While much of India?s media and policy debate focuses on private infrastructure providers, most of the country?s roads, ports, airports, telephone connections, electricity and other infrastructure networks and services are provided by public sector companies or departments.
Their performance obviously has an enormous impact on the quality of infrastructure. Every rupee spent on obsolete equipment or not spent on maintenance means one more reason for complaint from their customers. But it is not just their customers that are affected: public sector performance affects private providers? services as well as the overall business climate for private entry. Public entities are customers, competitors, suppliers and carriers of private infrastructure services.
Private investors in power generation, for example, have little opportunity to avoid public entities as buyers or carriers of the electricity they produce. SEBs buy most of the electricity generated. An NTPC subsidiary and PTC (majority owned by public sector companies and financial institutions) accounts for over 73% of trading volume, while Powergrid provides inter-state transmission services. Both affect companies? ability to re-route power if one SEB does not pay.
Public sector companies are also vendors of inputs for electricity. GAIL and CIL are primary suppliers of fuel for power plants, and investors are encouraged to use equipment manufactured by BHEL (67% government-owned). BHEL is behind on its orders, and fuel linkages for new power plants can be slow to come by, due in part to slow exploration and development of domestic coal resources. Costly rail transport of coal adds to the deterrent.
In telecoms, private investors compete with public companies in all segments of the market. Service quality depends on interconnection with public networks BSNL and MTNL, which provide most of the fixed line service and a significant share of wireless services. Many?though not all?of the most congested interconnections are between BSNL and private companies.
Similarly, private operators compete with public companies in transport, and rely on them as interconnected transport network and service providers. Airlines land and take off at publicly owned and operated airports, where runway traffic forces planes to burn costly time and fuel in circling.
Private investors may operate a terminal and remove containers from ships, but CONCOR (63% owned by central and state governments) has an effective monopoly on container evacuation from ports and transport to the interior. CONCOR?s delays in container movement add weeks to goods movement.
Regulatory favoritism for public sector companies, real or perceived, has a deterrent effect on potential competitors in both sectors. Regulators? choices, whether about allocating lucrative air routes, or scarce telecoms spectrum, have the ability to dramatically shift companies? fortunes.
These public companies are the sacred cows in the middle of a busy intersection. They cannot be hurried or bothered, but at the same time they are risky customers, unreliable carriers, and threatening competitors that clog up the flow.
What are steps toward better herding the cows, and improving public infrastructure provision along the way?
First, India must continue and accelerate the move towards commercial practices. Competitively selected professional management should become common. ?International competitive bidding? is as important for talent as for physical projects. Specialised domain knowledge exists, but a market search needs a basic restructuring of the pay, allowance and work conditions. Benchmarking with private competitors, as is proposed for public sector banks, is also important.
Listed PSUs should also increase the proportion of independent directors (and thereby the potential expertise and oversight) to the SEBI standard of half. This will likely require some reduction in the number of government appointees.
Second, the norms for public companies should be altered to remove procedural restrictions that both hamper companies? performance and provide convenient excuses for poor returns. The most commonly cited constraints/ excuses are that public companies have to obey civil service procurement procedures and provide uneconomical social services.
The present norms for procurement pose a tradeoff between red tape and corruption: the red tape, while frustrating, is meant to reduce corruption.
There are other ways to reach the same goal of limiting corruption, without the costs of red tape, however, including stronger performance incentives for managers. Managers whose job and salary depended on commercial success would be less likely to let quality slacken for a bribe.
The cost of social obligations should be made more transparent, and accounted for explicitly in public companies? statement of performance. This would enable shareholders and the public in general to better evaluate public companies? contributions on both fronts. The subsidies to public enterprises for social services should be thought of as ?viability gap funding?, to be extended to public or private infrastructure providers (or used for other pressing needs). A more transparent and credible subsidy regime could also encourage private companies to bid for social obligation programmes.
Third, India needs to create a firewall between the infrastructure incumbents and regulators. Ministers and Secretaries should not serve as intermediaries between public sector companies and regulators. India?s need for regulatory independence has been noted before; reducing the deterrent effect of public incumbents is one more reason to move forward.
Taming their bovine majesties may also require more disinvestment. Increasing the proportion of non-government shareholders creates an arms-length relationship between the public companies and government backing, assuring other competitors of a fairer playing field in addition to increasing incentives for performance.
Disinvestment through a programme designed to encourage small shareholders, as has been done in countries ranging from the UK to Peru, would return public sector companies to the actual public.
Sacred cows move slowly. But every small step in the right direction means that the momentum forward can be that much greater. Any reform matrix must not overlook the obvious.
?Regular columnist NK Singh and Dr Jessica S Wallack, a professor of economics at University of California, are collaborating on a book on infrastructure reforms in India. Essays based on their research will appear in these pages.