Stress on calibrated sops for private sector in infrastructure

New Delhi, Feb 25 | Updated: Feb 26 2005, 05:30am hrs
Asking the government to limit its role in infrastructure services, the pre-Budget Economic Survey has strongly advocated for increased private sector investment in development of infrastructure. The Survey has decried the rate of investment in infrastructure, which it says is not only far lower than China and East Asia but also lower than the Tenth Plan target.

Citing infrastructure bottlenecks as major growth hurdles, the Survey notes that improvements in infrastructure will have a strong impact on GDP growth and proverty alleviation.

According to the Survey, direct government production of all infrastructure services introduces difficulties concerning technical efficiency, adequate scale of investment, proper enforcement of user charges and a competitive market structure. As against this, private participation mitigates the problem of risk for the public sector, starting from project formulation.

While the Survey emphasises on the need to have private investment in infrastructure development, it also cautions that a complete reliance on private production in an unregulated market will not produce sound results.

Finding a right infrastructure policy framework is therefore the need of the hour.

Towards this, the Survey has suggested a delicate system of checks and balances with careful calibration of incentives so as to give the private sector the right incentives to invest adequately while at the same time preventing it from extracting monopoly rents.

Core Issues
Govt should limit its role in infrastructure services
Rate of investment in infrastructure lower than Tenth Plan target
Calls for increased private investment in developing core sectors
Also cautions on complete reliance on private production
Right infrastructure policy with a system of checks and balances
Policy framework to enable public-private participation
The Survey has also noted that decline in public spending in infrastructure sector has not been adequately compensated by the private sector mainly due to difficulties in the regulatory environment. It has therfore called for an appropriate policy framework enabling public-private participation in the infrastructure sector.

A key part of this is establishing a framework of rules, and limiting arbitrary state power, to give the private sector confidence in embarking upon the multi-decade horizons of these projects, it said.

In his address, President APJ Abdul Kalam also listed infrastructure as a key priority area for the government. Given the huge investrment requirement of over $150 billion over the next decade, the President stressed on the need to have increased public and private investment in core areas of infrastructure.

Six core industries (electricity, coal, finished steel, cement, crude oil and petroleum products), with important forward linkages with the rest of the economy, registered a lower average growth of 5.4% during April-December 2004 compared to 5.8% in the same period in 2003.

The decline was on account of a sharp fall in the growth of finished steel, it said. Among the other infrastructure sectors, goods traffic on railways (7.7%), cargo handled at major sea ports (11.1%) and airports (18.3%), and air passenger traffic (21.8%) experienced higher growth rates in April-December 2004 as compared to the same period in 2003.

On the initiatives taken by the government in sectors like power, telecom, roads, ports and civil aviation, the Survey notes that the national electricity policy announced recently envisages access to electricity for all households in the next five years and fully meeting power demand by 2012.

The structure and composition of the telecom sector has undergone a substantial change with mobile telephones accounting for 50% of the total phones and the private sector accounting for 44% of the total phones. Expansion of the broadband telecom sector will also impact growth considerably, it says.

In the area of roads, there was a need to shift the focus from construction to corridor management and road safety. Ports need to have an adequate policy framework to promote inter-Port and intra-port competition.

In the civil aviation sector, there is an immediate need to improve regulation and competition in the airline industry, and to build better airports, it said.