As a run up to the 11th Plan, there are multiple accounts that India’s drive to upgrade its infrastructure is at last “gathering momentum.” Good news, but why are we still merely anticipating private participation in infrastructure? More importantly, how can we turn anticipation into actualisation? Mental images of infrastructure age after a while, as do the recitations of bottlenecks and solutions. How can some endemic obstacles be addressed systematically? We focus here on three priority concerns: payment, regulation, and red tape.
First, infrastructure and service providers, particularly in power, often don’t get paid. Governments promise subsidy payments?which are not fully provided for in the actual budget. Competitive populism has made user charges nearly impossible. Inter-state competition is often cited as one of federalism’s benefits?states compete to provide better policy environments to attract citizens and investors?but it cuts the other way in states’ reluctance to rationalise pricing for services such as electricity. Reductions in power tariffs for agriculture are always popular and any efforts to increase these tariffs are protested, citing examples of other states with more lenient policies.
In the long run, the best solution is market-based: public credit ratings, based on past payment records, and creating an incentive for good behaviour. The states? record on payment of subsidy bills to SEBs, for example, should be included in their ratings. A shorter-run solution would be to guarantee subsidy payments by segregating a particular revenue source from the General Budget and placing it in escrow. This may constrain expenditure management over time, but may be worthwhile.
Competitive populism poses a bigger challenge. One solution would be to limit the frequency of incentives for populism by unifying the electoral cycle. Elections take place in some state every year, and pre-election promises become rallying cries in other states, bringing the whole polity into populist mentality. Another solution would be to enable politicians to cater to a different kind of popular demand: better infrastructure. Survey evidence, generator purchases, and the survival of private water services all demonstrate consumers’ willingness to pay for infrastructure and services. However, few governments are in a financial position to improve services before fees are collected, or in a political position to collect fees before services are improved.
Why not develop an off-the-shelf model for transition loans that allow governments to improve the services upfront and repay later? This was the initial rationale for the accelerated power development programme, apart from distribution improvements. Transparency legislation and a transition model will be useful. This should be in conjunction with banks already successfully lending for local infrastructure upgrades. Finally, another possibility would be to guarantee extra power from central generating stations to states that rationalise pricing. This would enable these states to provide more reliable power for the higher fees.
Second, India’s regulatory environment suffers from the lack of independence, poor expertise, and ambiguous dispute resolution. Some parts of creating independence are simple (though not politically easy): increase the independent budget to support a professional staff, and define and respect jurisdictions. Others are more complex. How should accountability to the public, for example, be balanced with regulatory independence? India has so far taken the record of allowing regulators wide latitude in decisions, but ensuring that decision can be reviewed by the legislature or by a special purpose judicial review.
The rules of the game must be more explicit to attract private investment. India can also create accountability by encouraging regulators to be more transparent and explicit about their procedures, and shaping public oversight to hold commissions to these rules. Commissions should publish their conduct of business regulations. Judicial oversight via TDSAT or the Electricity Appellate Tribunal should focus on the extent to which the regulators followed these procedures, and not constantly subject the regulator to trials.
Finding expertise is a harder question, as there may be a trade-off between experience and unbiasedness. India has more than enough professionals with expertise in infrastructure policy, but many of these work for the regulated industries. Higher emoluments may incentivise them to serve as regulators, but would not alleviate concerns about bias. However, the talent search would necessitate closer alignment of their compensation package to prevalent market conditions.
Third, the sheer number of ministries and levels of government interested in preserving their jurisdiction over any given project means red tape. The practice of central government-created SPVs that bundle all clearances together is a stopgap but worthwhile start. The Centre has faced similar problems as investors in putting together the permissions and clearances for the ultra mega projects.
India must create stronger and more direct incentives for states to create effective one-stop shops. The Centre could provide preferential access to inputs and fuels in short supply or preferred access to financial incentives for states that either enact a one stop window or respond to applications within a certain time frame. Anticipation is only exciting for so long. The malaise of competitive populism must be overcome. Well-designed policies can help the transition to competitive federalism.
?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
