiatives thus far, to provide
an explanation of why these have generally failed. Waiting
for growth to take care of pollution may be quite misplaced
in India. Not only is the transformation of the economy not
assured but even if it were to happen it would hardly be
the quick process that is current in East Asia. Vast income
inequalities would mean that the poor and the marginalized
would bear a very large part of the pollution and
environmental costs as they do today. The Delhi Janwadi
Adhikar Manch (in Section 5.2 and in Box 5.1.2 of 5.1)
bring out the tragic effects of pollution control on the poor
in Delhi, via the usual command and control approach
8 India Infrastructure Report 2002
discussed by Curmally. The political economy of pollution
and its control is today in Delhi a case of systematic assault
by the state on the poor. (An equally abhorrent case is that
of displacement—both in rural and urban areas which we
have already mentioned). In both these situations although
we do not have ready and well honed solutions we are able
to say what is dramatically wrong with the current system
and indicate the more workable and fair approaches possible
today.
CONTEXTUALIZING REGULATORY CHOICES
Excessive and premature regulation, even when formal as
through legally constituted and independent regulators, may
itself be a cause of governance failure. Electricity, telecom,
and the current proposals for water and gas have the potential
of this dysfunctionality. Historically, (in the now developed
economies) regulation has usually been a post development
phenomenon. There is a natural contestability or func-
tionality to the monopolist pricing that arises when the
network is rapidly expanding wherein therefore only light
supervision, not amounting to regulation but some
intervention around standards and rules is all that is necessary.
This viewpoint which goes against the current approach of
bringing about complex regulatory mechanisms3 needs
serious consideration.
The current proposals would if pushed4 create a
humunguous superstructure of regulators that would dwarf
the 5000 active regulators who existed in the US prior to
deregulation. Areas like gas pipelines, water, telecom and
electricity in rural areas, where much network expansion
can quickly take place face a real danger of getting into
regulatory quagmires. The possibility of capture by the
regulated to ensure high returns without efforts to overcome
risk and develop the market is large. Jayanth Varma discusses
this theme in Section 6.1 and then goes on to develop the
insight that what is required out of private infrastructure
(today) is not just private finance as such but private
entrepreneurship. ‘The private sector would then bear the
risks and reap the rewards of infrastructure projects. The
design and location of these projects would follow economic
logic [most vital for the country today], rather than the
dictates of political considerations’. The gains in allocative
efficiency in bringing the private sector are far larger than
3 It is interesting that in all the regulatory initiatives in India
thus far, the option of an index based incentive regulation, which
could have been much lighter than the current cost plus detailed
regulation in electricity and telecom, has been entirely ignored. In
the last IIR I had argued strongly for such mechanisms.
4 More than being pushed there would be an autonomous tendency
for expansion and growth of the regulatory apparatus since there
would be new space for the bureaucracy to expand.
merely in project construction and management. And the
private sector would enter in a big way if the rewards in
entering, in bringing in technology and new modes of
working, and contesting are high. (The benefits for the
consumer too would be very large particularly through the
expansion of the network and in the use of innovative
technologies and modes of working.) This is not to deny
that a ‘small number of strategic infrastructure projects may
remain that the state considers important, but the private
sector does not consider attractive. It is only for these few
projects that the state needs to step in either by undertaking
the project with public funds or by providing subsidies or
credit enhancement’.
Atanu Chakraborty (Section 6.2) brings out the salient
features of the proposed Gujarat Gas Act. As one actively
involved in its creation he is best placed to outline the pulls
and pressures that worked against the Gujarat government
going ahead with the act. The jurisdiction of the Gujarat
(state) government to legislate on gas was contested, though
the matter is rather clear. The act creates a common carrier
mode for gas transport separating the trade in gas from the
pipes business. It can serve as a working model for other
state governments serious about gas network development.
Chakraborty reports that the apprehensions that the regulator
would be weak, and a state owned enterprise in gas
transmission is unwarranted, are quite misplaced. ‘Removal
of a member of the Commission is fairly difficult, and the
Act lays out a comprehensive procedure.... Transmission
being a natural monopoly had to be structured carefully and
it was that consideration that led the state to set up a
venture where all the stakeholders are represented. It is not
the usual government company but one that has formal
participation of stakeholders’.
CORRUPTION AND BRIBERY
Ajay Pandey (Section 6.3) reviews the economic literature
on corruption to bring certain insights into the discussion
on governance. Thus we learn that the welfare prompting
aspect of corruption, much in vogue some time ago, arises
only under special conditions and only if second order
effects are ignored. It makes sense to define various types
of corruption since their sources and effects could be
dramatically different. Decentralization, competition among
officials, supervision by key decision making authority, greater
role of markets and private sector in public services go along
with much less corruption than otherwise. Generally the
empirical evidence supports the contention that corruption
reduces growth, as revealed in cross country regression studies.
Praveen Kulshreshtha (Section 6.6) presents a model of
bribery where he is able to argue that previous contentions
showing bribery as welfare promoting is wrong even in

terms of the first order effects. In my own discussion of
corruption in Chapter 2 (which is a more general
phenomenon than bribery) I present the case of China
which despite its highly corrupt society is growing most
rapidly and suggest that while corruption does generate vast
rents, if these are invested in productive businesses the
growth impetus is large. Corruption therein is a means for
the emergence of the bourgeoisie out of the party elite and
hence its functionality. This situation is changing very rapidly
though as corruption has now become dysfunctional, and
expectedly the Chinese government is cracking down severely
on it. Kulshreshtha next (Box 6.3.1) documents very briefly
the World Bank’s approach to governance, important aspects
of which have been capacity building for administration
especially for management of public services and institutional
development. Success though has been mixed because of
technocratic orientation of its projects, weak contextuali-
zation, and uniform prescription of what is best practice.
Moreover governance related actions do come in conflict
with traditional project lending. Until recently the World
Bank ignored the available options for institutional reform.
Thus mechanisms of decentralization or voice and
competition were overlooked by the Bank.
ACCOUNTING FOR TRANSPARENCY
Gujarathi and Barua (Section 6.4) look at the attempt by
state and local governments (SLGs) in many countries to
find the appropriate accounting and reporting of
infrastructure assets. ‘In many cases, standard-setters have
embraced accrual accounting for infrastructure assets as a
part of the larger efforts to institute better accountability
regimes and improved governance in the public sector’. But
there is no magical accounting solution to the problem of
reporting the worth and contribution of public
infrastructure. When the accrual systems have been grafted
on to public infrastructure nothing very significant is gained
by investors and users as the set-ups are public, with long
and extendable lives. The solution may well be increased
disclosure of information that goes beyond the financial to
cover physical and analytical information, demand studies,
etc that may have been made. Cash flow based methods may
still be all right if supplemented with adequate information.
LESSONS FROM GOVERNANCE FAILURES
The two most visible cases of governance failure have been
in the electricity sector (with regard to the independent
power project (IPP) policy and subsidization) and in the
financial sector. The results have also been very severe. The
failures therein would have in a major way also contributed
to the recession and to the negation of the fruits of reform.
Overview 9
They have also created an adverse climate and opinion
against reform. I have come across umpteen bureaucrats
arguing against any kind of reform in the electricity sector
because of what happened with Enron and Orissa. Both the
IPP’s policy and the reform of SEBs are primarily intellectual
failures, despite the obvious governance failure and
probability of high corruption in the case of Enron. These
had been brought out in the IIR 2001.
In this report using the Godbole Committee’s findings
Subodh Wagle of the Prayas Group (Section 6.7) draws out
the failures in the case of Enron and the harm it poses to
consumer interest (and of course to the Maharashtra State
Electricity Board (MSEB)). The kind of massive and sequential
failure at many administrative and decision making levels in
the Enron case can only be countered by a vigilant citizenry
working hard for transparency, accountability and participation
of the people. The Prayas Group’s activities, including their
struggle in courts and in public hearings of the Maharashtra
regulator were instrumental in bringing to the fore the sordid
details of the arrangement that took the nation and the
consumer for a ride.
The financial sector’s story has been a string of regulatory
failures of the SEBI and what is not generally appreciated
of the RBI in a very crucial aspect of any modern economy
viz. in the regulation of banking. The learning from past
mistakes has been at best weak in these organizations. Many
factors have been responsible—poor skills and ability, the
lack of professionalism, and an inability and unwillingness
to crucially monitor key aspects of the financial sector.
Barua analyses three scams—The Securities Scam of 1992;
the (Section 6.5) Madhavpura Mercantile Cooperative Bank
(MMCB) Scam of 2001; and the US-64 Crisis of 2001—
to argue that ‘there is an urgent need to harmonize the
regulations for different segments of the financial sector to
reflect the basic inter-connected nature of operations of
different segments’, for possible unification of regulations,
for separation of the functions of development of the sector
and its regulation, and the ‘extensive use of appropriate
statistical tools for data analysis to anticipate and defuse a
developing crisis’ and for speedier processes for dealing with
frauds. The key to achieving these is professionalization of
the regulatory functions. The financial sector’s health is
crucial to all other sectors including infrastructure and the
sector as such has a large regulatory aspect.
RURAL POVERTY, INFRASTRUCTURE, AND
GYANDOOT
The approach to poverty has been to mitigate the same by
acts of redistribution. It is well known that all of these have
had very little effect because of the vast leakages and the
very high costs of their administration. The Integrated Rural
10 India Infrastructure Report 2002
Development Programme (IRDP) programmes and the
various special employment programmes are of this genre.
Their true role may have been little more than to create
space for the expansion of the bureaucracy and counter
potential dissent among the poor. Keshab Das (Section 7.1)
reviews very briefly the rural growth and development
experience with a focus on infrastructure arguing that
privatization would not work because of the low affordability
and problems of excludability specific to the rural context.
While the government’s role is potentially large, state failure
as exemplified by the IRDP and similar programmes would
mean that status quo would not deliver either. The best way
out of the mess is to bring back the agenda of land reforms
since that by creating productive endowments for the poor
can bring about their participation, and make them afford
infrastructure. Better institutional and administrative
mechanisms and governance improvements are possible for
an enhanced role of the state, which is inevitable if there
is willingness to seriously strive for rural infrastructure.
In Section 7.2 Das takes the case of a specific
infrastructural development effort—the programme of the
Gokul Grams taken up with much fanfare in Gujarat. He
brings out the dimensions of their failure which are more
or less the same as in typical rural development programmes,
despite claims to the contrary. Community participation
could have helped, so would empowerment of the village
and taluka panchayats which were actually responsible for
the implementation of the programme.
Brij Kothari, Avinash Pandey and Amita Chudgar (Section
7.3) report the strange case of electronic networking in rural
Dhar, one of the most backward districts in rural Madhya
Pradesh. The personal initiative, dynamism and leadership
of the local collector resulted in the development of an
electronic network with branches and nodes in taluka
headquarters and the main servers in the district headquarters
and dial up access in many villages with plans to cover most
clusters of villages, so that no villager is far from these
soochnalayas. This Gyandoot project is remarkable in having
involved the people not merely as users but as contributors
and initiators so that the sense of ownership and participation
is very strong. It has a high probability of being commercially
viable and self-sustaining. The content of the information
made available at the soochnalayas and the interactivity that
is possible for such tasks as getting copies of records,
certificates, complaints, and the commitment of the local
government offices to respond to queries are the beginnings
of true e-governance. The ultimate potential of the computer
and the internet for e-governance is immense since at current
rates of penetration it is likely to cover a very large part of
the population if special public arrangements like these
soochnalayas can do what the subscriber trunk dialling/
public call office (STD/PCO) booths did to the use of
telecom. Of course the project would hardly have been
possible without the initiative of the collector. Now that one
Gyandoot has come up, many more might be round the
corner.
THE URBAN SITUATION
The urban situation with regard to infrastructure, especially
in the big cities, depends crucially on policies and practices
with regard to urban space, both built up and land. It also
depends upon the capacity and resources of the urban local
bodies and the constraints they have in investments and in
bringing the private sector in. In the last IIR we covered
the finances of urban local bodies bringing out their
vulnerability. We thought we would be able to cover the
major issue of the distortions in the market for urban land
and space, but that for various reasons we could not do in
this report. Bhavin Kothari (Section 8.2) as mentioned
before brings out the potential of TDRs to overcome in part
the worst effects of the distortions in the market for land
and space, to allow at least some land to be made available
for adding vitally necessary urban infrastructure.
Bithin Datta (Section 8.1) brings out in crisp detail the
present situation with regard to urban infrastructure and
the organization responsible for the same—the Kanpur
Development Authority (KDA). The beginnings of a slow
change are there—projects have begun on build, finance,
operate and transfer (BFOT) and BOT basis but much
improvement is needed. Many problems arise with the
management and maintenance of infrastructure due to
problems at the planning stage itself—incorrect data and
surveys that lead to wrong layout, improper master plans
that do not recognize the ground reality, improper feasibility
studies, over-ambitious standards of layout and space
allocation. Thus plans that attempt to anticipate the needs
of the future would be futile and almost impossible to
realize. Poor coordination between the KDA and other
bodies concerned—the Railways, the Nagar Nigam and the
electricity board principally—have imposed huge delays and
costs. These hopefully will soon be overcome since there is
the beginning of the consciousness that these need to be
overcome if progress has to be made. Projects which are
abandoned after partial construction for various reasons,
but continue to exist on paper (for accounting and procedural
reasons), impose additional drain on the resources of the
KDA. Illegal encroachments even during the construction
of the project are rampant and have resulted in high costs
and delays. Without the political will to remove these and
prevent such encroachments a major constraint would
continue to exist whatever the improvements in other aspects.
The financial situation of the KDA though better than of
many other similar organizations is under stress. Salaries

take up a large part of the expenses and today there is little
contribution from user charges and taxes. The potential for
improvement though is high if the willingness-to-pay surveys
can be relied upon. Bringing about user charges would
require legislative changes and the development of a
framework to allow for tariffs and subsidies linked to tariffs
and tolls for many of the urban services. Land development
fees and user charges for water, certain roads and bridges
like bypasses are eminently feasible.
Mukesh Sharma (Section 8.3) continues the story of
Kanpur bringing out the situation with regard to water
supply and its pricing. Losses both technical and unaccounted
are very large, the rates which are low are highly distortionary
and do not promote judicious use of water. Going by the
water charges as a proportion of income the poor cannot
afford to pay more5. Binayak Rath (Section 8.6) brings out
the problems with regard to solid waste management in
Kanpur that are likely to be typical of most large cities in
India. Despite many regulations and injunctions of the
courts there is little adherence to norms as laid out in several
policies and documents of the central government. Collection
efficiencies both primary and secondary are poor, storage
facilities are entirely inadequate, existing equipments
including trucks are poorly utilized, the siting of landfills
is quite improper and equipments are in poor shape. The
Kanpur Nagar Nigam is poorly organized for the task, the
elected members are indifferent to the problems, and the
phenomenon of ‘badla workers’ is also noticeable. Some half
hearted attempts at involving NGOs and privatization have
naturally failed. The problem can be overcome if the space
for the informal sector can be created and suitable NGOs
can be actively brought in.
URBAN WATER
Nirmal Mohanty and Shreekant Gupta (Section 8.4), bring
out the issues in the use of water markets for reforms in
the sector. They argue that though ‘…informal water markets
have been in existence for decades, formal markets with
clearly assigned, private and transferable water rights are of
relatively recent origin. …In many instances water trading
has alleviated water shortages. International experience also
shows that formal and developed water markets strengthen
5 Essentially the method is to show that water rates already take
2.2 per cent of family income, higher than in many countries where
it takes between 0.9 and 1.8 per cent. This method of comparison
is debatable and the opposite conclusion can actually be drawn which
ties up with the willingness to pay surveys since the comparison is
with the advanced countries. At high levels of income the share of
necessities including water would be low given the nature of
consumption baskets. To presume similar shares is to assume that
consumption functions are homothetic over the items in the basket
which is certainly not true [Editor].
Overview 11
the incentives for conservation and more efficient use of
water. For example, farmers have responded by switching
to water-saving technologies and high-value, less water
intensive crops. The Indian experience with water markets
has been positive, although there have been only limited
gains as markets have remained informal, localized and
primitive. …The current challenge in India is therefore to
establish formal water markets which will expand the scope
of trading and make inter-sectoral water transfers possible.
Further, since formal water markets have a legal basis, effective
regulation can be designed to address the issue of ecological
sustainability. These markets will be of significant relevance
to the urban sector which has been suffering from acute
shortages of water but has not been able to access informal
markets. While it is true that in urban areas tariff
rationalization and reforms at the distribution end can
improve efficiency in water supply and use, nevertheless
additional measures will be required in view of fast growing
urban population. …In this context it is estimated that if
five per cent of the water being used for irrigation is
transferred to the urban sector, the latter’s water requirements
can be met for the next fifty years.
In Alandur on the outskirts of Chennai Muncipal
Corporation, but part of Chennai’s urban agglomeration,
citizens actually paid rather stiff connection charges and
monthly fees for a new sewerage system. The rates that they
paid were far higher than even the figures revealed by an
earlier willingness-to-pay survey. Residents of nearby Chennai
did not pay anything for sewerage facilities. This happened
because of the persuasive and educational efforts of the
Alandur Municipality. Mukesh P. Mathur (Section 8.5) brings
out this interesting story. The case is of importance in the
discussions of user charges and commercialization of urban
infrastructure. The costs that people bear in being subject
to denial are much higher than the cost of providing the
service. This is especially true in the urban agglomerations
of large cities not covered by muncipal facilities. The point
had been discussed in IIR 2001. If the state cannot gear up
to provide services, or even to create the framework (of
regulation) for bringing in the private sector, then it should
consider opening up such activities (without any regulation)
to private parties to organize and build facilities. That would
be better than continuing with the denial.
DEVELOPMENTS IN THE ELECTRICITY SECTOR
The high point in the electricity sector was the arrival of
the official draft bill to usher in open access. The National
Council of Applied Economic Research (NCAER) had been
working on the Draft Bill 2000 which had gone through
eight versions in the process of consultations among
government and potential stakeholders. The current official
12 India Infrastructure Report 2002
bill 2001 is in many ways different. Ajay Pandey (Section
9.4) critically reviews the draft bill to point out its pluses,
and bring out its inadequacies. A golden opportunity for
reform of the electricity sector would again be missed. The
bill does not start with consumer interest but with open
access, yet it does not rule out all restrictions on interstate
and interregional trade and transport of power, puts severe
restrictions on the traders, and does not neatly solve the
problem of cross subsidization through for instance bringing
about direct subsidization. (See my discussion in Chapter
2.) While putting much responsibility on the regulatory
commissions, there is lack of clarity of roles between
government, the Central Electricity Authority (CEA) and
the commissions. Similarly the bill loses an opportunity to
have explicitly brought in incentive regulation. ‘There are
provisions which preclude the possibilities for the sector
such as competition in supply, development of pool or spot
markets as any such move will require further legislative
change, a time-consuming and costly process. The emergence
of new sets of problems and issues …in the areas of regulatory
coordination, conflicts between state and the regulators,
transmission and distribution (T&D) losses, conflicts
between state and central transmission utilities, besides the
political fallout of attempted tariff rationalizations cannot
be ruled out.’
The first day of 2001 started with the collapse of the
Northern grid leaving the region with no electricity, from
which it recovered only after several days. The CEA that
enquired into the episode brought out the events and failures
leading to the collapse. Taking off from that epsiode Puneet
Chitkara, Rajiv Shekhar and Prem Kalra (Section 9.2) lay
threadbare the nature of the failure and suggest ways to
improve the physical management of the grid, the regulation
and pricing of transmission for interstate movement of
power. The current system of responsibility assignment and
authority and of regulation is such as to create little incentives
for effective management of the grid both in the normal
course and in emergencies. The cost plus pricing that is
current, neither provides for efficient management of costs
nor does it provide for the correct siting of investments.
They propose, comprehensively and in much detail, a fresh
transmission pricing and regulatory mechanism, and
ownership and management structure for transmission assets
and operations that would overcome the problems with the
current system and would also be much in line with the
proposals for large scale unbundling of the electricity sector.
Dynamic line rating systems, online data gathering devices
and soft investments for condition monitoring with a view
to anticipate likely weak points in the grid are possible. Very
little investment may be required but they would become
vitally necessary if the events leading to the grid failure are
not to repeat.
After the Central Electricity Regulatory Commission
(CERC) rule on the availability-based tariff (ABT), giving
its ABT order for bulk tariffs, the same was opposed on
jurisdictional grounds by those central power corporations
(CPCs) who were badly affected by the order. Ajay Pandey
(Section 9.4) comprehensively reviews this order going into
both the processes followed by the CERC and the rationale
of the outcome. His findings are not particularly encouraging.
The process followed by CERC was very open. ‘It also took
expert opinion wherever required as is evident from the
appointment of consultants and committees.’ But those
affected by the order of CPCs took a ‘confrontational
posture…More surprising however, in the process of review
was the low level of involvement... of the beneficiaries’. The
CERC despite apparently noting the merit of certain
recommendations of the consultants with regard to
consistency with the IPP policy chose to ignore the same!
Similarly despite its attention being brought to significant
anomalies in the definition of the rate base, the treatment
of depreciation, the allowed return, the treatment of liabilities
denominated in foreign currency, the CERC chose to ignore
these. And the anomalies have continued to harm the sector.
‘In the end, the order despite openness in the process, looks
more like a balancing act, and we will have to wait at least
untils the next tariff review for a sound framework for bulk
power tariff regulations to emerge’. Professionalization of
the CERC is thus still awaited.
Sidharth Sinha (Section 9.3) brings out the reasons for
the failure of the much-touted Orissa model. He shows how
the inability to measure T&D losses and the inability to
achieve the desired reduction in the same resulted in the
failure of the Orissa Model. Ramamohan Rao, Puneet
Chitkara, and Kaushal Saxena (Section 9.5) ask, from the
vantage point of the Mukta Panna Oilfield Contract with
a private group, if there has not been a policy/governance
failure. It does not make sense to bring in a multinational
corporation (MNC) to work a proven gas/oil field where
there are few risks commensurate with the large returns it
would make. Liberalization of the oil sector has to be carefully
worked out.
TRANSPORT
G. Raghuram (Section 10.1) brings out several cases of
commercialization activities in the railways that have had
moderate success. The incentive incompatibilities, ignorance
of network effects as in the case of the Konkan Railway, the
tendency to tie its partner or client into one sided contracts
that the railways seem to have a propensity for come out
in these cases. The success factors and the problem areas are
identified and as the railways prepare themselves for large
scale commercial orientation the lessons from their earlier

experiences would prove invaluable. Raghuram identifies
eight dimensions that are crucial to the success of
commercialization and rate the cases on these. The case of
commercialization of catering services presents the disturbing
picture of large underreporting of the sales of the railways
official contract caterers. While the percentage share that
the railways take from the revenues of the contractors has
been significantly increased, at the same time it is difficult
to monitor and measure the base. Is there an impending
governance failure?
Subir Gokarn (Section 10.2) reviews the liberalization in
the air-transport sector and the developments therein.
Significant has been the entry of the private sector in a
major way into scheduled airlines that has made the domestic
airline sector show the beginnings of competition. The
regulatory supervisory mechanisms need to develop in the
direction of independence from the government. The policy
on airport infrastructure is not adequate to lead to quick
development of the sector. S. Sriraman (Section 10.3) brings
out the recent experiences of the state road transport
undertakings. Load factors have been falling because of
recently allowed private operators who have been operating
on high density routes, leaving the low density and expensive
routes to the State Road Transport Undertakings (SRTUs).
This partial liberalization has therefore not been conducive
to SRTUs restructuring for better effectiveness. Fare
structures do not take into account demand factors and are
not flexible enough. SRTUs need greater autonomy in this
directon and routes and route bundling would have to be
fairly allocated if the playing field has to be level between
the SRTUs and private operators. Performance of SRTUs
vary a great deal, and there are many SRTUs especially in
the south whose physical parameters show the same or
better efficiency than private operators. But their higher
cost, especially of manpower, would nevertheless make their
costs of service higher.
Biju Varkkey and G. Raghuram (Section 10.4) do a
detailed case study of the new Cochin International Airport
that was the first airport to be built on a BOT basis. In
many ways a private effort, it has nevertheless a dominant
stakeholding by the Kerala government. The large traffic
from the state to the Gulf, the limitations in expanding the
existing airport, the enthusiastic response of people from
the Gulf and the active interest of the district collector were
factors that led to the start of the project. Land acquisition
was difficult but was carried out despite all the hurdles.
Issues of adequate and fair compensation remain. The project
did not do as well as was anticipated because inter alia the
assumed transfer of bilateral landings from Mumbai did not
take place. The case brings out the issues in viability of
airports, rehabilitation and resettlement, and in structuring
Overview 13
of projects, and draws lessons for the practice of private–
public partnership.
TECHNOLOGY MOVES AS CONSUMERS WAIT FOR
WLL (TELECOM SECTOR)
After the draft convergence bill at the end of the previous
year much was expected this year in the telecom sector.
Especially that it would lead to uniform licences across
various segments of the telecom industry. As mentioned
before instead there came WLL with limited mobility (LM)
in which the consumer interest has perhaps been all but
forgotten. Rekha Jain and Dheeraj Sanghi (Section 11.1)
review the WLL(LM) episode bringing out the content and
processes in the decision making. We realize that the only
way the issues could have been resolved would have been
through equivalent licences and making the terms of the
cellular and fixed line operators similar, since the strong
force of technological change does not allow much else. The
need for ‘the clear separation of roles of the Group on
Telecom and Information Technology (GOT-IT),
Department of Telecom (DoT), and TRAI is underlined’.
The TRAI should have a bigger role in detailing an expected
development. Thus once the idea of WLL is accepted the
TRAI rather than the government is best placed to work
out the details. The regulatory and governance environment
should have been strong enough to have left the technology
use to the industry without at the same time bringing about
the costs of multiple and competitng standards or technology
on the consumer. The use of the ‘short distance charging
area as a unit for mobility, and also for defining the roll-
out plans is arbitrary, and needs to go to be replaced by more
naturally defined units such as districts, or defined distance’.
Perhaps the biggest let down was the opportunity to separate
the spectrum licences from the service licences that WLL
would have offerred to the regulator. As a late comer in
network expansion, increased telecom density is likely to
result from a much larger and quicker penetration of cellular
rather than land lines. This can be inferred from the
experience of China and others in East Asia who are ahead
of us in telecom development. Thus to see cellular as a value
added service and only fixed line as basic is wrong. Cellular,
WLL with land lines, and land lines should have been
allowed same conditions of entry. The opportunity to do
this was missed.
Integral to efficient roll-out is the correct pricing of
spectrum and making as much of it available as possible.
It is perhaps socially optimal, today, for the industry and
telecom users (existing and potential) to pay the costs of the
defence establishment to be able to convert their equipments,
so that they are able to release some more spectrum. Price
14 India Infrastructure Report 2002
of the ultimate service is important because there is both
a significant and large income elasticity as well as large price
elasticity. This is obvious today as cellular networks in
lowering prices have witnessed jumps in their subscriber
base. More importantly the spectrum should have been
nearly uniformally priced across its various possible uses,
bringing in a greater determinancy to the market. This is
the theme of Sidharth Sinha’s (Section 11.2) discussions. He
brings out the institutional structure for spectrum
management, the need for more efficient use and greater
availability of the spectrum, and the issues involved in
auctioning of spectrum rather than licences, and the whole
question of the bandwidth sizes in which unit lots of the
spectrum is allocated.
Dheeraj Sanghi (Section 11.3) looks at internet telephony
and argues why the feature of packet-switching and hence
efficient use of line capacity is not what makes internet
telephony cheaper. It is the significantly higher regulated
prices on long distance telephony that makes conventional
telephony expensive. With the removal of these differences
circuit switched telephony should be able to compete with
internet telephony (which is difficult to regulate) to give rise
to a new equilibrium where the former would have a distinct
and large space. ‘It is high time the ban on Internet telephony
is removed. It is hardly a threat to long distance telephony
in the near future. And we need to reduce the cost of long
distance rather than shield it from competition. When
Internet telephony becomes a real competition to long
distance telephony, then the TRAI may worry about the
level-playing field’.
With the auction of the fourth cellular licences the
mergers and acquisitions (M&A) in the telecom sector are
expected to speed up as the logic of scale and scope unfolds
itself. In Chandlerian terms those who make the investments
and moves to park themselves in a commanding position
would be survivors. In the long run it is unlikely that more
than a handful of firms would remain, perhaps even fewer.
Today contiguity drives the deals as weaker players sell off,
and others with greater value for the circle lap up such
licences. M&A got a boost with the government allowing
equity changes from the original license. Lokesh Garg and
Venu Madhav (Section 11.5) study the M&A activities in
the sector providing a rationale for the same and making
an attempt to peer into the immediate future using the logic
of contiguity. As that logic becomes redundant once players
reach an all India presence, convergence could drive the
M&A. India started with many more licences than most
countries so that many more M&A would take place.
‘VOICE’ GOVERNANCE AND NETWORKING
The Gyandoot project’s success with very little use of resources
should alert us to the vast possibility of e-governance as a
meaningful free of change in the relationship of people with
the government and the provider of public services. Citizens’
feed back through the experiments and methods developed
by the Samuel Paul and his group at the Public Affairs
Centre Bangalore, highlights the potential value that is
there in bringing the public user in regular and formal
contact with the provider of the service at low cost in terms
of time and effort or both. The gains in combining
networking and an electronic base for such feed back on a
regular (and formal) basis can be enormous. This is especially
so because the usual market with either price changes or
quantity changes to signal performance to the producer is
not there in so many public services.
Can IT potentially, with sound methodological
innovations in surveying and sampling, make a difference
here? Remember that the developments in real time
measurement at low cost brought about unbundling and
hence competition in electricity and telecom sectors. Rekha
Jain and Raghuram (Section 11.4) look at the many state
wide area networks (SWANS) wherein several state
governments have or plan to spend to develop these networks
to enable rapid and enhanced intra government
communication. If indeed communication over the network
comes to be recognized as valid within govenment, the gains
from the resulting quicker decision making would be large.
The quality too could potentially improve as much more
information, and in formats far more convenient, could be
made available. This is particularly important in government
and public bodies where decision making has to be consistent
and according to rules. As governments put out a vast array
of documents and forms outlining their processes, policies
and rules, the electronic media, particularly the internet,
already plays a role in their dissemination. The potential to
carry this further by linking a Gyandoot with the SWANs
is enormous. As Jain and Raghuram bring out, the SWANs
would have to put much more effort into application
development conceptualizing client (both government and
citizen) needs. A need driven flurry of activity to develop
the software and the applications that can then go over the
physical network ought to start soon. Otherwise there is a
real danger that the SWANS may be limited to voice and
video communication within government. Even that in
itself would still be beneficial. Such is the potential of the
new technology.