India Country Framework Report for Private Participation in Infrastructure World Bank and Public-Private Infrastructure Advisory Facility Copyright © 2000 The findings, interpretations, and conclusions expressed in this paper are The International Bank for Reconstruction entirely those of the authors and should not be attributed in any manner and Development to the World Bank, to its affiliated organizations, to members of its Board THE WORLD BANK of Executive Directors or the countries they represent, or to the Public- 1818 H Street, N.W. Washington, D.C. 20433, U.S.A Private Infrastructure Advisory Facility. 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Permission to photocopy items for internal or personal use,for the inter- nal or personal use of specific clients, or for educational classroom use is granted by theWorld Bank,provided that the appropriate fee is paid direct- ly to Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923,U.S.A.,telephone 978-750-8400,fax 978-750-4470.Please con- tact the Copyright Clearance Center before photocopying items. For permission to reprint individual articles or chapters,please fax your request with complete information to the Republication Department, Copyright Clearance Center, fax 978-750-4470. All other queries on rights and licenses should be addressed to the World Bank at the address above or faxed to 202-522-2422. Contents Abbreviations v Acknowledgments vi Executive Summary 1 PART 1. SECTORAL REVIEW 1. Telecommunications 5 Market Structure and Performance 5 Private Sector Participation 6 Regulatory Environment 8 The New Telecom Policy of 1999 10 Policy Recommendations: Moving to a Competitive Telecommunications Market 10 2. Power 15 Market Structure and Performance 15 State-Level Regulatory and Policy Reform 18 Reforms at the Central Level 19 Policy Recommendations: Implementing Fundamental Sector Reforms 22 3. Urban Water and Municipal Services 25 Market Structure and Performance 25 Private Sector Participation 28 Tariffs and Financial Performance 29 Policy Recommendations: Private Participation in Operating Water Systems 29 4. Roads 33 Sector Performance 33 Private Sector Initiatives to Date 34 Policy Recommendations: Developing a Privately Financed Road Program 39 5. Ports 41 Market Structure and Performance 41 Private Provision to Date 43 Sector Regulation 46 Policy Recommendations: Modernizing the Ports Sector 46 iii Contents 6. Airports 49 Market Structure and Performance 49 Private Sector Participation 50 Policy Directions: Redefining the Public Sector's Role 51 PART 2. INSTITUTIONAL ISSUES 7. Developing Infrastructure Regulatory Institutions 53 Regulatory Independence 53 Multi-Sector or Single-Sector Regulatory Agencies? 55 8. Infrastructure Finance:The Role of the Domestic Debt Market 57 Funding for Infrastructure 57 Debt Market Functioning 58 Policy Recommendations: Developing a Genuine Market for Long-Term Debt 59 9. The Public-Private Interface 61 Contracting and Implementing Private Infrastructure Projects 61 Sharing Risks between the Public and Private Sectors 62 Environmental and Social Impact Legislation 62 Policy Recommendations: Efficiency and Transparency in Contracting Infrastructure Projects to the Private Sector 63 PART 3. POLICY RECOMMENDATIONS 10. Overview of Policy Recommendations 65 Telecommunications 65 Power 66 Urban Water and Sewer Systems 66 Roads 66 Ports 67 Airports 67 Developing Infrastructure Regulatory Bodies 68 Developing a Genuine Market for Long-Term Debt 68 Improving Efficiency and Transparency in Contracting Infrastructure Projects to the Private Sector 68 References 69 iv Abbreviations BLT Build-lease-transfer BOOT Build-own-operate-transfer BOT Build-operate-transfer BPC Bangladesh Petroleum Corporation BSES Bombay Suburban Electric Supply Limited GAIL Gas Authority of India Limited GDP Gross domestic product GRIDCO Grid Corporation of Orissa Limited HBJ Hazira-Vijaipur-Jagdishpur pipeline HUDCO Housing and Urban Development Corporation IOC Indian Oil Corporation LIBOR London interbank offered rate MOST Ministry of Surface Transportation MTNL Mahanagar Telephone Nigam Limited NHAI National Highway Authority of India NTPC National Thermal Power Corporation of India OERC Orissa Electricity Regulatory Commission OIL Oil India Limited ONGC Oil and Natural Gas Corporation Limited RBI Reserve Bank of India SACFA Standing Advisory Committee on Frequency Allocation TRAI Telecom Regulatory Authority of India TAMP Tariff Authority for Major Ports VSNL Videsh Sanchar Nigam Limited WPC Wireless Planning and Coordination Wing of the Department of Telecommunication v Acknowledgments This Country Framework Report for India is the first and Mitchell Stanfield (roads),andAlanTownsend (power). in a series of country reviews aimed at improving the envi- The report also draws on inputs from various staff from ronment for private sector involvement in infrastructure. theWorld Bank and other development institutions,as well Prepared at the request of the government concerned, as discussions with representatives of the private sector. Country Framework Reports have three main objectives: Work in progress for the report was discussed at a · To describe and assess the current status and per- conference on Private Investment in Infrastructure in formance of key infrastructure sectors. India, held in Paris in November 1998 and, earlier, at a · To describe and assess the policy, regulatory, and series of workshops in India in June 1998. An earlier institutional environment for involving the private draft of this report was circulated at the Conference on sector in those sectors. Private Participation in Indian Infrastructure held · Through the above, to assist policymakers in fram- November 12­13, 1999 in New Dehli. ing future reform and development strategies and to The Country Framework Report process was sup- assist potential private sector investors in assessing ported by an advisory group comprising representa- investment opportunities. tives from the private sector, financial institutions, and This report was initiated under the auspices of the bilateral donor agencies. Members of the Advisory World Bank Group's Infrastructure Action Program, Group for this report include Keishi Fujii, Japan-India with funding from the World Bank and the Japanese Business Cooperation Committee;Virendra Hajela, Government.It is being published jointly by theWorld RPG;Takuma Hatano, Export-Import Bank of Japan; Bank and the Public-Private Infrastructure Advisory Ranjit Mathrani,Vanguard Capital,Ltd.;Rakesh Mohan, Facility, the new multidonor technical assistance facil- National Council ofApplied Economic Research;Anan- ity established in July 1999, which is carrying forward da Mukerji,ICICI;Nasser Munjee,Infrastructure Devel- the program of Country Framework Reports begun opment Finance Company Ltd.; Shardul Shroff, under the Infrastructure Advisory Facility. Amarchand, Mangaldas, Suresh A. Shroff & Co.; and The report was prepared by a core team led by Clive Cesar Zalamea, American International Group. The Harris and comprising Christopher Juan Costain (capi- report was designed and produced by Garrett Cruce, tal markets),Marc Juhel (ports),Bridger Mitchell (telecom- Terry Fischer,Wendy Guyette, and Daphne Levitas of munications), Kumar Ranganathan (water), Jeff Ruster Communications Development Incorporated. vi Executive Summary Recognizing the need to attract more investment in infrastruc- ture, India opened itself to private investment as part of the coun- try's 1991 reform program.There have since been some advances. The first privately financed basic telecommunications services now compete with the public service provider. More than 1.1 million cellular phone subscribers now receive service from pri- vate companies.A total of 3,000 megawatts of privately financed independent power projects are now operational. Private investors are funding the construction of roads, ports, and airports. Indians still receive infrastructure services largely through reforms. Looking ahead, private sector participation public entities--usually part of a government depart- in infrastructure is an important focus of India's Ninth ment.Because those services are erratic,Indian businesses Five-Year Plan for 1997­2001.The government also routinely provide their own power and water.TheWorld has established a high-level task force to attract Economic Forum's 1998 Global Competitiveness Report, investment--including private funds--to projects of a business survey of international investors,ranked India national and regional importance.The task force is con- last among 53 countries in the quality of overall infra- centrating on developing expressways, adding lanes structure. If the provision of high quality, reliable, and to national highways, and building five world-class reasonably priced infrastructure services continues to be international airports. inadequate,it will be a major drag on economic growth The full potential of the private sector to meet India's in India. pressing infrastructure needs is largely untapped.With The expected increase in demand for infrastruc- few exceptions (principally in the power sector in the ture services points to the need for augmenting capac- state of Orissa),there has been little divestiture of exist- ity and improving efficiency in all areas.The Expert ing assets.The private sector has built new infrastruc- Group on the Commercialization of Infrastructure ture, such as independent power projects and new port Projects estimates that India needs to invest $115 bil- sites,and established new companies that compete with lion to $130 billion in infrastructure from 1996­2001, public operators, particularly in the telecommunica- and $215 billion in 2001­2006 (NCAER 1996). tions sector. However, the productivity and efficiency Achieving this investment will require major policy improvements that private management and ownership 1 Executive Summary could introduce to existing public sector service Power providers--under an appropriate regulatory regime and with competition when possible--would help to relieve State electricity boards are an increasing financial drain some of the current infrastructure constraints. on their governments.They have low average tariffs,with India has started to restructure government roles in high cross-subsidies to agricultural and residential con- power--particularly by separating operations from pol- sumers, and suffer from poor management, high levels icy and regulation.This has occurred to a lesser extent of theft of power,and a large volume of uncollected bills in telecommunications and ports. In other sectors the (table 2).This has lead to capacity shortages, poor sys- process is incomplete or has not yet begun.This sepa- tem reliability, and frequent blackouts. Despite govern- ration of roles and the creation of independent regula- ment steps to introduce private sector investment in tory agencies will be particularly important where there generation, the poor financial standing of most boards is competition between private and publicly owned ser- means that far fewer deals have reached financial clo- vice providers--and when there is a need to insulate sure than expected. Key issues: tariffs from political pressure. · Private ownership in distribution would provide commercial incentives to reduce technical and,in par- Telecommunications ticular, nontechnical losses. · Genuinely independent regulatory agencies would The entry of private operators into the telecommuni- help ensure that prices are set to correct present dis- cations sector indicates great potential for competition tortions and provide incentives to make operators and private investment.But market structure and license more efficient. conditions have undermined incentives for large invest- ments and new entry. Teledensity remains extremely Urban Water and Municipal Services low (table 1). The New Telecom Policy, unveiled in March 1999, provides a platform for further develop- No large privately sponsored projects have yet reached ment and liberalization of the sector.It envisions a more financial closure in the water and sewerage sector,which competitive market for all telecommunications services. is handicapped by inadequate revenues and a cumbersome Key issues: institutional approach (table 3). Central, state, and city · Defining relationships among the regulatory agency, governments have been providing and regulating services. policymakers, and the current service provider. The goal of the 74th Amendment to the constitution is · Establishing an efficient interconnection regime to spur competition. Table 2 India's Electricity Performance Compared · Continuing to rebalance prices within a more com- withThat of Neighboring Countries petitive environment. (percent) Access to electricity, 1994 Energy losses, 1996 India 88 21a China 92 7 Table 1 India'sTelecommunications Performance Indonesia 39 12 Compared withThat of Neighboring Malaysia 90 11 Countries, 1997 Pakistan 46 23 Sri Lanka 38 17 Telephone mainlines Waiting list as percent Note: Access to electricity in India is measured by electrified villages as a percent- per 100 people of mainlines in operation age of total villages, rather than electrified households as a percentage of total India 1.9 15.2 households. As a result, the above figure may overestimate the percentage of the China 5.6 1.5a Indian population with access to electricity. Although the Ministry of Power Indonesia 2.5 6.3a reported total energy losses of 21 percent throughout India, closer examination Malaysia 19.5 4.2a shows serious underreporting. In Orissa, for example, where loss reduction and Pakistan 1.9 11.8 revenue enhancement measures have been most active of late, actual losses are Sri Lanka 1.7 89.9 far above losses reported prior to reform, at around 46 percent. a. Data refer to years other than 1997. a. Data refer to years other than 1996. Source: ITU 1997a. Source: India, Ministry of Power 1997; ADB 1997a, 1997b. 2 Executive Summary to move toward municipal management of urban water government has begun introducing tolls on newly expand- services, but the process is in the early stages.Although ed stretches of road,and the number of toll roads,bridges, several bulk water schemes are under consideration,they and bypasses will increase. The government plans to are likely to prove viable only when supported by sales upgrade the national highway network and include the to industrial consumers or when the municipality has private sector.Key issues for central and state governments: strong finances. Poor management of existing networks · Identifying and preparing financially viable projects. suggests that efficiency could be improved greatly by · Determining how tolls fit into the overall funding introducing private operators and measures to provide an of road projects, both public and private. adequate revenue stream. · Identifying and providing for the contingent liabil- Failure to provide water of adequate quantity and ities that privately financed projects imply for the pub- quality is a major cause of death and illness in India, lic sector. often resulting in epidemics. An estimated 12 percent of premature deaths and disabilities in India are due to Ports water-related infections, primarily diarrheal disease, hepatitis, and parasitic infections, with the proportion Indian port productivity is extremely low by international rising to about one-fifth of all causes of death among standards. Unless the productivity and capacity of ports children.That translates into about half a million deaths are increased,more bottlenecks will occur as demand for in children under five each year (based on India 1996). port services grows.The Ministry for SurfaceTransport Key issues: oversees the country's 11 major ports, for which the · Municipal governments must be stronger and have TariffAuthority for Major Ports regulates prices.The other sound finances. 142 ports come under state jurisdiction. The central · Private sector management is needed to improve effi- government has adopted broad policy measures to open ciency. ports to private investors and operators.Some maritime · Pricing reform needs to be a priority. states are also attracting private investments.The central government is seeking private investment in captive and Roads other facilities, and state governments are seeking pri- vate investment, largely in new sites. Key issues: Small projects, like bridge and bypass construction, have · Separating statutory and operational roles at the been privately financed,but larger projects have not.Just major ports. 4 percent of national highways have four lanes. Only 20 · Continuing to transfer operational roles to the pri- percent of paved roads are considered to be in good con- vate sector. dition,and many roads cannot cope with increasing traf- · Enhancing competition between ports to provide fic volumes (India, Planning Commission 1999). The greater choice for consumers. · Improving the sector's institutional structure,particu- larly the distinction between major and minor ports. Table 3 India's Water Performance Compared withThat of Neighboring Countries Airports Access to safe water Availabilitya (percent) 1993 (hours/day) 1995 Passenger traffic is concentrated at Bangalore, Calcut- India 85 4 China 83 24 ta, Chennai, Delhi, and Mumbai. All of these airports Indonesia 65 18 are operated by the Airports Authority of India. Major Malaysia 89b 24 investments in airports are needed to bring existing Pakistan 62b 17 Sri Lanka 70b 22 facilities up to international standards and to handle the a.Water availability figures are for the cities of Delhi, Beijing, Jakarta, Kuala expected increase in passengers and cargo. One project Lumpur, Lahore, and Colombo. with private sector participation was recently commis- b. Data refer to a year other than 1993. Source: ADB 1997b; World Bank 1999. sioned in Cochin,Kerala.To set the stage for more pri- 3 Executive Summary vate sector participation,the government is planning to Table 4 Investment in Infrastructure as Percent lease operations at the Calcutta, Chennai, Delhi, and of GDP Mumbai airports. Key issues: · Structuring the proposed leasing contracts. 1991­92 1992­93 1995­96 1996­97 1997­98 Public 4.0 3.7 3.2 2.9 3.0 · Establishing a regulator to oversee private opera- Private 1.4 1.6 1.0 1.5 1.6 tions under the lease. Total 5.4 5.3 4.2 4.4 4.6 Source: World Bank staff. Developing Regulatory Institutions the start of the decade, private investment has failed to A growing number of special economic regulatory fill the gap. As a result, total investment in infrastruc- agencies in India oversee power, telecommunications, ture, as a percentage of GDP, is below the levels of and ports.Their experience provides lessons about the 1991­93 (table 4). political economy of infrastructure regulation in India The increasing emphasis on private provision of and about the design of regulatory bodies to ensure infrastructure services is placing new demands on the that they fulfill their mandate as independent regulators. public sector's contracting and supervision skills.This sit- Key issues: uation frequently results in the bidding of projects that · Effectively delineating the responsibilities of regula- have been inadequately prepared.There is a need for tors and policymakers. greater interministerial coordination at the central and · Placing the creation of an independent regulator state levels.This need is also highlighted by constraints within a broader restructuring of the sector. on private sector developers, particularly in the power sector where many public and private sector actors are Promoting Domestic Infrastructure Finance involved. Policy recommendations: · Improve the efficiency and transparency in con- India has a relatively high savings rate of more than 25 tracting infrastructure projects to the private sec- percent, but the term of loans available for infrastruc- tor--each state government could establish a single ture projects is still relatively short. The number of body responsible for contracting and obtaining nec- providers of long-term debt is limited; these providers essary clearances. have similar incentives and investment patterns,and the · Report and value contingent liabilities--state gov- regulatory system constrains the willingness of lenders ernments should monitor their contingent liabilities to provide financing for infrastructure projects. The systematically and provide other forms of support. development of a secondary market for debt is also Public agencies should create liquid funds that allow somewhat constrained by existing taxes and regulations. agencies to meet liabilities as they arise. These factors are reflected in India's relatively large pri- · Audit public support to private infrastructure mary debt market, but light secondary market trading. projects--governments should work toward audit- Key issues: ing the award of public-private infrastructure part- · Increasing demand for long-term debt instruments nership projects. through pensions and insurance reform. · Making the debt market work better by simplifying taxes to reduce distortions, regulating the private placement market,supporting securitization,and sim- plifying and harmonizing debt auction procedures. Improving the Public-Private Interface Although public investment in infrastructure has declined as a percentage of gross domestic product (GDP) since 4 PART 1. SECTORAL REVIEW 1 Telecommunications* *At · Policy objectives. The objectives of the New Telecom Policy the end of January 2000, the Government promulgated the Telecom Regulatory Authori- are universal service coverage, world-class telecommunica- ty of India (Amendment) Ordinance.This cre- ated a Telecoms Disputes Settlement and tions service, and a rapid increase in the coverage, quality, Appellate Tribunal to adjudicate disputes between the licensor and licensees, two or and range of services. more service providers, and between service providers and groups of consumers.The ordi- · Private participation. Private companies now provide cellular, nance also transferred appeals presently stand- radio-paging, voice, e-mail, and video-text services. Private ing before the High Court to theTribunal.TRAI's powers were redefined under the Ordinance firms are also starting up in fixed services. to give it clearer powers over the terms and conditions of interconnection between service · Key issues. Effectively separating policy, regulatory, and opera- providers. In addition, the Ordinance specifies that the government will seek TRAI's views on tional roles, strengthening the authority of the regulator, and the introduction of new service providers and on their license conditions, although the gov- introducing competition into all services, through an effi- ernment will have the final decision. cient, interconnection regime and rebalanced prices. Market Structure and Performance The process of introducing the private sector into telecommunications service provision began in 1991 The public sector still dominates telecommunications ser- with the tendering of licenses to provide cellular services vice provision (figure 1.1).The Department ofTelecom- in the metropolitan areas of Delhi, Mumbai, Calcutta, munications is the policymaker and licensor, and the and Chennai.India needed to achieve a rapid expansion recently established Department of Telecommunications in the coverage, quality, and range of services available Services, created by splitting the Department, provides (table 1.1).The NationalTelecom Policy, issued in May fixed services throughout metropolitan India and is the 1994, introduced the private provision of basic fixed sole provider of interstate long-distance services.Mahana- telecommunications services and proposed private pro- garTelephone Nigam Limited (MTNL) provides basic ser- vision of cellular services in nonmetropolitan areas (table vices in Delhi and Mumbai, andVidesh Sanchar Nigam 1.2). The more lucrative interstate long-distance and Limited (VSNL) has a monopoly on international services international services remained in the public sector.The (excluding Internet services).Both companies are major- introduction of competition and the need for intercon- ity owned and controlled by the government.1TheTele- nection with the Department ofTelecommunications and com RegulatoryAuthority of India (TRAI) was established MTNL networks led to calls for a regulatory authority, in March 1997 to act as the sector's regulator. and TRAI was established. 5 Figure 1.1 IndiaTelecommunications Sector: Institutional Framework Policy Telecoms Commission Department of Telecommunications Wireless Planning and Coordiantion unit of the Department of Telecommunications manages spectrum: Regulation Department issues licenses to new entrants Telecom Regulatory Authority of India Operations Mahanagar Telephone Videsh Mahangar Separate licenses Nigam Limited/ Sanchar Telephone awarded for radio Department of Telecommunications Nigam Nigam paging, public Services Limited Limited mobile radio monopoly (in 2 cities) trunking (PMRT), voice mail, e-mail, date networks, Internet, and global Private licensees Private licensees mobile public (42 licenses communications by issued) satellite (GMPCS) Basic services Long distance International Cellular Value-added services Source: World Bank Staff Table 1.1 India'sTelecommunications Performance Table 1.2 PrivateTelecommunications Service Compared withThat of Neighboring Providers as of December 31, 1998 Countries, 1997 Service Licenses issued Service started Telephone mainlines Waiting list as percent Basic 6 2 per 100 people of mainlines in operation Cellular 42 39 India 1.9 15.2 Radio paging 137 93 China 5.6 1.5a PMRTa 103 57 Indonesia 2.5 6.3a Data network 12 10 Malaysia 19.5 4.2a Voice mail 11 6 Pakistan 1.9 11.8 E-mail 15 15 Sri Lanka 1.7 89.9 Internet 45 1 a. Data refer to years other than 1997. GMPCSb 1c -- Source: ITU 1997a. a Public mobile radio trunking. b. Global mobile public communications by satellite. c. Provisional. Private operators experienced major difficulties in Source: World Bank staff. obtaining financing for their projects under the prevail- ing license structure.There has also been uncertainty over is below that of neighboring Asian countries such as the respective jurisdictions ofTRAI and the Department Thailand (11.4 percent),China (7.3 percent),and Indone- ofTelecommunications,and many of the NationalTele- sia (2.9 percent) (TRAI 1998).These problems,along with com Policy's objectives were not achieved. Despite the recognition of the implications of converging tech- increase in the number of mainlines for every hundred nologies and traditionally distinct markets, led to the inhabitants, the waiting list for a connection is higher New Telecom Policy, issued in March 1999. now than at the beginning of the 1990s (figure 1.2).More than 2.8 million people are waiting for about 20 per- Private Sector Participation cent of the current number of lines.2 Only 44 percent of villages have public telephone service (India,Planning The government originally sought to establish a duop- Commission 1999).Teledensity in India (at 1.72 percent) oly in basic and cellular telecommunications, with pri- 6 Telecommunications vate service providers paying substantial license fees for Metropolitan cellular licensers pay an annual fee per the right to provide services.This policy commenced subscriber to the government. This fee, indexed to in December 1991 with the tendering of licenses to pro- the ceiling unit call rate,has now risen to 6,023 rupees vide cellular services in the metropolitan areas.Eight cel- (Rs) per subscriber.Around 50 percent of subscribers lular licenses--two in each city--were awarded in generated annual revenues below this fee in mid- October 1994 for 10 years.The licenses could be extend- 1998. ed for five years.Cellular licenses for the state circles,which For the state circles, the later rollout makes it hard- broadly correspond to states,were awarded for the same er to assess the situation. Indications are that con- term by competitive sealed bidding in December 1995. sumer numbers are close to anticipated levels in the Private companies have been allowed to provide radio metropolitan areas, but use per consumer is also well paging, voice- and e-mail services, and video text ser- below forecasts, although use varies by state. Also, vices since 1992. some licenses for the "B" circles, deemed to be less A total of 39 cellular networks (covering both met- attractive at the time of auction,earn revenues per user ropolitan and circle areas) commenced operation.The similar to those of the "A" circles.Although there was number of cellular customers has increased since services considerable variation in the bids for each circle, most began, with about 1.2 million customers by September bids for basic and cellular circles have proven to be 1999. However, the number of consumers in the met- much higher than their markets can sustain.This over- ropolitan areas, as figure 1.3 shows, has only recently bidding was due partly to misestimation of market reached the levels seen in mid-1998. The substantial potential and, in some cases, to hopes that the license reduction after mid-1998 may be partly related to the shed- terms could be renegotiated. Bharti Telenet became ding of nonpaying consumers. the first basic operator to start operations. The number of subscribers is broadly in line with Although the introduction of the private sector has operators' forecasts. However, revenues in the metro- meant some increase in service expansion, particularly politan areas are only around 60 percent or less of through the availability of cellular telephones, paging, projections. The revenue shortfall is due to lower- and Internet services, the roll-out of services has not than-expected phone use and lower airtime call charges begun as quickly as many hoped.This delay is largely than the maximum amounts allowed by licenses. Met- due to the difficulties license holders have faced to date ropolitan operators also saw a decline in average rev- in achieving financial closure because of the high cost enue per subscriber as the customer base expanded. of license payments. 7 Telecommunications Licenses to provide basic services within state cir- · Facilitating competition and efficiency in the cles for 15 years (which could be extended by 10 years) sector. were also awarded by competitive bidding. Bids were · Protecting consumer interests. received for 13 circles.The license was awarded to the · Ensuring technical compatibility and effective con- bidder who offered the highest net present value of nection among service providers and regulating license payments. Of the 13 licenses awarded, 6 basic revenue-sharing arrangements. operators have signed license agreements with the · Announcing the prices at which telecommunications Department ofTelecommunications and paid the first- services can be provided within India. year fees. Court cases between regulators and incumbents are relatively common,and disputes betweenTRAI and the Regulatory Environment Department of Telecommunications are best interpret- ed in this light (box 1.1).TRAI's institutional structure The main responsibilities of TRAI are: is relatively strong.TRAI has been funded by disburse- · Determining the need for and introducing new ser- ments from the central government's budget. However, vice providers. the 1997Telecom RegulatoryAuthority of IndiaAct also · Recommending the conditions of licenses. provides TRAI with the authority to levy fees on the · Ensuring compliance with license terms and service providers it regulates.These fees are to be paid conditions and recommending revocation of into theTRAI General Fund to meet its operating costs.3 licenses. Members of TRAI can be dismissed only following a Box 1.1 Establishing the Scope of the Regulator's Authority The sector has seen uncertainty over the respective jurisdic- ical interference.TRAI's firstTariff Order on March 9,1999 man- tions ofTRAI and the Department ofTelecommunications.Under dated a reduction in long distance and international call charges, the act that established TRAI it holds powers like that held by and an increase in the cost of rentals and local calls.The Minis- regulatory bodies in many other telecommunications markets. ter of Communications subsequently directedTRAI to suspend However, four cases about the extent to whichTRAI can inter- its tariff order. In the final analysis, the government respected vene in issues between the department and a service provider TRAI's pricing order and instead,allowed the department to price have been filed with India's High Court. In a single bench ruling, rural connections at the previous, cheaper rates, but face the the High Court has upheld the department's right to grant a lower price caps mandated by TRAI on long distance charges. license to MTNL to enter the Mumbai and Delhi cellular mar- Although the fact that TRAI's pricing order was not challenged kets.The court reasoned that the department is not obliged to has strengthened the regulator, the possibility still exists that in seek TRAI's recommendation on the entry of new service the future the government could use its powers to issue poli- providers, and that any such recommendation would not be cy directives to overturn TRAI's orders. binding.In a case about provision of Internet services,the court A recent Delhi High Court ruling has posed serious ques- ruled that TRAI has no role in the dispute between the license tions over TRAI's authority in interconnection. The court holder and the licensor.These High Court rulings, though sub- held that under its Act, TRAI could not propose an inter- ject to appeal,have shown thatTRAI has relatively limited power connection regime that differed from that specified in the in disputes between license holders and licensers,and in the grant- license.This decision came about as a result of an appeal by ing of licenses.There are concerns that the ruling on license hold- MTNL and DOT against the Calling-Party-Pays regime-- ers and licensers has implications forTRAI's role in deciding the proposed by TRAI--which would have substantially reduced terms of interconnection, since these arrangements are speci- the revenue that the two fixed line operators would earn fied as part of the license agreement.These tensions have risen through interconnection charges on fixed to mobile calls. largely because of the department's multiple roles as service The case shows how important it is to clearly define in leg- provider, policymaker, and licensor of the department's private islation the powers of the regulator, and in particular how sector competitors, on behalf of the President of India. they may apply to licenses issued by another authority.This Controversy followingTRAI's 1999Tariff Order has highlighted decision makes it paramount that the government move for- the issue of whether, according to narrow interpretations of its ward with its announced intentions to strengthen TRAI's establishing legislation,TRAI is adequately protected from polit- powers through existing legislation. 8 Telecommunications High Court recommendation. However, there is less Telecommunications will continue to charge rural con- clarity over the scope of TRAI's powers. sumers the current connection rates, with lower rates for low-use urban consumers (see box 1.1).The cost of Price Regulation and Interconnection leased circuits is expected to fall by about 80­90 per- TRAI issued its first Telecommunication Tariff Order cent.The department is concerned that this cost reduc- on March 9, 1999.The order is a landmark for infra- tion will lead to further revenue losses as long distance structure regulatory agencies in India. It attempts to traffic is routed through leased circuits.4 rebalance tariffs to reflect costs more closely and to The New Telecom Policy proposed liberalization of usher in an era of competitive service provision.The order long distance service. Liberalization is likely to cause is the product of a consultation process with service some operators to price below the caps set byTRAI.These providers, consumers, policymakers, and members of caps apply to peak-hour charges for calls. TRAI has parliament. The process involved wide dissemination defined the peak hours, but allows operators to decide and discussion of two concept papers at open meetings on charges for off-peak hours.Operators may offer alter- nationwide. Continued use of this consultation process native tariff packages, but must offer the standard tariff will add robustness to TRAI's decisions and provide it as an option.They also must provide cost comparisons with some defense against arbitrary policy decisions. to allow consumers to make informed decisions. Liber- In devising its tariff recommendations,TRAI tried alization may also cause some operators to promote a more to balance multiple objectives.These included aligning rapid reduction in rates than planned.For example,mobile tariffs more closely with costs,providing affordable ser- cellular tariffs were rebalanced,with monthly rental rates vices to low-use consumers, providing a less complex increasing from Rs 156 to Rs 600,but with a reduction tariff structure,and allowing the Department ofTelecom- in the maximum call charge to Rs 6 per minute.These munications to earn sufficient funds to meet network will be reduced if and whenTRAI's proposals to intro- expansion targets over the medium term (table 1.3).At duce"calling party pays"principles are implemented (see the time that the recommendations were devised,rental section on Interconnection Terms below). and local call charges were well below cost, surpluses TRAI is reviewing three separate issues related to the were generated by high charges on international and long tariff order:interconnection,service quality,and the costs distance calls, and about 3 percent of subscribers gen- of universal service obligation.TRAI will use the same erated 50 percent of call revenue. consultative process that it employed for the tariff review. The chief features of the tariff order were substan- tial reductions in long distance and international call Interconnection Terms charges, increases in rental and local charges, and steep Interconnection terms have been largely favorable to the cuts in the cost of leased lines. The Department of Department of Telecommunications. Although access Table 1.3 Selection ofTariff Caps from theTelecom Regulatory Authority of India's 1999Tariff Order Previous 1999/2000 2000/01 2001/02 Rural rentals (Rs/month) Exchange capacity of less than 999 lines 50 70 70 70 Exchange capacity of more than 100,000 lines 180/190a 250 280 310 Urban rentals (Rs/month) Low users 75/190a 120 120 120 General users 75/190a Subscriber trunk dialing (STD) calls: peak rates (Rs) Radial distance between exchanges of more than 1,000 km 42.00b 30.00c 25.20c 21.60c International calls: peak rates (Rs) to the United States 84.00b 61.20c 49.20c 40.80c a. Ranges show lower and upper bounds depending on the number of lines in the exchange. b. For pulse rate of Rs 1.40 per metered call. c. For pulse rate of Rs 1.20 per metered call. Source: TRAI 1998. 9 Telecommunications charges are in principle reciprocal for basic service oper- who are mostly public agencies, to modify their band ators,private operators are not allowed to carry calls out- use or relocate to another band.5 Significant new side their licensed circle.Consequently,inter-circle calls assignments typically require full coordination with originating in the private network must be connected the interagency Standing Advisory Committee on Fre- to the department; in these cases, callers pay an access quency Allocation (SACFA) to obtain site clearances. charge.The department is able to carry a call originat- SACFA has representatives from 19 government depart- ing from any of its subscribers into the destination cir- ments that use the spectrum. The Department of cle.By connecting the call to the private operator within Telecommunications has recently acted to ensure that the local calling area of the subscriber, the department SACFA provides site clearances within three months incurs no access charge. Arrangements for connecting of receiving an application. Private service providers cellular operators to the department's network have were paying annual spectrum fees of Rs 1200 per sub- been colored by its treatment of cellular networks as cus- scriber; the department has waived these fees for now tomers,rather than as"co-carriers."There are several other because of the financial difficulties many licensers are artificial restrictions on interconnection,including direct suffering. connection toVSNL.These restrictions mean that pri- vate operators are forced to use government-owned The NewTelecom Policy of 1999 networks, rather than choose the most cost-effective solution for their consumers. The main objectives of the NewTelecom Policy are to TRAI issued the Telecommunications Intercon- (box 1.2): nection (Charges and Revenue Sharing--First Amend- · Increase the availability of affordable and effective ment) Regulation 1999 (3 of 1999) on November 1, communications. 1999, setting interconnection charges for the Calling · Provide universal service to all areas,including remote, Party Pays (CPP) on an interim basis. The major hilly and tribal areas. impact would have been the payment by MTNL and · Capture the benefits of technology convergence in DOT of mobile termination charges, at Rs 2.4 for the building an efficient telecommunications infra- first minute, for calls made from their networks to structure. mobile phones.As explained in box 1.1, a court rul- · Provide multimedia facilities nationwide. ing has suspended implementation of this order. · Introduce competition into telecommunications and create a level playing field for all players. Managing the Radio Spectrum · Achieve efficiency and transparency in spectrum Radio spectrum users are spread throughout the usable management. spectrum bands. The defense forces use a substantial · Protect the country's defense and security interests. amount of the 1800­1900 MHz band,which would be The policy has the following targets: attractive to commercial operators.The Department of · Telephones available on demand by 2002. Telecommunication'sWireless Planning and Coordina- · Teledensity of 7 percent by 2005 and 15 percent by tion (WPC) wing is a repository for spectrum assign- 2010. ments data.TheWPC's job has become substantially more · Affordable tariffs for rural connections. complex because of the large number of private com- · Mandatory rural connections for all fixed service panies that wish to use the spectrum.There is some con- providers. cern that theWPC lacks stature within the department · Rural teledensity to increase from 0.4 percent to 4 and that it lacks the authority to deal with other min- percent by 2010. istries and public sector agencies because it is too close- · Telecom coverage of all villages. ly tied to the department. · Internet access to all district headquarters by 2000. To make spectrum available to new operators at · High speed data and multimedia capability to all internationally standardized frequencies, the Wireless towns with populations of more than 200,000 peo- Advisor has the task of encouraging existing users, ple by 2002. 10 Telecommunications Box 1.2 Key Features of the NewTelecom Policy of 1999 Market competition vice providers. Seeking recommendations is not manda- · VSNL's monopoly on international services to end by 2004. tory. · National long distance voice open to competition by Jan- · TRAI will make recommendations on license fee levels for uary 1, 2000, with details to be determined. Alternative new licenses. infrastructure providers (public and private power trans- · TRAI will be involved in developing an interconnection mission companies, Indian Railways, and other public sec- regime. tor agencies with backbone networks) can provide long · TRAI will only have the power of arbitration in disputes distance data services immediately. between service providers and the policymaker over inter- · Cellular:MTNL and Department ofTelecommunications will connection terms. be third operators, with an additional operator to be added · TRAI will have full authority over the Department of where available spectrum allows. Telecommunications when the department acts as the ser- · Fixed basic services: move toward a liberal entry regime, vice provider. with potentially open entry, although there will be restric- Spectrum management tions initially. · The National Frequency Allocation Plan 2000 will be made · Internet telephony (voice services via the Internet) will public and updated every two years. not be allowed. · Defense and security communications will be relocated License fee structure from commercial frequencies; these forces will be com- · License fees will be retained, with a one-time entry fee pensated. and revenue sharing thereafter. Initially for 20 years, extend- · An interministerial group will establish broad allocation able by 10 years thereafter. policy. Interconnectivity · Spectrum users will pay fees and TRAI will recommend · Cellular and fixed basic services can interconnect with all their level. service providers in their own areas. Universal service obligations · Terms for interconnection among service providers in dif- · Fixed service providers will have targets for universal ser- ferent areas will be announced on August 15, 1999. vice obligations; all service providers could participate in · Access providers will be required to provide connection universal access programs funded by a levy on provider rev- to long distance service providers to ensure competition. enues. The Department of Telecommunications' future · The Department of Telecommunications will be refunded · The department initially will be divided into separate pol- for cellular license payments because of the burden of uni- icymaking and licensing units.The department will be incor- versal service obligations. porated by 2001. New legislative framework The role of the Telecom Regulatory Authority of India · The policy recognizes the need for new legislation to replace · The government will retain a licensing role, but will the Indian Telegraph Act of 1885, but sets no timeline for seek TRAI's recommendations on introducing new ser- devising such legislation. Policy Recommendations: Moving Clarifying the Role of the Telecom Regulatory to a CompetitiveTelecommunications Authority of India * Market The New Telecom Policy reaffirms the government's commitment to a"strong and independent regulator with The New Telecom Policy is a clear step toward mod- comprehensive powers and clear authority to effectively ernizing India's telecommunications.The government perform its functions."TRAI will be involved in key has publicly committed to separating the Department decisions about markets, license fees, and interconnec- of Telecommunications' policy and operating func- tion.The fact that, despite political controversy,TRAI's tions and has announced a date for corporatizing the pricing order of March 1999 was respected has strength- department's operations.The new policy is explicit-- ened the regulatory regime (see box 1.1). and fairly progressive--about new entry and compe- In the light of recent court interpretations ofTRA's tition.The policy also addresses some of the implications powers,particularly regarding interconnection,it will be of convergence. important for the government to establish in legislation * The Government recently promulgated the Telecom Regulatory Authority of India (Amendment) Ordinance, 2000, to clarify the role of the regulator with respect to interconnection and the introduction of new service providers. 11 Telecommunications TRAI's ability to establish an efficient interconnection Box 1.3 The RuralTelephone System: Using Public regime, in particular overriding whatever clauses may Funds to Leverage Private Participation be in the licenses drawn up by DOT. If interconnec- Various forms of support that work with the market can be tion is not brought underTRAI's purview, it is hard to developed to expand services to areas that are commercially see competitive markets developing. unattractive. Subsidies can be provided either from the gener- Even following the corporatization of the Depart- al budget (as in Chile), or from the telecommunications sector ment of Telecommunications, the government will own itself. For example, income can be provided from investing the the vast majority of telecommunications assets in the proceeds of spectrum auctions (as in Guatemala) or from a small country.The government may face conflicts of interest in levy on telecommunications bills (as in Peru). Chile's Telecommunications Development Fund is perhaps determining policy for telecommunications.TRAI's pow- the best known example of a market-based approach to ers should be strengthened to reduce the likelihood of con- expanding service coverage.The sector regulator identifies pro- flicts of interest affecting the design of the rules of the game. jects in commercially unattractive areas. These projects are This gains increased significance with the entry of MTNL put out to bid and awarded to the company asking for the into the cellular markets in Delhi and Mumbai, offering smallest subsidy. (The regulator also establishes a maximum prices considerably lower than private cellular operators subsidy.) In 1995 the fund committed US$2.1 million of pub- and using a different technology to that specified in the lic money and leveraged an estimated $40 million of private original cellular license auctions. MTNL's low prices investment. prompted TRAI to act to review these tariffs, following Source: Wellenius 1997. concerns that it was cross-subsidizing the cellular tariffs with revenues from its fixed line operation.The newly- · Standard qualification requirements would be more created Department of Telecommincations Services has appropriate for opening up fixed services,and qual- recently announced plans to launch mobile services in three ified new players should be allowed to enter. For states during 2000.The impending opening of the long instance, a broadband network operator coming distance market,and the impact this may have on DOT's from the rapidly growing data and Internet fields revenues, increases the need for an independent body, would be well equipped to provide voice service but TRAI, to have the ability to set the framework. would be ruled out if required to have telephone In October 1999 the government formally separat- company experience.Similar arguments can be made ed DOT into the Department of Telecommunications for long distance services (voice and data), which Services, which will cover VSNL, DOT's operational should be liberalized without delay. arm, and MTNL, and the Department of Telecommu- · The proposed license fee regime is inconsistent with nications,which will remain responsible for licensing,pol- principles of opening up the market to allow icymaking,and promoting private investment.However, increased competition.The regime represents a spe- at present both departments are still under theTelecoms cial tax on telecommunications services, increasing Commission.Genuine separation and independence for the cost to users. In areas where there will be a lib- the operational arm will commence only after it is cor- eral entry regime, payments should be minimal and poratized,in 2001 according to the NTP,at the earliest. reflect regulation costs alone. · The licensing regime maintains the fiction of sep- Opening Up Telecommunications Markets arate technologies, although the New Telecom The New Telecom Policy envisions a substantial liber- Policy will permit accumulation of licenses in dif- alization in market entry for telecommunications ser- ferent areas,allowing both consumers and providers vices. However, there are several caveats: to reap the benefits of convergence. Future legis- · The present restriction on Internet telephony will lation must not enshrine artificial restrictions of be difficult to enforce. The restriction also misses licenses. opportunities to increase competition in the sector · Although Internet Service Providers can have the and allow consumers and service providers to take option of establishing their own international gate- advantage of technology convergence. ways, the envisaged monopoly on international 12 Telecommunications voice services until 2004 will clearly not benefit Auctioning and Pricing the Spectrum consumers. Relocating defense and security use from parts of the · The interconnection policy, to be developed by the commercially attractive bands (and providing suitable end of 1999, will be crucial to the development of compensation) would be a positive move. The pro- competition. posed fee system raises the question of how to estimate the value of the spectrum. Administered pricing, in Handling Existing License Fee Problems which the government determines the price, is an The New Telecom Policy established the possibility of approach used by several countries. However, serious a revenue-sharing regime with a one-time entry fee and consideration should be given to auctioning the spec- a more open market.The government has recently ini- trum, particularly in areas where there are constraints tiated moves to allow existing license holders to migrate on its availability. to this new regime, whereby licensees will pay 15 per- cent of their gross revenues on an interim basis, with a requirement to pay arrears in license fees payable up to end June 1999 before migration is allowed.The indus- try has generally reacted favorably to this move. Meeting Universal Service Obligations The New Telecom Policy acknowledges the costs of universal service obligation by introducing a fund to encourage expansion into noneconomic areas. How- ever, prices charged by the Department of Telecom- munications for rural connections are estimated to be Notes less than the costs of connection. If long distance com- 1. In 1997 the government used the Glob- petition develops it will drive down the surplus that al Depository Receipt route to sell 10 per- the department currently uses to expand the network, cent of MTNL's equity and 17 percent of especially for rural connections.The lower surplus will VSNL's equity,raising a total of US$808 mil- put upward pressure on rates offered for rural services lion. and connections. 2. Although the Eighth Five-Year Plan set The rationale for reimbursing the department for new connections targets,which the Depart- license fees from cellular services is unclear.The pro- ment ofTelecommunications exceeded by 16 posed fund should provide reimbursement and be based percent, many people are still waiting for a on the excess costs that the department is incurring to line. meet its universal service obligations. 3. TRAI released a consultation paper in There is also a need to assess what genuinely con- June 1998 proposing a levy of 0.15 percent stitutes noncommercial service.There is evidence from on the revenues of all telecom service LatinAmerica that removing barriers allows innovation providers. This levy will enable TRAI to in service provision, both in technology and commer- meet its budgetary requirements and estab- cial options. Rural Latin Americans are also willing to lish a contingency fund. spend significant amounts of their income on telecom- 4. TRAI has indicated that service providers munications services. There is potential in India for should monitor long distance traffic to ensure adapting schemes that work with the market to expand that it is not routed through leased circuits. service to areas that are not yet commercially viable. 5. The extent to which spectrum is actual- However,schemes that work with the market imply that ly used by these public sector agencies is not relative prices for different services should provide ade- always clear. quate incentives for investment in rural areas. 13 2 Power · Policy objectives. The central government is putting increased pressure on the states to reform and introduce private partici- pation into the power sectors.This includes a requirement that states establish regulatory commissions.The government envis- ages an increasing role for the private sector in generation. · Private participation. Independent power projects now operate in several states and more are on the way. Orissa recently completed the privatization of its distribution companies. Two transmission projects involving private sector participa- tion are being pursued. · Key issues. Most states need to undertake fundamental sector reform.Tariff reforms are needed to put the industry on secure financial footing, as is the introduction of the private sector to reduce power theft and other sources of nontech- nical losses. Market Structure and Performance system. State-level generation, transmission, and distri- bution is largely in the hands of state electricity boards, The Ministry of Power is responsible for policy and most of which are in poor physical and financial health. planning in India's power sector (table 2.1 and figure The power sector depends heavily on Coal India, Ltd., 2.1). The Central Electricity Authority and the new Indian Railways, and the Gas Authority of India, Ltd. Central Electricity Regulatory Commission share reg- for fuel supply. ulatory responsibilities. Eleven state electricity regula- Throughout India the shortfall in meeting electric- tory commissions have been established, and two are ity demand is conservatively estimated at 11 percent for already fully operational.Two state-owned corporations nonpeak demand and 18 percent for peak demand, play key roles in India's power sector: National Ther- although the variation among states is substantial (India, mal Power Corporation, India's largest generator, and Ministry of Power 1997).1 During the period of the Powergrid, which operates the national transmission Eighth Five-Year Plan (1992­97), 16,422 megawatts of 15 Power capacity were added to the system. Projections had Table 2.1 India's Electricity Performance Compared called for 30,540 additional megawatts,of which the pri- withThat of Neighboring Countries (percent) vate sector was to provide about 2,800 megawatts.Indus- try has increasingly relied on captive generation to cope Access to electricity, 1994 Energy losses, 1996 with irregular supply and with high tariffs, which sub- India 88 21a China 92 7 sidize agricultural and residential consumers.Although Indonesia 39 12 the Central ElectricityAuthority estimated in 1996 that Malaysia 90 11 there was around 11,600 megawatts of captive plant Pakistan 46 23 Sri Lanka 38 17 capacity, industry sources suggest that the total is now Note: Access to electricity in India is measured by electrified villages as a per- around 20,000 megawatts. Half of this amount was centage of total villages, rather than electrified households as a percentage of added between 1992 and 1997. total households. As a result, the above figure may overestimate the percent- age of the Indian population with access to electricity. Although the Ministry The Electricity Supply Act of 1948 was amended of Power reported total energy losses of 21 percent throughout India, closer in 1991 to encourage private investment in power gen- examination shows serious underreporting. In Orissa, for example, where loss eration. However, private investors did not provide the reduction and revenue enhancement measures have been most active of late, actual losses are far above losses reported prior to reform, at around 46 additional capacity that was hoped for. Although pro- percent. jects totaling 23,000 megawatts have received techni- a. Data refer to years other than 1996. cal and economic clearance from the Central Electricity Source: India, Ministry of Power 1997; ADB 1997a, 1997b. Figure 2.1 India Power Sector: Institutional Framework Center State Most states Reform states Policy Ministry of Power State Department Department of Energy of Energy Central Electricity Authority Regulation Central Electricity State Elecricity Regulatory Regulatory Commission Commission Genaration NTPC, central Independent power Private generation Gencos sector, hydro products and distribution and nuclear companies in: Ahmedabad Calcutta State Mumbai electricity Surat boards Transmission Powergrid Grid company (also single buyer) System operations Distribution Separate distribution/retail Retail supply companies a. Such as Orissa, Haryana, and Andhra Pradesh. Source: World Bank Staff. 16 Power Table 2.2 Status of Major Independent Power Projects Capacity Project (MW) Comments In operation Essar Power Ltd., Gujarat 515 Partly captive AP Gas Power Corp Ltd., AP 172 GVK Industries, AP 216 Central government counter-guarantee covering termination Gujarat Industrial Power Co. Ltd., Gujarat 167 Spectrum Power Limited, AP 208 Withdrew from counter-guarantee scheme Dabhol Power Company (Phase I), Maharashtra 826 Central government counter-guarantee covering tariff payments and termination Gujarat Torrent Energy Corporation, Gujarat 655 Part of sales to large industrial consumers GMR Vasavi Power Corporation,Tamil Nadu 200 Total commissioned 2885 In construction Jindal Tractebel Power Company, Karnataka 260 Partly captive: 160 MW for use in steel plant, 80 MW for sale to grid Jojobera TPP, Bihar 240 67.5 MW already commissioned BSES Kerala Power Ltd., Kerala 165 Jaiprakash Hydro, HP 300 Gujarat Industrial Power Corporation, Gujarat 250 Kardapathy Power Corporation, AP 350 PPN Power Generating Company,TN 350 Dabhol Power Company (Phase II), Maharashtra 1,630 Total under construction 2,530 Source: World Bank staff. Authority, only 3,000 megawatts from independent Existing licensees (private companies supplying power power plants have started production. However, sever- in Mumbai, Calcutta, Ahmedabad, and Surat) have al of these projects supply a substantial proportion of financed another 1,000 megawatts since the Private power to large industrial consumers (table 2.2).Anoth- Power Policy was announced in 1991. Licensees are er 2,500 megawatts are under construction.Guarantees expected to commission an additional 835 megawatts from other governments or from Indian banks (includ- before the close of 2000. ing the Industrial Development Bank of India and the State electricity boards have become a major and ICICI) have covered all foreign debt invested in the sec- increasing financial burden on the public sector. Com- tor so far. mercial losses reached $2.3 billion in 1996­97 (India 1997).2 Because of the nonpayment of Board dues to central utilities and suppliers,this figure underestimates the true losses. These dues are now believed to total almost $3 billion,up 34 percent from the previous year.3 These heavy financial losses are the result of tariffs that do not cover costs and of poor management and oper- ational practices. Residential and especially agricultural consumers are heavily subsidized (figure 2.2 and table 2.3).These groups enjoyed a subsidy of $4.8 billion in 1996/97, equivalent to around 1.4 percent of GDP. About 80 percent of the $4.8 billion went to agriculture.Average revenue per unit was estimated at about Rs 1.7 per kilowatt hour (about 4 cents per kilowatt hour) in 1996/97, compared to average costs of just over Rs 2 per kilowatt hour that year (or 4.75 cents per kilowatt hour). 17 Power Table 2.3 Power Sector Subsidies (Rs billion, current prices) Cross-subsidy from Agriculture Residential Total commercial, industrial Net subsidy in sector 1992/93 51.4 20.3 74.5 39.1 35.4 1993/94 67.4 21.3 88.7 45.2 43.5 1994/95 85.4 25.4 110.7 53.8 56.9 1995/96 109.9 31.6 141.5 66.6 75.8 1996/97 12,912 3,897 16,809 8,034 8,775 1997/98 15,987 4,295 20,282 11,385 8,897 Source: India, Ministry of Power 1997. Although publicly reported energy losses are about ration, has since been successfully divested. Forty-nine 21 percent throughout India,closer examination of state percent of the equity was sold to the AES Corporation, electricity board losses often shows serious underreport- the highest bidder for the assets. The government is ing.In Orissa,where loss reduction and revenue enhance- nearing completion of the privatization of GRIDCO's ment measures have recently been most active, actual distribution business (box 2.1) GRIDCO will contin- losses are far greater than the amount reported prior to ue as the bulk transmission entity, and will become the reform,at around 46 percent.This greater accuracy is due bulk purchaser of power on behalf of the distribution to better information about sales and losses than existed companies operating in the state.The Regulatory Com- before corporatization and privatization. Orissa's expe- mission will review this arrangement at a later date. rience may be typical of all boards,and preliminary work The states of Haryana and Andhra Pradesh have in Haryana and Andhra Pradesh bears this out.4 enacted legislation comparable to Orissa's as the first step in restructuring the power sector. In addition to creat- State-Level Regulatory and Policy Reform ing regulatory bodies with similar autonomy and pow- ers, the legislation in both states provides for the Several states are attempting far-reaching power sector corporatization of power sector entities.The Haryana reform.This involves a combination of divesting exist- Electricity Regulatory Commission has already held its ing assets to private operators and establishing a regu- first hearings. latory framework for the sector,which will allow recovery of cost-based prices. Box 2.1 Privatizing Distribution in Orissa Efforts to change the performance of the state elec- In July 1997 the Grid Corporation of Orissa Limited (GRIDCO), tricity boards have been pioneered in Orissa.Legislation the utility responsible for transmission and distribution services was enacted in 1995 as the basis for this reform.This leg- in Orissa, offered the entire distribution business in the state islation established the Orissa Electricity Regulatory (divided into four zones) for privatization simultaneously instead Commission (OERC) as an autonomous regulatory of sequentially, as contemplated earlier.The Orissa state gov- body.The OERC regulates transmission and distribu- ernment and GRIDCO decided to offer majority stake and tion tariffs. The Commission has many other powers, management control to strategic investors. Eleven consortia, including major international utilities and including the authority to license companies that want leading Indian power companies, were prequalified to bid for 51 to engage in transmission and distribution and regulate percent of the shares in each distribution company. Bids from a the quality of the services those companies provide. total of three consortia (the Bombay Suburban Electric Supply Limited--BSES,Grasim Industries/Singapore Power,andTata Elec- Corporatization and Divestment tric Companies/Viridian Group PLC) were received for three out The same legislation also provided for the corporatiza- of the four zones in January 1999.The BSES emerged as the suc- tion of the Orissa State Electricity Board and created the cessful bidder for all three zones. Majority equity and manage- Grid Corporation of Orissa Limited (GRIDCO),which ment control in these distribution companies have been transferred to the BSES.GRIDCO recently completed the sale of the fourth is responsible for transmission and distribution.The Oris- zone to AES Corporation. sa Power Generation Company, a state-owned corpo- 18 Power Box 2.2 Price Regulation in Orissa The Orissa Electricity Reform Act of 1995 requires the Oris- GRIDCO submitted its second tariff application on August sa Electricity Regulatory Commission (OERC) to prescribe 17, 1998.The OERC gave its second tariff order, effective on terms for determining a licenser's tariff by framing appropri- December 1, 1998.The commission included an allowed return ate regulations.The commission must follow the parameters based on the rate prescribed by Schedule VI and on reason- of the 1948 Electricity (Supply) Act's Schedule VI, a relatively able loss levels of 35 percent, again adjusting revenues down- detailed cost-of-service methodology for price regulation.The wards to reflect differences between the target and actual schedule includes an allowed rate of return, which is calculat- losses. Once the 35 percent target was reached, the licenser ed as the rate of the Reserve Bank of India plus 5 percent.The could include the capitalized losses resulting from those adjust- OERC may introduce factors that would encourage efficien- ments in its rate base.The OERC also proposed another incen- cy and safeguard consumer interests if it provides reasons for tive--an increase in allowable return by 1 percent for every doing so in writing.Thus the regulator has substantial discre- percentage point reduction in losses below 35 percent. This tion in setting prices. target was a benchmark for GRIDCO as a whole. Because dif- The commission passed its first tariff order on March 12, ferent distribution zones have their own loss levels, new para- 1997. The utility's revenue requirement was determined by meters will be established for the first tariff order following the Schedule VI methodology and modified to incorporate privatization.Aside from the approach implicit in the tariff rul- efficiency requirements and consumer interests.The OERC con- ings relating tariff levels to losses, the OERC did not make any sidered the high level of system losses (46.4 percent) unac- other precise commitments to tariff changes. ceptable.GRIDCO was penalized for allowing power purchases The OERC also indicated that it is likely to use tighter labor corresponding to the excess amount of power needed to productivity norms in the future. Overall, average revenue per meet demand over the amount that would have been reduced unit was increased by 10.5 percent in the first order and 10.7 had system losses been at an acceptable level (35 percent).The percent in the second.There has been some rebalancing in tar- OERC calculated the allowable return, but did not include the iffs, although the regulator has indicated that rebalancing will be figures in average revenue calculations. implemented more fully once the quality of service has improved. State-Level Reform under the Electricity Regulatory should choose its own model of reform, the legislation Commissions Act does not address the wider issue of power sector reform. The Electricity Regulatory Commissions Act of 1998 In particular, the Act does not address the transforma- establishes a Central Electricity Regulatory Commis- tion of state electricity boards into corporations.A total sion (see the section on reforms at the central level) and of 11 state regulatory commissions had been established State Electricity Regulatory Commissions.TheAct pro- following the Act, or through state legislation. vides state commissions with powers over setting tar- iffs, procuring and purchasing power, and promoting Reforms at the Central Level competition and efficiency.The commissions are estab- lished by state government notification rather than The Central Electricity Regulatory Commission was through legislation. Although the Act does not auto- established to provide these functions, among others: matically provide commissions with powers over the · Regulate tariffs charged by centrally owned gener- granting of licenses, settlement of disputes between ating plants (such as the National Thermal Power licensers, or other matters, these powers can be grant- Corporation of India, NTPC) or plants that sell ed with the consent of the state government.Tariffs are electricity to more than one state. to be regulated in a similar manner as they are under · Regulate interstate transmission. the Orissa legislation (box 2.2).Like that legislation,the · Provide guidelines for tariff setting by state elec- Act also requires that state boards earn the 3 percent tricity regulatory commissions. rate of return specified under the Electricity Supply · Resolve disputes between generators and transmit- Act. The new legislation mentions compensation by ters that fall under the commission's purview. the state government for subsidies for particular con- · Licensing entities engaged in interstate transmission-- sumers.5 Since the central government felt that each state this provision does not apply to Powergrid but would 19 Power apply to the new, privately financed transmission become involved in decisions regarding escrow cover projects that could be established in connection with allocation. independent power projects. The government recognizes a need to accelerate According to the Electricity Regulatory Commis- hydropower development in India to maintain a balance sions Act, interstate transmission is defined not only as with thermal power generation.This is especially true the conveyance of energy between states or across an of "run of the river" hydropower projects that tend to intervening state, but also the conveyance of energy have fewer environmental and resettlement problems than within a state that "is incidental to such Inter-State those involving the flooding of large areas. In planning transmission of energy." The Act's definition includes these developments the government tries to consider full transmission by a central transmission utility or an enti- river systems and basins rather than individual project ty working on the utility's behalf. sites.The power ministry also is discussing a central ini- The Central Electricity Authority would continue tiative on hydropower development.A hydropower pol- to advise the Ministry of Power on policy developments. icy has been formulated that establishes a return on The authority is supposed to develop a national power equity of 16 percent, allows for premium tariffs for policy and plan and coordinate the development of the peaking power (although it is not clear how these will sector--for example,by granting clearance for new gen- be calculated), and defines incentives for developing eration plants. However, it is likely that these responsi- mini-hydel projects. bilities will be transferred to the state electricity regulatory commissions, given their role in investment approval. The Power Trading Corporation and Megapower Projects The central government is unwilling to issue further Financing Additional Power Generation counter-guarantees for projects beyond the eight orig- The original forecasts for the Ninth Five-Year Plan called inally selected to receive them.7 It has recently estab- for an additional 57,000 megawatts. The Ministry of lished the PowerTrading Corporation (PTC) to enhance Power has scaled back these forecasts and is now antic- the development and implementation of large power pro- ipating 40,000 megawatts, of which around 40 percent jects selling to more than one state.The government's is expected from the private sector.A similar volume of goal is to reduce the cost of generating power by reap- investment is expected in transmission and distribution. ing economies of scale available through large facilities. Independent power projects have added substantially Fiscal incentives, such as lower import duties on capi- less capacity than expected. Around 5,500 megawatts tal equipment and longer tax holidays, also are expect- of privately funded independent power projects are ed to reduce final costs. now either in operation or under construction, but Under the current plan, the Power Trading Cor- this amount is small compared to the number of pro- poration initially would buy power through long-term jects that have received Central Electricity Authority agreements from large independent power projects clearance.6 The financial weakness of the state elec- and on-sell the power to state boards and distribution tricity boards is a major reason for delays in achieving companies. Later, the corporation may develop more financial closure, although some delays are due to dif- of a trading function.The government has proposed ficulties in obtaining commercially acceptable fuel sup- that in addition to escrows and letters of credit,the cor- ply and transportation mechanisms. Several projects, poration would be able to draw on defaulting states' notably in Madhya Pradesh, are awaiting the award of central plan allocations. However, independent power escrow cover to complete financing (escrow cover projects that are close to tying up their financing are involves committing revenues from specific blocks of likely to have the bulk of escrowable revenues.Thus customers).The amount of escrow cover,calculated on fresh credit enhancement will come from guarantees a basis acceptable to lenders, cannot support all of the provided by the central plan allocations,which may offer projects that have been awarded state electricity board only limited coverage.To encourage reform, it is pro- contracts and that have received bankable fuel supply posed that the corporation should only sell power to agreements. In Madhya Pradesh the courts have even states that are making progressive changes, such as 20 Power establishing regulatory commissions and privatizing companies outside the core, state-owned oil and gas the urban areas of their distribution networks. The corporations, such as the Oil and Natural Gas Corpo- Power Trading Corporation is expected to start oper- ration Limited (ONGC) and GasAuthority of India Lim- ations shortly. ited (GAIL). Natural gas production in India is dominated by Fuel Policies state-owned ONGC and Oil India Limited (OIL). Difficulties in arriving at commercially bankable fuel However, private joint ventures between Indian and supply and transportation agreements have caused foreign companies produce 10 percent of current out- implementation problems for independent power pro- put. Private companies involved in oil and gas produc- jects, although some progress has been made in these tion include Reliance andVideocon of India,Marubeni areas.The government has allowed coal importation of Japan,Hardy and Cairn of the United Kingdom,and and reduced the duty on power station grade coal Enron of the United States. In January, under the New from 85 percent to 10 percent. Locally produced coal Exploration Licensing Policy, the government invited is currently the least expensive option for base-load 48 oil exploration licenses from domestic and foreign power generation in India. Given the cost advantage companies to give bids to obtain licenses. Companies and India's large reserves, domestic coal is likely to that obtain these licenses will have the freedom to sell remain the main source of primary energy for India; gas and crude oil directly in the domestic market. Nat- other options are supplements, not substitutes. Because ural gas transmission is currently handled exclusively by the Indian coal industry (dominated by Coal India the Gujarat Gas Company (GAIL, partly owned by Limited) could not meet the increasing demand British Gas).The company operates one major pipeline, requirements, the government established a new coal the Jazira-Vijaipur-Jagdishpur (HBJ) line,which brings policy in 1996.This policy aimed at increasing com- gas from the Western offshore into Haryana, through petition in the coal sector and opening the industry Gujarat,Madhya Pradesh,Rajasthan,and Uttar Pradesh. to private investment. The policy included phasing The major consumers along the HBJ line are fertilizer out budgetary support to Coal India,reducing import plants, gas-fired power plants belonging to the NTPC, duties, liberalizing marketing, and implementing legal and some other industrial users. and regulatory measures to enable private participa- GAIL and Mahanagar Gas (a British Gas/GAIL joint tion. However,there have been no amendments to the venture for gas distribution in Mumbai) handle natur- Coal Nationalization Act that would enable such al gas distribution. No gas is currently imported.Two participation. consortia are now lining up liquefied natural gas imports: Natural gas is likely to become a much more impor- Enron for its Dabhol power plant south of Mumbai,and tant part of India's fuel mix. Increased gas availability Petronet (a joint venture of ONGC, GAIL, the Indian would be a boon to the development of new power gen- Oil Corporation (IOC),and BPC) for plants in Gujarat eration capacity.Natural gas output in 1997 was 755 bil- and Kerala.8 At least 10 liquefied natural gas import lion cubic feet.Reserves at the end of 1997 are estimated schemes involving a range of current liquified natural at 17,400 billion cf, for an apparently healthy reserve- gas suppliers and prospective buyers have been pro- to-production ratio of 23 years. But production is still posed.The Enron and Petronet proposals are by far the relatively low, accounting for only about 7 percent of most advanced. Enron has made a supply deal with India's primary energy consumption,compared to coal, Shell for a project in Oman, while Petronet has signed which accounts for 56 percent (BP 1998).Any appre- a contract with Mobil for an liquefied natural gas pro- ciable increase in gas demand in India would quickly ject in Qatar.Both projects will export gas to India.GAIL reduce reserves unless they were supplemented by will be the exclusive gas distributor in the Petronet imports. For this reason, the quest for a reliable and deal. Enron hopes to market gas beyond the needs of affordable stream of imports has been an important goal the Dabhol power plant. of Indian gas sector policy for some years.However,pol- The government has set natural gas prices at very icymakers have been extremely reluctant to fully involve low levels, making both imports and expansion of 21 Power domestic production difficult. Major changes have As the central transmission utility,Powergrid will devel- occurred, however. India has increased gas prices to 75 op a seven-year investment plan that will identify new percent of import fuel oil parity,a first step in the direc- transmission projects to be offered to private investors. tion of full deregulation.The government also has accept- A national task force has been considering options ed that regional variation in gas prices may be necessary. for developing bulk power markets in each region.The (GAIL now supplies gas at a uniform price everywhere task force has recommended that daily system opera- in India.The HBJ line rate is essentially a single-zone, tions involve the dispatch of power owned by the cen- all-in-one tariff.)This step could be important in south- tral government per an agreed schedule, following ern India,where the proposed fuel for new power plants individual state allocations.Each state could schedule and is often petroleum. dispatch its own generation to meet the remaining The government is considering gas sector legislation demand,taking into account any agreed withdrawals from that would establish a new regulatory agency for the nat- the regional system.The new frequency-linked Unsched- ural gas transmission and distribution sector,clarify mar- uled Interchange Tariffs will be used to charge state ket structure, and elucidate the roles of GAIL and the electricity boards and central generators that deviate private sector. Separate regulatory provisions are being from schedules. developed for upstream oil and gas and downstream There is also growing interest in cross-border product sectors. power trade. The benefits from trading power lie in addressing the mismatch between supply and demand Development of Bulk Power Markets and Regional in the region, while using regional natural resources Power Trade better. India has large supply shortfalls and could be India's power system is divided into five regional sys- the main purchaser. Bangladesh and Nepal possess tems: eastern, northern, northeastern, southern, and considerable resources of low-cost power generation western. Weak or nonexistent connections between (natural gas reserves and hydropower potential,respec- these regions mean that there is little exchange of ener- tively), but these resources are located in areas far gy.The east cannot export much of its power surplus removed from the centers of rapidly growing electricity to other regions. The government plans to increase demand and are separated by national borders. Lower regional interchanges of power by developing the trans- than anticipated demand growth in Pakistan and excess mission system and creating the necessary pricing and power supply from Pakistani independent power pro- grid rules for bulk power markets. jects has motivated discussions about the sale of power The Electricity Laws Act, passed in August 1998, from Pakistan to India. The two countries are dis- aims to facilitate the development of the national grid cussing the possibility, but talks are at a preliminary and encourage private investment in the sector.Trans- stage. mission is defined as a distinct activity under the Act, thereby creating a regime for licensing transmission Policy Recommendations: Implementing service providers.The Central Electricity Regulatory Fundamental Sector Reforms Commission will grant licenses for interstate transmis- sion; state regulatory commissions will perform this The key challenge facing the sector is to improve finan- function for intrastate transmission. Licensing will be cial and technical performance of the distribution sys- for new service providers only--for example, building tems.The state electricity boards are a major drain on a transmission line with private funding that connects state government finances and are unable to provide ade- an independent power project to the main grid. quate service to consumers. The Central Electricity Regulatory Commission is overseeing the development of a grid code for system Reforming Distribution operation.The code will provide technical regulations Three states--Orissa, Haryana, and Andhra Pradesh-- for planning, operating, maintaining, and dispatching have embarked on a comprehensive reform program. the power system and is due to be issued in January 2000. This includes the establishment by law of independent 22 Power regulatory commissions to implement tariff reform. Box 2.3 Reducing Losses: Experience from Power The state electricity boards also have been transformed Privatizations in Latin America into corporate entities with private sector participation. Chilectra is the largest electric distribution company in Chile and In addition,Orissa has sold off controlling stakes in dis- distributes and transmits electricity in the Santiago metropol- tribution and a major stake in its thermal generation itan region. Chilectra has cut losses from 22.4 percent in 1983 assets. to 8.6 percent in 1996. Other states are establishing regulatory commissions, Edesur is the largest electric distribution company inArgenti- following the Electricity Regulatory Commissions Act na and has exclusive rights to distribute electricity in southern of 1998. A regulatory agency may be able to clarify and central Buenos Aires. When the company was privatized nontechnical losses and the reasons for the board's poor in 1992, it was suffering from high financial losses, due largely to theft and inadequate billing. Under private sector manage- performance. However, the establishment of a techni- ment, losses were reduced from 22.1 percent in 1993 to 10.1 cally competent and even independent agency is unlike- percent in 1996. ly to improve the operations of a state electricity board Edelnor distributes electricity in Lima, Peru's northern met- that has no real motive to improve efficiency. GRID- ropolitan area and an adjacent province and has cut losses CO, for example, had little success in Orissa in reduc- from 15.7 percent to 13.8 percent in the first year of private ing losses as a publicly owned entity. management. Fundamental changes are required in the boards' Source: World Bank staff. management and operations. Improving their perfor- mance will require the introduction of private man- agement,with a substantial financial incentive to cut losses processes as much as possible.This will enable tariffs to and increase efficiency. Experience from power priva- track costs over time.These bodies will also facilitate the tizations in Latin America suggests that the private sec- process of introducing tariffs that reflect costs and reduc- tor can minimize losses from theft,inadequate metering, ing current levels of cross-subsidies. and other factors in systems with high and low loss lev- els (box 2.3.) Corporatization will be an important first Financing a New Generation:The Megapower Policy step in introducing the private sector, and will require The government has announced plans to develop a legislation to allow the transfer of state electricity board megapower policy using the Power Trading Corpora- assets to successor companies. tion. Of the proposed methods of supporting the cor- poration,only central plan allocations would provide fresh Strengthening Regulatory Agencies credit enhancement.The extent to which these alloca- The establishment of regulatory agencies by several states tions will be able to support substantial amounts of following the Electricity Regulatory Commissions Act capacity is unclear. is a welcome step. However, legislation will be required Further support from the central government,includ- to transform the power sector's operations.This legisla- ing support through a company such as the PowerTrad- tion also could take the place of the notification process ing Corporation, would require states that benefited to that is now used to establish regulatory bodies. Regula- undertake major power sector reform. Reforms would tory agencies could be granted a wider range of pow- include establishing a regulatory agency with sufficient ers as well,comparable to those of commissions in Orissa powers,and introducing private management and own- and Haryana. These powers could include licensing, ership into the sector, especially in distribution. resolving disputes among service providers,and regulating their quality of service.This authority can be given to regulatory commissions established under the 1998Act, but at the discretion of the state government,which can also remove these powers. The need to strengthen the regulatory body arises partly from the need to insulate tariffs from political 23 Power Notes 1. However, when using higher estimates of captive capacity (of around 20,000 megawatts),peak deficit is estimated at about 10 percent. 2. In the absence of rigorous auditing of the state electricity board's financial posi- tions,financial statistics quoted in this report must be regarded as estimates. 3. Together, the states of Bihar, Delhi, and Uttar Pradesh reportedly account for more than 50 percent of total outstanding dues. 4. There are indications that state govern- ments overstate unmetered sales (for exam- ple,to agriculture) to avoid reporting growing system losses due to theft, broken meters, and underinvestment. 5. The 1948 Act also requires state govern- ments to provide funds to the state electric- ity boards to allow them to recoup the cost of politically mandated subsidies. In reality, these subsidies are hardly ever provided due to the poor financial health of most state governments. 6. According to the Ministry of Power, a total of 23,000 megawatts of projects have received techno-economic clearance.Anoth- er 54 projects amounting to 27,873 megawatts have received initial clearance. 7. Of these eight,Spectrum Power dropped out and has since commenced operations. Five counter-guarantees have been issued.The first of these, to Dabhol Phase I, provided a 12-year counter-guarantee from the central government for tariff payments by Maha- rashtra State Election Board and a termina- tion guarantee capped at $300 million.The government has since redefined the guaran- tee to cover payment of foreign debt upon termination. 8. Other firms are looking to join as well. 24 3 Urban Water and Municipal Services · Policy objectives. Provide water supply facilities to 100 percent of the population and sanitation facilities to 60 percent of the population. Strengthen the role of local authorities in opera- tion and regulation and encourage private sector participation. · Private participation. The government has pursued, and in some cases implemented, out-sourcing, management con- tracts, and build-operate-transfer projects. Concessioning is under consideration but private investment has been limited. · Key issues. Municipal governments must be financially sound and better managed if privately financed projects are to have a significant impact in the water sector. Pricing reform needs to be a priority. Market Structure and Performance maintenance and capital works in certain small cities. In other cities the board is only responsible for capital Authority over urban water and sanitation services lies with works, while municipal bodies handle operations and each state, although implementation of the 74th Consti- maintenance. There is an entirely separate, partially tutional Amendment,passed in 1992,is intended to pro- autonomous local water board in the capital city of Ban- mote decentralization of service provision to the municipal galore. In some cases, the Public Health and Engi- level (figure 3.1).The central government's role in urban neering Department of the state Urban Development water is generally limited to an advisory function through Department handles engineering planning,design,and the Ministry of UrbanAffairs and Employment.The gov- construction,while the local government water and san- ernment also influences the sector through centrally con- itation service provider manages operations and main- trolled infrastructure finance institutions such as the tenance.However,there are relatively few metropolitan Housing and Urban Development Corporation. agencies that supply only water and sanitation services. There are no standard institutional arrangements The Delhi Jal Board was recently created to provide for providing water and sanitation services. In Kar- these services, which were previously supplied by the nataka, for example, the state Water Supply and Sew- municipality.There are now boards in Delhi, Banga- erage Board is responsible for operations and lore, Chennai, and Hyderabad. 25 Urban Water and Municipal Services Figure 3.1 India Water Sector: Institutional Framework Center Satates Municipalities Policy Advisory role State-level water supply and Municipal corporations, (such as the Ministry of sanitation bosrds municipal-level water Urban Affairs and Employment) The 74th Amendment to the supply and sanitation Constitution enables local departments, and so on governments to assume a larger Bangalore Regulation role in urban services--this is Delhi leading to decentralization and Chennai formation of municipal-level Hyderabad boards. Operations Financing support (Housing and Urban Development Corporation) BOT/BOOT projects (no sizeable ones have reached financial closure) Source: World Bank Staff. Even service providers that are semi-autonomous in to municipalities.Kerala,for example,has transferred more theory are governed by an extensive set of government than 40 percent of its funds to municipalities and other regulations.There is also considerable political interfer- local governments. ence in operations,managerial decisionmaking,and tar- iff setting.The current institutional arrangements do not Operational Performance and Unmet Demand create the proper structures and incentives for improv- Although official statistics indicate a reasonably high ing operational efficiency and quality of service.They level of service coverage (85 percent of people living also do not encourage service providers to operate in a in urban have access to safe water), water availability is commercially oriented and financially sound manner. very low in practice. Of 27 Asian cities with popula- The 74th ConstitutionalAmendment,passed in 1992, tions over 1 million,India's four largest cities are ranked enables local governments to assume a greater role in the among the five worst cities in terms of hours of avail- planning,management,and financing of urban services. ability of water per day (tables 3.1 and 3.2). Between The approach paper to the Ninth Five-Year Plan states, 25 percent and 50 percent of water supplied is lost due "The responsibility for planning, operation and main- to leaks. Low water pressure and intermittent supplies tenance of the urban facilities will be passed on, wher- allow back-syphonage and contamination. ever not done, to the local bodies, in line with the 74th The lack of water availability disproportionately Amendment to the Constitution."Generally,this means affects the urban poor. For example, although the offi- that municipal bodies will take responsibility for providing cial per capita water supply is about 200 liters a day in services within their geographical boundaries. Delhi, about 30 percent of the city's 9 million people Although most states have ratified the amendment, have access to less than 25 liters a day. About 42 per- there are many problems related to realizing decentral- cent of the population is reported to have access to ization in practice.There is the need to make manage- basic sanitation services, but only 15 percent of the ment in medium and small urban areas more professional; households in low-income slum and squatter settle- build technical skills in accounting, procurement, and ments have toilets.About 21 percent of these settlements financial planning; and change the roles of the institu- have access to community toilets.About 61 percent of tions that now perform these functions.1 Another con- poor households use open spaces for personal sanitation cern is how to transfer resources from state governments (Sivaramakrishna, Dasgupta, and Buch 1993). 26 Urban Water and Municipal Services ities. The Plan envisions substantial support from the Table 3.1 India's Water Performance Compared private sector in meeting these targets. withThat of Neighboring Countries Access to safe water Availabilitya Framework for Ownership and Use of Water Resources (percent) 1993 (hours/day) 1995 Water provision is considered a state responsibility under India 85 4 China 83 24 the Indian Constitution (World Bank 1998a).Although Indonesia 65 18 the Constitution does provide for the regulation and Malaysia 89b 24 Pakistan 62b 17 development of interstate rivers and river valleys by the Sri Lanka 70b 22 central government, state authority is preeminent in a.Water availability figures are for the cities of Delhi, Beijing, Jakarta, Kuala practice.Exploitation of interstate river basins is to some Lumpur, Lahore, and Colombo. b. Data refer to a year other than 1993. extent governed by specific interstate agreements or tri- Source: ADB 1997b; World Bank 1999. bunal decisions, rather than a national policy outlining the principles by which states will share these resources. Investment Requirements The legal status of individual surface water abstrac- Municipal authorities traditionally have depended some- tion rights from rivers is unclear.The courts have rec- what on their own budget surpluses,but more on grants ognized riparian rights in which people living next to and loans from the central and state governments.Recent- natural waterways can use the water without disturb- ly, limited institutional financing from government- ing a similar benefit to other people. However, only a owned development finance institutions has benefited government permit can grant extraction of water from the sector.The funds available through plan allocations artificial bodies and waterways.Individual rights to water are less than those required for providing basic services. abstraction and use can be established only through Political considerations,rather than any rigorous project time-consuming litigation. It is unclear whether gov- preparation or appraisal process, generally decides allo- ernment assurances of water allocation can be withdrawn cation of these funds to different municipal authorities. in favor of new uses. Given the lack of definition and The levels of investment needed are dictated largely by security of surface water rights,there is considerable con- the sector objective to be achieved in the Ninth Five- fusion over whether these rights can be commercially Year Plan.The broad objective is to achieve 100 percent transferred. urban population coverage with water supply facilities There is more clarity on the status of groundwater and 60 percent population coverage with sanitation facil- rights. Indian law considers groundwater an easement Table 3.2 Summary of Results for Water Utilities Consumption Accounts Coverage Water availability (liters per Average tariff Metering Staff per 1,000 receivable (percent) (hours) capita/day) (US$/m3) (percent) connections (months) Calcutta, India 66 10 202 0.01 0 17.1 1.5 Chennai, India 97 4 0.25 25.9 25.9 5.8 Delhi, India 86 4 209 0.03 73 21.4 4.5 Mumbai, India 100 5 178 0.06 67 33.3 19.7 Beijing, China 100 24 96 0.05 100 27.2 0.1 Shanghai, China 100 24 143 0.07 100 6.1 11.1 Colombo, Sri Lanka 58 22 165 0.14 94 7.3 3.2 Dhaka, Pakistan 42 17 95 0.09 74 18.5 11 Faisalabad, Afghanistan 60 7 170 0.03 5 25 12 Jakarta, Indonesia 27 18 135 0.61 100 5.9 1 Karachi, Pakistan 70 1-4 157 0.09 1 8.4 16.8 Kathmandu, Nepal 81 6 91 0.14 83 15 4.5 Kaula Lumpur, Malaysia 100 24 200 0.34 100 1.1 0.5 Lahore, Pakistan 84 17 213 0.2 24 5.7 7 Manila, Philippines 67 17 202 0.23 98 9.8 6 Source: ADB 1997b. 27 Urban Water and Municipal Services connected to land.Ownership of groundwater thus falls There have been several initiatives to encourage pri- to the landowner; tenancy laws govern groundwater vate sector participation in providing urban water,sewer, uses, and groundwater rights cannot be transferred to and other municipal services in India.The Chennai Met- others.The existing legislation also treats groundwater ropolitanWater Supply and Sewerage Board outsourced as a private good,ignoring externalities.Only a few states the operations and maintenance of 14 sewage pumping have passed legislation concerning groundwater extrac- stations in 1992.These were followed by an additional tion. Legislation covers groundwater extraction in the 61 pumping stations,the operations and maintenance of Chennai metropolitan area.In Maharashtra an act passed 4 water boreholes, and an operations and maintenance to protect the drinking water supply provides for some contract for Chennai's new water treatment plant.Sewage regulation of groundwater quality. pumping stations that are contracted out have achieved cost savings of 45 to 65 percent over the time stations Private Sector Participation were operated by the board.Other municipalities,includ- ing Hyderabad, Rajkot, Surat, Nasik, Pune, and Tirup- A relatively limited number of build-operate-transfer pur have contracted out the provision of services.Rajkot (BOT) projects have been attempted in India so far.When has contracted out solid waste management, street light these projects sell water to a municipality or board, the maintenance,and other services to private companies and potential investor's main concern is the purchaser's abil- community groups. The municipality has maintained ity to pay for services.When these projects sell water sufficient capability to provide essential services in the to industrial consumers who have the ability to pay,addi- event of service disruption.Rajkot has reduced costs by tional complications arise, such as the requirement to 5 percent of total revenue expenditures and has achieved provide water at subsidized rates to residential con- some increases in service coverage. sumers located nearby.In the case of theTiruppur pro- As is common in most developing countries,private ject (table 3.3) out of a total of 185 million liters per water vendors play a substantial role in meeting demand. day (MLD), 14 MLD will be provided at highly subsi- Water vendors operating with carts or trucks and self- dized rates to residential consumers. supply by housing associations are examples of private Municipalities and water boards are looking to the participation meeting residential demand. private sector to provide financing to increase capacity Municipalities, state governments, and water boards and supply.Their weak financial condition leads to ques- have shown considerable interest in attracting the pri- tions about their ability to pay for increased supply. vate sector into funding, constructing, operating, and Increasing bulk supply will not solve these problems. maintaining facilities such as bulk water treatment plants. And if water pressure is increased,it could lead to greater However, no projects have reached financial closure so losses.Substantially improved commercial performance far, although the Tiruppur project is nearing this mile- and mechanisms for ensuring more cost-reflective tar- stone,and several projects have been abandoned,notably iffs are required if the sector is to generate financial in Hyderabad,Cochin,and Pune (table 3.3).The planned resources that meet the expected increase in demand. project in Goa has been shelved and the state govern- Table 3.3 Private Sector Initiatives in the Water Sector Cost Form of private Water purchase agreement City (Rs million) sector participation (million liters per day) Creditors' security Status Tiruppur,TN 15,000 BOT 185 State government guarantee Financing being arranged Bangalore, Karnataka 13,000 BOOT 500 State government guarantee Evaluation underway Hyderabad, Andhra Pradesh 5,000 BOOT 410 State government guarantee Project abandoned Cochin 4,000 BOT 200 State government guarantee Project abandoned Pune, Maharashtra 7,500 BLT 180 Debt provided by state Project abandoned Panjim, Goa 3,000 BOOT 165 State government guarantee Project may be relet as full concession Source: World Bank staff. 28 Urban Water and Municipal Services ment is considering the introduction of a statewide concession. There are two main approaches to structuring these projects.The first is selling water solely to a municipal- ity or water board,as in the abandoned Hyderabad pro- ject or the ongoing Bangalore project. The second is delivering water principally to industrial consumers who have a good credit base, as in the Tiruppur project. Several municipalities have attempted to tap the financial markets.Ahmedabad's bond issue, which was based on escrowing octroi revenues, is relatively well known.To attract private funds in Pune, bonds backed by octroi receipts were to fund proposed water projects. TheTamil Nadu Urban Development Fund finances pre- dominantly small projects within municipalities. This fund is composed of about Rs 191 crores. Of this amount, the ICICI Ltd. provided Rs 21 crores and Infrastructure Leasing and Financial Services Ltd. and access the domestic debt markets and pay for facilities the Housing and Urban Development Corporation constructed and operated by the private sector. provided Rs 15 crores each. Municipalities receive revenues from three principal Many international water operators are investigat- sources:transfers from state governments;taxes levied by ing opportunities for managing water service providers the municipality, such as octroi and property taxes; and in India.There are several potential obstacles to intro- nontax revenues, such as service charges for water and ducing the private sector. These include inadequate sanitation and rents from municipal properties. Gujarat information about the current financial and physical and Maharashtra are the only large states that still col- condition of the service provider and assets, tariffs well lect octroi; most other states have phased it out in favor below cost recovery levels, and the need to obtain the of less distortionary taxes. Service charges are generally full support of the workforce.Additionally,there is a need low and do not contribute much to overall revenues. to create regulatory oversight for other forms of pri- A formula-based approach for devolving funds vate sector participation such as leasing and concession would provide secure revenues for municipalities.There contracts. Many international water operators are try- are other ways to increase revenues as well.TheAhmed- ing to identify opportunities for concessions in medium- abad Municipal Corporation, for example, increased size towns in India. its revenue base by raising octroi revenues from Rs 13 billion to Rs 22 billion, and property tax receipts from Tariffs and Financial Performance Rs 4 billion to Rs 9 billion from 1993/94 to 1996/97. These revenue increases stemmed from measures to The financial performance of water and sanitation agen- improve collection ratios of taxes and to update assess- cies is generally poor.Many agencies fall short of recov- ment procedures. ering even operations and maintenance costs through tariffs (figure 3.2).One justification for low tariffs is that Policy Recommendations: Private Participation they allow the poor to receive essential services at afford- in Operating Water Systems able rates.However,the evidence suggests that the urban poor face significantly higher charges for water.2 Recent trends indicate that the urban water sector is The existence of a secure revenue stream,the finances highly inefficient, there are problems in meeting the to pay bills on time, and sound accounting and finan- growing demand from industry; and investment needs cial management practices will allow municipalities to exceed funding from existing sources.The public has 29 Urban Water and Municipal Services adjusted to some extent, meeting its needs by storing include financing a revenue gap, with explicit targets water to safeguard against shortages and purchasing that would diminish over time, or providing capital extra water from private suppliers. investments to match private sector resources. Main- The poor operational performance of this sector taining adequate prices while protecting consumer strongly parallels the performance of the power sector. interests will require the creation of an appropriate reg- The emphasis on bulk supply facilities financed by the ulatory framework. private sector and selling water to a public body or The strategies that are adopted need to provide a pol- industrial consumers mirrors the power sector's initial icy framework in which informal water providers can emphasis on independent power projects. Experience continue to provide services to the poor.The frame- in that sector since 1991 has shown that it will be dif- work must also address water resource and allocation ficult to finance projects without fundamental reform. issues, particularly in water-deficient areas. Although some of the bulk water and sewer schemes being negotiated may reach closure,they are unlikely to Establishing a Regulatory Framework solve the fundamental problems besetting water systems. The continuity and stability of the contractual envi- India's urban water supply suffers mainly because it ronment will be critical to private participation in lacks a commercial orientation. Under an appropriate the water sector.The nature of the regulatory regime regulatory framework,the private sector can provide the will be driven by the extent of that participation. For management expertise and incentives to reduce losses example, a well-written management contract could and expand service.However,India has yet to introduce be enforced largely through contract terms. A more private management in this area.An appropriate strat- complex approach, such as a concession,in which the egy would combine tariff increases with improvements private sector has a much greater financial stake,would in service standards and water availability,which in some require a tight contractual framework and an oversight cases will require substantial investments. role for an independent agency.These would ensure Management contracts may be an entry point. that tariff and investment decisions are insulated However, without full management control (includ- somewhat from political interference, as in the power ing the authority to hire and fire workers and the abil- sector. ity to provide incentives for good performance), such contracts are unlikely to improve operating perfor- Box 3.1 Private Participation in Water and Sewage mance significantly. Some private operators have sug- Projects in Developing Countries gested using management contracts to gather Nearly 100 water and sewage projects involving private par- information about the system to allow the introduc- ticipation were implemented by the end of 1997. Of these tion of a more substantial form of private sector par- projects, just over 40 percent were in Latin America. South Asia is the only part of the world where substantive private par- ticipation,such as concessioning.One alternative would ticipation has not been realized, although several projects are be for the municipality or water board to undertake under consideration.An analysis of these projects shows that extensive due diligence to give bidders a concession around half have been concessions; these account for 80 per- with all the relevant information.This approach would cent of private investment in the sector. avoid providing an advantage to a management con- tractor who is responsible for collecting the informa- Private Water and Sewer Projects in Developing Countries tion and then allowed to bid. (1990­97) The issue of cost recovery needs to be addressed Total investment if the private sector is to assume investment respon- Type Projects ($ millions, 1997 prices) sibility (box 3.1). Price increases may need to be Concession 48 19,909 Greenfield 30 4,037 phased in over time to better match improvements in Operations and management 13 na water availability and quality, and to allow a transition Divestiture 6 997 Total 97 24,950 from the current low price levels. Targeted govern- Source: Silva,Tynan, and Yilmaz 1998. ment support may be required. Such support could 30 Urban Water and Municipal Services Under the 74th ConstitutionalAmendment,munic- ipalities are increasingly providing public services such as water and sanitation. This change raises questions about the appropriate focus of regulation and the divi- sion of responsibilities between the municipality and the state regulator.One approach could be to establish joint powers,for example allowing the municipality to grant the contract or license but giving powers of enforce- ment and monitoring to a state regulatory agency.Under this approach, for example, revisions or terminations could be done by the municipality but only following the recommendations or clearance of the regulatory body. Policy Initiatives from the Central Government There is a role for the central government in promot- ing sectoral reform.The development of a benchmark- ing scheme that compares the technical and financial performance of water systems in towns across India would help stimulate public debate.The central gov- ernment also should consider enhancing fiscal support for municipalities that are attempting to reform water distribution. Notes 1. See table 2.1 of World Bank 1998b for a summary of the issues to be confronted in ensuring effective and efficient decentral- ization of these services. 2. A recent study in Dehradun,Utter Pradesh estimated that those with access to a public tap spent 6.7 percent of their income on water,while those with access to an individual connection spent only 1.6 percent of their income on water.Additionally,the poor often pay high prices to purchase water from ille- gal suppliers or private suppliers such as water tankers. 31 4 Roads · Policy objectives. Expand the capacity and quality of national and state highway networks, and attract private sector financ- ing to the sector. · Private participation. Numerous bridge and highway bypass projects have been privately financed; larger projects are being pursued. · Key issues. The structuring of privately financed deals, includ- ing the level of dependence on tolls and the extent of sup- port from the public sector, needs to be carefully considered. Sector Performance every 12 years;demand for passenger transport is expect- ed to double every 8 years (figure 4.2). Of the total Responsibility for managing India's national highways 34,000 kilometer national highway network, 5 percent is shared by two central agencies, the Ministry of Sur- is four lanes, 80 percent is two lanes, and 15 percent is face Transportation (MOST) and the National High- one lane.1 The aggregate length of roads has increased way Authority of India (NHAI), along with various eightfold,but traffic has increased almost twentyfold.The state public works departments.Both the central and state length of national highways has increased only 1 per- governments are interested in attracting private sector cent a year,and the length of state highways has increased funding to increase the capacity of roads. Several pri- 1.8 percent a year. Investments in road development in vately financed bridge and bypass schemes are in oper- India have emphasized secondary or local roads rather ation. More are under construction, and additional than arterial highways.Arterial highways receive 20 per- schemes are under negotiation or out for bid. cent of total road expenditures, although the country's India's total road network now approaches 3 million national highways carry 40 percent of India's road traf- kilometers. It is the second largest road system in the fic. Expenditures on national highways also declined world, but there is a significant variation in construc- from 1.4 percent of the total plan during the 1950s to tion quality and road conditions nationwide. India's 0.6 percent today. highways carry approximately 60 percent of the coun- In preparing for the Ninth Five-Year Plan,the Plan- try's total freight, measured in billions of tons per kilo- ning Commission declared strengthening and improv- meter (figure 4.1).This demand is expected to double ing crucial sections of the national highway network a 33 Roads priority.These sections are the major highways linking public sector is still providing substantial support (table Delhi, Calcutta, Chennai, and Mumbai (the "Golden 4.2).There are relatively few large-scale projects under Quadrangle") and the North-South and East-West cor- construction.The NHAI is embarking on a program to ridors.Recent traffic counts on these corridors indicate attract private financing and expertise for the construc- substantial congestion on the routes identified by the tion and operation of roads.One privately funded express- Planning Commission (table 4.1). Forecasts of traffic way is under consideration from Bangalore to Mysore. volumes suggest that many four-lane stretches will have The profitability of the project is determined to a con- inadequate capacity by 2005.2 siderable extent by associated real estate development.3 Because private toll roads are a relatively new phenom- Private Sector Initiatives to Date ena in India, it is not surprising that the first projects (bridges and bypasses) have been fairly small. Experience suggests that smaller projects,such as bridges MOST and the NHAI have signed concessions with and bypasses, can attract private financing, although the the private sector for the development of nearly 20 Table 4.1 Daily Traffic Flows on Segments of Priority Roads Corridor National highways Cars Buses Trucks Total vehicles Delhi-Mumbai Delhi-Jaipura 8 4,328 1,591 10,370 18,088 Jaipur-Ajmer 8 2,208 1,603 9,850 14,386 Vadodara-Talasri 8 4,212 1,322 15,775 22,792 Delhi-Calcutta Delhi-Agraa 2 6,018 1,452 5,794 19,159 Durgapu-Palsit 2 1,349 412 9,426 12,383 Calcutta-Chennai Calcutta-Baharagoda 6 1,754 1,648 7,641 12,474 Pannikoil-Khurda 5 4,839 2,326 7,133 19,308 Vishakhapatnam-Vijayawada 5 3,173 2,765 6,368 14,227 Mumbai-Chennai Pune-Kolhapur 4 7,054 4,622 8,848 22,107 Hiriyur-Bangalore 4 1,893 1,148 8,039 12,249 Ranipet-Chennai 4 5,231 2,450 7,716 17,987 a.These segments have four lanes or are being expanded. Source: India, Ministry of Surface Transportation 1997. 34 Roads Table 4.2 Privately Financed Road Projects Length Concession Estimated cost Name of project (kilometers) period (Rs million) Status NHAI/MOST projects Thane-Biwandi Bypass Two-laning (NH 3/4) 24 7 years, 8 months 170 In operation Udaipur Bypass (NH8) 11 10 years, 2 months 240 In operation Coimbatore Bypass (NH17) 33 30 years 900 Construction started 11/97 Durg Bypass (NH6) 18 30 years 680 Financial closure achieved Under construction Nellore Bypass (NH5) 18 29 years 730 Time period for financial closure has expired Hubli-Dharward Bypass (NH4) 24 26 years 750 Under construction. Financial closure achieved Six Bridges, A.P. (NH5) -- 35 years 500 Financing being sought 2nd Narmada Bridge (NH8) -- 12 years 1,130 Construction started 12/97 Chalthan ROB (NH8) -- 2 years 100 In operation Nardhana ROB (NH6) -- 12 years, 10 months 340 Financing being sought Patalganga Bridge (NH17) -- 15 years, 10 months 330 Facility expected to be completed 1999 Koratalaiyar Bridge (NH5) -- 10 years 300 Financing being sought Nasirabad ROB (NH6) -- 10 years, 11mos 105 Financing being sought Wainganga Bridge (NH6) -- 18 years, 9 months 326 Financing being sought Mahi Bridge (NH8) -- 7 years, 8 months 420 Financing being sough Kishangarh Bypass ROB (NH4) -- 4 years, 3 months 167 Financing being sought Khambadki Tunnel -- -- 400 Financing being sought Kaman-Paigon (NH8,3) -- -- 240 Financing being sought Thane-Biwandi Four-laning (NH 3/4) 24 -- 900 Financing being sought State government projects Pali Bypass, Rajasthan 7 -- 102.5 Opened 6/98 Karaunti Bridge, Rajasthan -- -- 22.5 Opened 2/97 Rao-Pitanpur Bypass, Madhya Pradesh 11.5 -- 150 Opened 11/93 Delhi-Noida Toll Bridge -- 30 4,000 Financial closure achieved Bangalore-Mysore Expressway -- -- 7,870 Government of Karnataka acquiring land Mahakali Flyover (Mumbai) -- BLT 1,400 Construction started; financial closure achieved Vadodara-Halol Bypass (Gujarat) 35 30 1,350 Financial closure achieved Ahmedabad-Mahesana (Gujarat) 63 30 1,750 Construction started, financing being arranged Source: World Bank staff. bridge and bypass projects,costing Rs 10 billion (approx- 2.1 percent of GDP.About one-third of this amount imately $240 million).Because concessions were award- (Rs 113 billion) was spent on state and national roads ed to run from the date of signature,construction began and highways in 1995­96.The Central Road Fund before financial closure was achieved in several cases.4 raises approximately Rs 200 million for road devel- Of the facilities that are now operational, the Thane- opment. However, these funds are retained in the Bhiwandi Bypass in Maharashtra is earning revenues national consolidated fund. 60 percent above projections. The Ministry of Finance determines allocations for The NHAI is developing several other projects that the road sector.The 1998 budget introduced an addi- will be offered for private financing (table 4.3). These tional Rs 1 levy on petrol.The funds derived from this include projects to create four or six lanes in some stretch- levy, estimated to be Rs 7.9 billion, are earmarked for es of national highways.The Jaipur-Kishangarh portion the NHAI for the future development of national high- of National Highway 8 will be the first project offered; ways.6The 1999 budget provided for a tax of Rs 1 per six bidders have been prequalified for this project. liter on diesel to generate about Rs 50 billion a year. These funds will be distributed among rural develop- Road User Charges: Financing Network Development ment, roads, and railways in a 50-40-10 ratio. Rural India has a Central Road Fund and a history of excise development investments will mainly improve roads. and import duties, fees, and taxes for road users.5 The road component will be divided among the nation- Total road user charges in India currently account for al highway system, which will receive 65 percent of 35 Roads Box 4.1 Tolling National Highways in India In April 1998 the government began toll collection on an 80- company (as it was for tolls on bridges).The winner, Ganpathi kilometer section of National Highway 8 from Jaipur to Kot PrivateTolls Limited, bid Rs 324 million for the first year (end- Putli, which was recently expanded to four lanes.Tolls are col- ing in March 1999).The contract may be extended for a sec- lected at a single toll plaza near the Jaipur end.Trucks, which ond year as well. Because National Highway 8 is a public road, constitute 90 percent of traffic on this road, are charged Rs the NHAI and MOST receive the tolls, which are deposited 140 (4.3 cents) per kilometer.Cars are charged Rs 40 (1.3 cents) into an escrow account.The surplus above the amount owed per kilometer.The reaction to the tolls is inconclusive over such to NHAI-MOST, based on a monthly average of the annual bid, a short period, but the NHAI estimates that about 12,000 is returned to the private contractor. NHAI and MOST are vehicles use the road daily and that average toll receipts are examining the experience with this highway to determine if $25,000 a day. Toll collection was auctioned off to a private tolls can be applied more widely. Table 4.3 National Highway Authority of India's Project Pipeline: Private Financing Length Project cost Project (kilometers) (Rs million) Status Expansion of national highways Jaipur-Kisangarh (NH8) 93 3,500 Bidders prequalified. Concession document being finalized. Hosur-Krishnagiri (NH7) 61 2,250 Bidders prequalified. Concession document being finalized. Chinglepet-Tindivanam (NH47) 55 2,100 Bidders prequalified. Concession document being finalized. Delhi-Gurgaon Six-laning (NH8) Project structure to be finalized. Durgapur Expressway 65 300 Project structure to be finalized. Ahmedabad-Vadodara Phase II 93 3,400 Project structure to be finalized. Bypass and bridge projects Amravati Bypass -- 900 Bidders prequalified. Second Vivekananda Bridge -- Preferred consortium has been selected. Jaipur Bypass -- 700 Project structure to be finalized. Chennai Bypass -- 710 Project structure to be finalized. Tiruneveli Bypass -- 540 Project structure to be finalized. Belgaria Bypass -- 1,000 Project structure to be finalized. Talpuna Guliba Bypass -- 600 Project structure to be finalized. Namakal Bypass -- 100 Project structure to be finalized. Akola Bypass -- 675 Project structure to be finalized. Source: NHAI 1999. funds, and the states, which will receive 35 percent of cases concessionaires have received revenues from exist- funds.Funds will be used largely for building four lanes ing assets. For the Second Narmada Bridge, the con- on national highways and providing financial support cessionaire will receive revenues from the existing bridge to the private sector to construct national highways and once financial closure has been achieved. expressways on a build-operate-transfer (BOT) basis.The Table 4.4 presents a sample of the support private- rail component will be used to construct bridges over ly financed road projects receive.A range of support is railways at staffed and unstaffed crossings.The proposed provided. Real estate rights are being granted in the tax will be used primarily for development rather than Bangalore-Mysore Expressway project and are available maintenance. to concessionaires in the Noida Bridge andVadodara- Halol Bypass projects. There is extensive recourse to Risk Allocation and Incentives in Projects to Date the public sector in many transactions.Under the Noida Projects that have been completed or reached financial Bridge andVadodara-Halol Bypass projects,full recourse closure have involved both the construction of a new is provided to the public sector, with senior debt being facility (such as the Second Narmada and the Delhi- covered even in the event of a concessionaire's default. Noida bridges) and capacity expansion on an existing Government agencies have taken an equity stake in route (such as with theThane-Biwandi Bypass).In some a special-purpose contract vehicle established for the exe- 36 Roads Table 4.4 Public Support Provided to Privately Financed Road Projects in India Project Public agency Nature of support and government participation Durg Bypass NHAI NHAI subordinated the loan in the event that revenue reaches a shortfall over projected amounts of Rs 50 million or more.The termination package covers senior debt in all events of default. Pali Bypass Government Traffic guarantee. of Rajasthan NH8 Jaipur-Kisangarh NHAI Revenue shortfall loan. Equity support in the form of a grant.The termination package four-lane expansion covers senior debt in all events of default (post-construction). More details are provided in table 4.5. Moradabad Bypass NHAI Special-purpose contract vehicle established in which NHAI and a private EPC contractor own equity.The bulk of funds are public. Vadodara-Halol Bypass Government The termination package covers senior debt in all events of default. Equity stake from the of Gujarat government. Development rights can be granted to concessionaire if an independent engineer judges revenues from concession insufficient to earn a 20% return.The government will provide 20-year term convertible capital dividend of 1% up to year 12. Interest thereafter will give a 17% yield over the life of the instrument. Delhi-Noida Bridge Municipality The termination package covers senior debt in all events of default, even concessionaire of Noida default. Equity stake from Noida. Development rights can be granted to the concessionaire if an independent engineer judges revenues from concession are insufficient to earn a 20% return. Source: World Bank staff. cution of many projects.The municipality of Noida has invested. If this cap is not realized within the pre-spec- taken equity in the Delhi-Noida toll project, equivalent ified concession period,the term will be extended.The to 8 percent of project costs.The NHAI has established concession term can be lengthened to allow the pro- a special-purpose vehicle to construct the Moradabad ject to meet the target,providing some insurance against Bypass, although the engineering-procurement- traffic being lower than anticipated.However,this cost- construction contractor is only providing private equity of-service style regulation reduces the operator's poten- to a limited extent. tial upside from increased traffic flows. Toll Rates and Performance Incentives The National Highway Authority of India's Concession The basis for NHAI and MOST projects awarded to Document for the Expansion of National Highways date was the estimated lowest cost to facility users. The NHAI developed a concession document specifi- Since the tolls and traffic levels used in the bid were cally for the Jaipur-Kisangarh section of National High- pre-specified, awards were based on the shortest con- way 8.The authority envisions that the document will cession period.The concession period is fixed by the serve as a template for awarding contracts with a value bid and cannot be adjusted if demand is higher or of more than Rs 100 million. (MOST is reportedly lower than expected.Tolls for bridges are specified,but developing a model document for smaller contracts for not for bypasses, where there are free routes. On the bridges and smaller bypasses, for example.) Table 4.5 18 kilometer Durg Bypass, the concessionaire is plan- provides an overview of the key features of the concession ning to charge Rs 50 per truck in the first year, fol- agreement, and table 4.6 provides an analysis of risk lowed by Rs 60 in the second year.Thereafter the toll allocation under the contractual framework.7The con- will be linked to the wholesale price index.Although cession agreement includes a state support agreement, operators gain from increased traffic, they do not have under which the state government of Rajasthan would any specific performance incentives linked to the qual- commit to cooperating in constructing and imple- ity of service,such as the speed of emergency response menting the project. There is also a provision for an systems or the removal of vehicles blocking traffic lanes. arrangement allowing senior lenders to transfer and In the Vadodara-Halol and Delhi-Noida projects, assign the concession agreement in case of concession- there is a 20 percent cap (in nominal terms) on funds aire default on the terms of the contract. 37 Roads Table 4.5 Key Features of Concession Agreement for Jaipur-Kishangarh (NH-8) Six-laning Element Allocation of risk and responsibilities Concession length 15 years from financial closure. Financing package provided NHAI provides "grant" of sum bid by concessionaire, applied to funding the equity part of the capital.This grant by NHAI cannot be more than 25 percent of the total project cost and no more than 50% of equity subscribed. The concession will be awarded to the bidder who asks for the least amount of the grant. Revenue shortfall loan In the case that direct or indirect force majeure results in revenues below subsistence levels, NHAI will provide a revenue shortfall loan to cover senior debt repayment and operations and maintenance costs, with interest of the State Bank of India's prime lending rate. Operations and maintenance costs will have a ceiling of 2% of project costs. Toll rates Rs 0.40 per kilometer for passenger cars, jeeps, and vans, Rs 0.70 per kilometer for light commercial vehicles, and Rs 1.40 per kilometer for trucks and buses.These rates will be effective from July 1, 1997. Indexation: 100% to the wholesale price index. Dispute resolution Indian Arbitration Act. Source: World Bank staff. Table 4.6 Risk Allocation under the Jaipur-Kishangarh Concession Agreement Phase and risk Risk allocation Predevelopment phase Projects may not reach financial closure If financial closure is not reached within 180 days from the effective date of concession, because of delays in securing permits and penalties apply of Rs 100,000 a week. If financial closure is not reached within 270 days from authorizations, negotiating third party the effective date of concession, NHAI can cancel the agreement and seek payment under bid contractual agreements, and so on. security or performance bond. These provisions do not apply if force majeure incidents are responsible for delays in reaching financial closure. Construction period Construction delays and overruns The government's equity support grant is paid based on financial disbursement targets. Delays in achieving operations date lead to payments to NHAI. Performance bond (Rs 10 crore) provides comfort, but can be cancelled after the concessionaire has spent 25% of project costs. There is no cap on the number of change orders that NHAI can make. NHAI will make payments if delays arise due to failure to secure right-of-way. Cost overruns due, for example, to inflation, Tolls are indexed to 100% of the movement in the wholesale price index. No indexation to exchange rate movements. Concessionaire adherence to technical Performance bonds can be cancelled after the concessionaire has spent 25% of project cost. standards NHAI and concessionaire jointly pay independent engineer. Operating period Quality deficiencies with operations and NHAI can terminate concession if concessionaire does not maintain required permits or maintenance standards. Concessionaire is not required to post performance bond, create maintenance reserve fund, or carry insurance. Concessionaire can sell down equity stake from 51% to 33% after two years of operations. Gross revenue deficiencies, such as low traffic Revenue shortfall loan if force majeure reduces revenue below subsistence levels (see table 4.5). levels, non-payment/non-collection of tolls NHAI to repay 90% of senior debt in concessionaire event of default. State governments cannot build a competing highway for first eight years of concession. Increases in operations and maintenance costs Operations and maintenance support grant provided from the balance of the Equity Support Grant. Force majeure and termination Nonpolitical NHAI pays 90% of senior debt. Indirect political NHAI pays 100% debt due, 110% of equity. Political NHAI pays 100% debt due, 150% equity. NHAI also backstops payments owed by state government to the concessionaire. Concessionaire event of default NHAI pays 90% of senior debt. (post-construction) Creeping expropriation State support agreement requires the government of Rajasthan to grant all required permits, facilitate access to infrastructure, ensure that barriers are not placed on the highway by state agencies, provide police surveillance, and assure that taxes and tolls are not imposed. Source: World Bank staff. 38 Roads Key features of risk allocation include the following: streamlined the process,at least for national highway pro- · The NHAI allows only 180 days to achieve financial jects.A January 1997 ordinance amending the Nation- closure--a tight time period,even for countries with al Highways Act allows the central government to established private toll-road programs.This time peri- acquire land for public highways. In April 1997 the od is even tighter when considering that the condi- Environment Protections Act was amended by notifi- tions include execution of the state support agreement cation from the Ministry of Environment and Forests. and a tripartite agreement among the state govern- The amendment clarified procedures for environmen- ment, the NHAI, and the Reserve Bank of India. tal clearances required for road construction.Under this · Surprisingly,the concessionaire is not required to cre- notification projects related to the widening and strength- ate a maintenance reserve fund. Allowing for can- ening of roads with marginal land acquisition along cellation of the performance bond after only 25 existing alignments do not require Ministry of Envi- percent of total project costs have been spent is also ronment and Forests clearance. Exceptions are made unusual, given that relatively little physical progress when the road passes through "ecologically sensitive will have been made. areas,such as National Parks,Sanctuaries,Tiger reserves, · The support to be provided by the NHAI represents and Reserve Forests" (Gazette of India April 10, 1997). a reduction on that offered by the public sector for other road projects in India.The revenue shortfall loan has Policy Recommendations: Developing a been defined to be activated in events of direct or indi- Privately Financed Road Program rect force majeure,which means that the NHAI is not simply agreeing to provide support for risk associated Although experience shows that bridges and bypasses with traffic levels. However, the interest rate at which can be financed as toll facilities,there is little experience this loan will be made is relatively concessional. with highway tolls.Most projects in India have had exten- · The NHAI government grant has caps relative to sive public sector support. Higher levels of public sup- the total project cost and total equity.Any remain- port are to be expected during the development of a road ing funds that cannot be applied to equity can be program. However, certain forms of public sector sup- used to support operations and maintenance. The port (such as covering senior debt in the event of a con- grant is provided with fairly limited conditions, cessionaire default) should be eliminated following the linked more to disbursement of funds than to phys- first phase of successful concessions.Lenders should take ical progress.The grant essentially covers construc- some commercial risk, including evaluation of the con- tion risk,which the private sector may be better able cessionaire's capabilities. to handle and assess than the government. Each project will have its own commercial, finan- · Tolls are not indexed to foreign exchange rate move- cial,and policy risks.Government support should be tai- ments.The government also has not provided any lored to the characteristics of each project.The key is exchange rate guarantees in lieu of toll adjustments to develop public sector support mechanisms that are to provide cover for foreign currency debt.Exchange well targeted and easy for government to monitor. rate guarantees can expose the government to sub- stantial liabilities. Incentive Structures and Demand Risk in Road Concessions · Because of the NHAI's commitment to meet debt Chile has introduced a new system of awarding projects in the event of termination (post-construction), based on the lowest present value of gross revenues at including breach of contract by the concessionaire, a concession auction where the concessioning author- senior lenders face reduced risk. ity sets toll and discount rates.The concession does not have a fixed term but ends when the concessionaire earns Delays with Permits and Access to the Site the value bid. One advantage of this approach is that it Major concerns for private toll-road developers in India reduces the demand risk facing the concessionaire; if are delays associated with obtaining clearances and right- demand is less than anticipated,the concession is length- of-way free of encumbrances.Recent amendments have ened.Establishing a measurable value of the concession-- 39 Roads the amount that is bid--also simplifies issues related to ratios, traffic volumes, or gross revenues, or after a compensation for early termination. fixed period. In the Noida Bridge andVadodara-Halol Bypass pro- · Toll-road utility approach. Variations on the toll-road jects the concession period is not fixed, but is varied to utility approach have been developed with varying allow the concessionaire to earn a 20 percent return on degrees of success in France, Italy, Spain, and the the cost of funds invested.The variable concession peri- United States. Basically, in the toll-road utility od again insulates the concessionaire against some demand approach project financing is converted into corporate risk.However,rate-of-return regulation requires careful financing once several projects are operating suc- monitoring of the cost base used to calculate returns. It cessfully. Future expansions are funded by retained will be important to use a genuinely independent eval- earnings and bond issuance backed by the corpo- uator, rather than one selected by the concessionaire. rate standing of the toll-road company. Both incentive structures limit the upside potential facing the concessionaire.If demand is better than fore- Notes cast, the concession ends sooner.The SR-91 toll road in California,which had a rate-of-return cap,also includ- 1. An additional 11,000 kilometers of state ed performance incentives related to high occupancy highways was recently added to the nation- vehicle use and user safety.The benefits of such an incen- al highway network. tive must be offset against the likely monitoring costs. 2. In India a two-lane road is regarded as congested once total vehicle flow is around 15,000 vehicles a day, 50 percent of which Different Approaches for Public Support are commercial vehicles.The figure for four- In addition to the measures adopted so far for public sup- lane stretches is around 40,000 vehicles a day. port to privately funded road projects (which include traf- 3. Authorization to transport and sell water fic guarantees and extensive coverage of debt in nearly to the townships is also part of the conces- all instances of termination; see table 4.4), India could sion agreement,as is authority to develop and consider some approaches tried in other countries: sell up to 300 megawatts of power. About · Shadow tolls.Shadow tolls can be structured in two ways. 20,000 condominiums (for approximately In the first a capacity payment is made as long as the 100,000 residents) are expected to be built concessionaire complies with certain key technical in each township. requirements (such as timely completion and main- 4. For example,the Concession Agreement tenance) or social requirements (like environmental). for the Second Narmada Bridge states that The capacity payment can be sized to cover a certain it should be in operation by December 2000. proportion of the project's fixed costs,principally relat- Work began in December 1997, well in ed to debt service. In the second a variable payment advance of financial closure. is based on actual use by vehicle type.The greater is 5. The central government receives the rev- the weight on the variable payment, the lower is the enues from excise taxes and import duties on government's exposure to demand risk.The govern- vehicles and accessories,tires and tubes,high- ment is currently considering an approach based on speed diesel,and motor oil.States receive the an annual payment to cover both investment and oper- revenues from fees and taxes on vehicles (sales, ations and maintenance costs.This would expose the registration,and licensing),fuel and lubricants, private investor to no demand risk. and the movement of passengers and goods. · Minimum revenue guarantees and fall-away provisions. 6. A 1988 Cabinet Resolution envisioned Another option is to award a project based on the directing revenues from fuel levies to the states. lowest minimum revenue guarantee.These guaran- 7. The concession agreement is undergoing tees could be reduced or eliminated as the project changes related to the concession fee and expansion of the facility from four to six lanes. achieves certain minimum credit ratings (either for the project or the country), debt service coverage 40 5 Ports · Policy objectives. Expand port capacity through new projects and productivity improvements; secure private financing for 25 per- cent of total investment over the Ninth Five-Year Plan period. · Private participation. Five greenfield projects are under con- struction, and many other initiatives are planned. · Key issues. Poor productivity and underinvestment at the major ports has led to inefficient use of existing capacity; inland transportation bottlenecks complicate port expansion. Market Structure and Performance an amendment to the Major PortTrustsAct.This amend- ment will allow the PortTrusts to invest in equity in com- About 6,000 kilometers of Indian coastline is serviced by panies established to provide operating services at the 153 ports (figure 5.1). Of these, 11 have special status as ports.A parliamentary committee is examining the leg- major ports under the central government's purview. islation.The Ministry of SurfaceTransportation (MOST) State governments oversee the remaining ports.The major has indicated that corporatization through this route ports are currently operated as Port Trusts, which exer- could be considered for some of the newer ports, such cise both statutory and commercial functions, following as Jawaharlal Nehru and Haldia. Corporatization is less what is commonly known as the service port concept. likely for older ports such as Mumbai, which are sub- When the Major Port Trusts Act was enacted, six ports stantially overstaffed and have less favorable commercial were named (Calcutta,Mumbai,Chennai,Cochin,Kand- prospects.The government also has approved schemes la,andVishakhapatnam).Since then,five ports have been allowing joint ventures between Indian ports and pri- added (Paradip,Tuticorin,New Managalore,Mormugao, vate companies (both foreign and national) to improve and Jawaharlal Nehru).States administer their ports either productivity and efficiency at the ports. through state maritime boards, as in Gujarat, Maharash- The government also plans to establish the Ennore tra, and Tamil Nadu, or through government depart- Port (which is under construction) along different lines ments.Maritime boards have structures and powers similar from PortTrusts.The aim is to create a corporatized ven- to those of the board of trustees of a major port. ture,with the government initially owning all the equi- The government has introduced legislation that will ty in the controlling company.A portion of this equity permit gradual corporatization of the major ports through would be divested to strategic operators. However, the 41 Ports Figure 5.1 India Ports Sector: Institutional Framework Center States Policy Ministry of Surface Maritime State departments, Transportation Development state maritime Council Regulation boards Tariffs Tariff Authority for Major Ports Major port trusts Operations Greenfield port Minor ports development Joint ventures with Leasing and other private sector outstanding to (new ports) private sector Source: World Bank Staff. corporation would have both regulatory and opera- dards on cargo-handling operations (table 5.1).The total tional roles. Under the landlord port scenario, the port costs of moving a container through a terminal are on aver- authority only owns land and basic infrastructure,which age 70­80 percent greater in India than in Japan and the is leased to operators who provide services. United States, where labor costs are much higher. There is concern at the national level that there has Low handling productivity rates mean that ships been a lack of coordination in developing new port facil- spend a long time at berth.The Shipping Corporation ities and perhaps a lack of strategic oversight in bring- of India reports that its ships spend 52 percent of their ing the states and the central government together. A time in ports. Consequently, ship turnaround time in National Maritime Council was recently established to Indian ports is commonly between five and six days, provide coordination among government bodies con- compared to one day or less in other ports in the region. cerned with port development,particularly among state Additionally, waiting times to get alongside the berth and central government agencies. are considerable.Waiting time for a berth in Chennai in October 1998 was five or six days.As a result,region- Current Operational Performance al feeder operators recently decided to impose a sur- India's total port throughput was 287 million tons in charge ($30 per laden container and $10 per empty 1997­98 (April 1­March 31); 251 million tons (88 per- container) on inbound and outbound containers between cent) went through the 11 major ports.The government estimates that the current capacity of the major ports is Table 5.1 Productivity in Container Handling: overstretched by 217 million tons, substantially below International Comparisons throughput levels.India's ports have struggled to keep up with the increase in demand. Average ship turnaround Handling productivity Throughput per day (moves per ship hour) (TEUs)a time increased between 1990 and 1996, reflecting a 30 Chennai -- 310 percent increase in the number of vessels sailing from the Jawaharal Nehru 15 800 major ports and only a 10 percent increase in capacity. Bangkok/Laem Chabang 35 1,300 Colombo 38 1,400 Significant productivity gains could be achieved at a.Twenty-foot equivalent units. major Indian ports by moving closer to average world stan- Source: Fairplay 1996a, 1996b. 42 Ports Chennai and Singapore, Port Klang, and Colombo. 5.2).Approximately 45 million tons,or around one-third External trade procedures, particularly customs, also of capacity,is expected from the private sector,in addi- reduce overall port productivity. Containers usually tion to 31 million tons from captive schemes.1The gov- spend 10 to 25 days in ports; an acceptable standard is ernment also anticipates productivity increases of around 2 to 4 days.Customs clearance can take up to five days; 11 million tons. the average is three or four. In the longer term,minor ports are expected to play an increasingly important role in meeting India's trans- Meeting the Growing Demand for Port Services port needs.The Planning Commission estimates total Increases in demand are likely to require an increase in capacity of the major ports at about 550 million tons a capacity of more than 70 percent during the period cov- year; by 2020 MOST projects that demand is likely to ered by the Ninth Five-Year Plan. Port capacity, based be about 1,200 million tons, indicating the important on current operating practices,is around 217 million tons role that minor ports will play. for the 11 major ports.In 1997 total traffic was 251 mil- lion tons--an apparent use rate of 115 percent. How- Private Provision to Date ever, this figure accounts for wide differences in traffic segments. For containers, current capacity is assessed at The Major Ports Act of 1963 allows private provision about 15 million tons, while total traffic in 1997 was of services at the major ports.The legislation already per- more than 20 million tons,showing an apparent use rate mits private sector intervention in port operations in the of 133 percent. form of leasing of port assets, construction and opera- Previous analysis concurs that implementing ratio- tion of facilities, leasing of equipment for cargo han- nal management and working practices should increase dling, pilotage, and captive facilities for port-based the overall capacity of Indian ports by about 35 per- industries. cent (Raghuvansi 1996; Shashikumar 1998; Fairplay The central government has adopted policy measures 1996a, 1996b). For container operations, the figures aimed at opening the port sector to private investors and suggest that at least a 40 percent improvement in han- operators. Based on the Major Ports Act of 1963, this dling and processing capacity is not beyond reach.If these policy was strengthened at the federal level by the 1996 changes were implemented today, they would allow "Guidelines on Privatization,"which provides a more pre- Indian ports to provide world-class service without hav- cise framework for private participation in the major ports. ing to expand infrastructure.However,the traffic growth At the state level maritime states have issued policy state- trend--around 6 percent, and close to 18 percent for ments in the form of infrastructure policy or port pol- containers--means that significant capacity expansion icy papers. Gujarat was the first to publish a port policy will still be needed even if a 40 percent improvement statement in 1995;Karnataka is the most recent.Private is achieved in coming years (table 5.2). sector participation in development and operations of The government envisions demand growth for port port infrastructure is the prominent feature in each doc- services of around 200 million tons, with estimated ument.The government of Andhra Pradesh has decid- throughput of around 415 million tons in 2001­02. It ed to privatize the operations and maintenance of three is therefore planning to add 122 million tons of port existing berths at Kakinada Port and is pursuing devel- capacity over the Ninth Five-Year Plan period (figure opment of a number of greenfield sites as well. Table 5.2 Growth in Container Traffic (thousands of tons) Port 1990­91 1991­92 1992­93 1993­94 1994­95 1995­96 1996­97 1997­98 Calcutta 664 804 1,009 1,339 1,761 1,814 1,951 2,122 Chennai 1,132 1,003 1,253 1,606 2,019 2,308 2,564 3,002 Mumbai 4,286 3,462 ,3884 5,413 6,268 6,748 7,632 8,097 Jawaharal Nehru 657 1,314 1,712 2,077 2,929 4,069 5,078 6,050 Total 8,043 7,627 9,009 12,189 15,358 17,618 20,590 23,120 Source: Indian Ports Association 1998. 43 Ports In addition to the projects mentioned in table 5.3, several other projects at the state and central government levels have been offered to the private sector,largely for the development of new facilities (table 5.4).The pro- posed Cochin container terminal project would involve operation of the existing container terminal and the subsequent development of a new,larger terminal.MOST has indicated that several additional projects will be offered to the private sector at Port Trusts, including projects involving the operation of existing facilities. Risk Allocation and Incentives under the Concession Framework Concessions awarded for projects at major ports follow the 1996 "Guidelines on Privatization" in establishing the allocation of risks between the private and public sec- tors and the incentives for efficiency provided under the Following these developments six greenfield private contract.So far,concessions have been awarded as license projects are under construction (table 5.3).As far as major agreements. Some key provisions of the concessions: ports are concerned, two container terminals are now · Projects are currently defined under the build- operational,one being P&O Australia's container termi- operate-transfer (BOT) format,with asset ownership nal at the Jawaharlal Nahru PortTrust and the second the vested in the concessioning authority due to legal recently opened PSA-Sical terminal at Tuticorin. Con- constraints linked to public domain legislation. struction of one 150-meter container berth was com- Although a build-own-operate-transfer (BOOT) pleted,with construction of the remaining berths expected format would allow assets to be assigned to guaran- by the first half of 2000.Four largely captive ports,all based tee commercial debt, existing deals bypass this dif- in Gujarat, are being developed with private financing.2 ficulty and mortgaging rights were granted to Of these, Dahej and the Pipavav Ports have substantial investors (for example,at the Jawaharlal Nehru con- involvement from the Gujarat government.3 In addition tainer terminal developed by P&O Australia). to these projects concessions have been awarded to PSA · Assets financed under a BOT basis will revert free of Corporation at Tuticorin for container handling and to cost to the PortAuthority,a possible deterrent to con- Abujamaria at Marmugao for coal berths,although con- tinuous upgrading and modernizing of facilities and cession terms are still being finalized. equipment throughout the lifetime of the concession. Table 5.3 Private Initiatives in the Ports Sector Project Nature Status Pipavav Port, Gujarat State port First 400 meters berth ready. Another 325 Multi-purpose facility meters under construction. Gujarat Chemical Port Terminal Ltd, Dahej, Gujarat State port Liquid cargo Under construction. Essar Shipping Limited,Vadinar, Gujarat State port Financing completed. Liquid cargo, serving Essar Refinery P&O Australia Container Terminal, Nhava Sheva, Major port Financing being finalized. Maharashtra Container terminal Reliance Ports and Terminals Ltd, Jamnagar, Gujarat POL/petrochemical port. Serving Reliance Under construction. refinery and Reliance industries Tuticorin Port Container terminal Awarded to PSA, financing being finalized. Source: World Bank staff. 44 Ports Table 5.4 Pipeline of Private Port Projects Project Description Major port projects Kandla Port Trust Development and operation of container terminal at berths 7 and 8.Three bidders short-listed. Upgrading and expanding cargo handling facilities. New Mangalore Port Trust Dry bulk cargo berths. Bids have been invited. Cochin Port Trust Operation of existing container terminal and development of terminal for transshipment at new site. Cochin Port Trust Development of LNG terminal (with Petronet). Scheme being finalized. Chennai Port Trust Development of container terminal. Mormugao Port Trust Coal handling terminal--agreement signed with AGB Industries Ltd. State port projects Dhamra Port Coal-handling, multi-purpose. Concession agreement signed between Orissa Government and International Seaports Pvt. Ltd. Kakinada Port Concession agreement between AP Government and International Seaports Pvt. Ltd. Dahej Port Development of liquefied natural gas terminals at Dahej (with Petronet). Scheme being finalized. Source: World Bank staff. · The lead partner in a consortium is required to keep facilities with little or no labor liability attached-- its full shareholding in the port development com- as with P&OAustralia in Jawaharlal Nehru and pos- pany throughout the concession period and may sibly the PSA Corporation in Tuticorin.4 This not sell any part of it. provision will create a bias toward investing in new · The fee structure includes an up-front fee,lease rent, facilities rather than expanding or improving oper- and royalty per ton.The "Guidelines on Privatiza- ations at existing facilities. tion" also add the concept of a fee based on an annual minimum of guaranteed traffic. New Terms for Concession Contracts at the Central Level · There is no compensation in case of failure by the New standard bidding documents and concession con- concessioning authority to deliver agreed services tracts are being prepared under MOST supervision for (such as power). concessions at the major ports.Table 5.5 presents their · There is no provision for extending the duration of main contractual provisions. a concession to compensate for force majeure events. · There are no provisions allowing an amicable set- State Initiatives tlement process before resorting to court action to Gujarat, Maharashtra, Andhra Pradesh, and Karnataka settle contractual disputes. have introduced contracts that are more favorable to · Concessionaires must assume all labor liabilities investors. The BOOT format adopted in Gujarat, for attached to an existing facility.Significant overstaffing instance, includes full tariff flexibility in both level and and low productivity will favor the creation of new currency. Gujarat's policy is clearly to attract invest- Table 5.5 Main Features of New Concession Agreements for Major Port Concessions Type of agreement Build-operate-transfer Tariffs Freedom to set tariffs under the ceiling defined by the Tariff Authority for Major Ports. Competition within the port Port Trust, the licensor, is allowed to compete with the licensee on the same traffic operations (such as container handling). Principle of common-user and adoption of nondiscriminatory practices for the terminal. Port Trust may not bring another private competitor into port until traffic on concession reaches declared capacity. Incentives on traffic Minimum throughput levels. Labor Freedom to fix working practices, within applicable labor laws; however, wages must not be lower than for corresponding positions at the Port Trust. Safeguards Compensation upon termination. Arbitration Before Indian jurisdictions. Source: World Bank staff. 45 Ports ments in ports to foster regional economic development. Terminal, which is being established by P&O Australia In Karnataka private investment in infrastructure,includ- at Jawaharlal Nehru. TAMP allowed the operator to ing ports, should "contribute to economic growth and have a tariff ceiling based on container handling charges public welfare" with the objective of "rapid economic currently levied at Jawaharlal Nehru. Cargo-related development of the State." Fiscal incentives and con- charges will be specified in rupees.In this rulingTAMP cessional rates on leases and dues are proposed to enhance held that port operators should not be allowed to charge the financial attractiveness of development projects. or calculate tariffs in foreign currency for cargo-handling The main weakness of these contractual frameworks services. It is established practice that only vessel-relat- for developing new state ports may be the often limit- ed charges can be based on foreign currency. Howev- ed physical connections between the project site and the er,the Mumbai PortTrust already charges a tariff based main inland transport networks.Under the BOOT for- on US dollars for container handling services. Most mat being finalized in Gujarat,road and rail linkages for other port trusts would like to do the same.TAMP is new port developments may be structured as separate considering reviewing the legal basis for the Mumbai BOT packages to be offered to the private sector. It is PortTrust's tariff and also undertaking a broader review unclear whether a private port developer would com- of the issue. mit investments in a port facility without assurance that missing or inadequate land connections would be built Policy Recommendations: Modernizing the or upgraded in time. On the other hand, it is unclear Ports Sector whether the private sector will be willing to upgrade road facilities without substantial public support. Although there has been progress in bringing the pri- vate sector into port development and operation,reforms Sector Regulation are needed to provide greater commercial autonomy to all the port trusts, enhance competition among ports, TheTariffAuthority for Major Ports (TAMP) was estab- and provide the institutional structure for a modern lished in 1997 as a distinct body under the umbrella of ports sector. In the long run, India will have to rely MOST to regulate port tariffs independently from the increasingly on throughput from minor ports.This fact Port Trusts (box 5.1).TAMP has responsibility for set- ting the tariffs of the major ports. It can also set tariffs Box 5.1 The Tariff Authority for Major Ports: for private licensers operating at a major port, where Jurisdiction and Autonomy TAMP's tariff rulings will take precedence over charges TAMP lacks some of the powers and autonomy that other outlined in a contract between a Port Trust and a pri- Indian agencies regulating infrastructure possess. For example, vate operator.TAMP was created in response to protests TAMP's mandate is restricted to tariffs for port services at the by private partners in the port system that they could major ports, but the government retains the right to invalidate not expect fair treatment on tariff matters from the Port TAMP's tariff rulings. There are no provisions for enforcing Trust, which is their commercial competitor. TAMP orders and the central government can suspend the authority for an unlimited period.TAMP lacks financial auton- TAMP guidelines, adopted in Chennai in February omy as well, depending on MOST for budgetary support. 1998,state that"TAMP's overall objective shall be to move One of the major questions about TAMP is the scope of towards competitive pricing."TAMP is supposed to pro- its jurisdiction. Established through an amendment to the Major mote rationalization of the tariff system, applying uni- Port Trusts Act, TAMP's purview on tariff issues is limited to form principles at ports to develop cost-based prices. ports covered by the Act. The government recently made TAMP is also working to develop a pricing methodol- Ennore Port a major port under the provisions of the Indian ogy that will encourage improvements in operational effi- Ports Act. Because it will not be a trust, however, Ennore will ciency and the introduction of innovative practices. not fall under the Major Port Trusts Act, nor under TAMP's authority. For this reason, Haldia and Jawaharlal Nehru, which TAMP is developing tariff formulations for the Port will become corporatized port trusts, may not necessarily be Trusts. It has already issued a ruling on tariffs to be under TAMP's jurisdiction either. charged by the Nhava Sheva International Container 46 Ports increases the urgency of developing an overarching Improving Inter-Ministerial Coordination transport strategy.A three-tiered structure could sepa- MOST and the Ministry of Railways have a shared rate policy, regulatory, and commercial functions clear- interest in finding a common approach to creating inter- ly and provide a nexus for central and local interests. modal platforms that would reduce transport costs and Figure 5.3 illustrates such a structure. increase trade competitiveness. Dry ports are mainly railway-based and developed under the Ministry of Restructuring the Ports Sector Railways' umbrella. A common approach is likely to As far as corporatization is concerned, separation of enhance the impact of such developments and help policy,regulatory,and commercial roles will help reduce integrate them into the inland transport network as a conflicts of interest (such as uneven access to ship ser- whole.At the port level,improved cooperation between vices managed by Port Trusts and berthing priorities) actors such as Indian Railways,Container Corporation that the Port Trusts face. This raises the issue of the of India, and the Central Warehousing Corporation appropriate role for TAMP. If statutory authorities are would improve the climate for investment in the ports created at each major port, these bodies could assume system.In some cases,cargo transfer between Indian Rail- TAMP's regulatory functions. ways and the local port railways results in inordinate Reform is unlikely to be rapid, and TAMP will delays. Improving the interface between railways and need to continue in its current role in the medium ports should be a priority, possibly using agreements at term. Because its authority extends to tariff setting, Jawaharlal Nehru as a model.5 however, it may need enhanced authority to handle predatory behavior from Port Trusts against private Addressing Labor Practices at the Major Ports schemes. A progressive realignment of the workforce consistent with modern traffic and cargo-handling requirements Figure 5.3 A Proposed Institutional Structure for a cannot be avoided in the ports sector. Addressing the Modernized Ports Sector overstaffing issue before bringing the private sector in supposes that an adequate budget and sufficient staff National POrts Council management skills are available early enough in the Function. Determines national port policy and strategic process.If the private sector is called in before this issue planning objectives. Defines main sector regulations to is resolved,private operators should be allowed to adjust be enforced by the port authorities. Composition. Representative from the Ministries of Surface their workforce to actual operational requirements over Transportation, Railways, and Environment and Forests; time, and existing social protection provisions should mayors of port cities; and port authority managers. ensure that the staff adjustment process is acceptable. These changes may require special government provi- Port Authorities sions to accompany staff retrenchment over a defined Structure. Autonomous public institutions or public time period.These provisions could include retraining, joint-stock companies, granted the right to use state- voluntary retirement,indemnity payments for voluntary owned land and administer, maintain, and develop port infrastructure assests. departure, and creation of a temporary workers' pool. Functions. Enforce navigation safety measures and environmental protection regulations, monitor Award Criteria for Concessions concessions, lease contracts governing private sector The success of a concession depends not only on get- activities in the port area, and market the port facilities to attract new investors. ting the contract provisions right, but also on design- ing an appropriate method for awarding the concession. Private and Public Operating Companies The most common options for profitable operations Function. Conduct commercial activities related to ship include awarding bids on the basis of the highest price services and cargo traffic management and handling. for the assets or shares of the enterprise being privatized, the highest concession fee (one-time or annual),and the Source: World Bank Staff. highest net present value of discounted revenue streams 47 Ports Box 5.2 Introducing Competition into the Ports Sector Port privatizations in Latin America indicate the extent to which introducing competition is important for ensuring that consumers benefit from this transformation. In Argentina competition was introduced not only among ports, but also by dividing up larg- er ports into distinct terminals and offering them as separate concessions. In Colombia the four major ports were conces- sioned in 1993 to regional port "societies," which introduced competition for stevedoring services.This helped the ports to achieve substantial productivity gains and about a 50 percent reduction in real rates between 1994 and 1996. Source: Estache and Carbajo 1996; Gaviria 1998. over the concession period to accrue to the government. The other most common option is bidding on the low- est tariff charged to consumers. When competition in the market is strong enough, the government should not worry about tariffs, which market pressure should keep low.In this case the option based on the highest financial benefit to the government Notes can be selected, and commercial tariffs left free of con- 1. Capacity increases at the Major Ports are trol.When competition in the market is weak or nonex- expected at Jawahal Nehru, Kandla, Mor- istent, the government should be concerned about the mugao,New Mangalore,Mumbai,Chennai, risk of rent-seeking behavior.In this case,the option of and Paradip. bidding on the lowest tariff charged to consumers can 2. These are petroleum product- be selected.This option will organize competition for petrochemical terminals being established by the market and force candidates to optimize their bids Essar Shipping,Reliance Ports andTerminals, around the minimum acceptable profit. Bidding docu- and the Gujarat Chemical Port Terminal ments also will indicate the concession fee to be paid Limited in Dahej. to the government,calculated to cover all infrastructure- 3. In the case of Pipavav 25 percent of equi- related costs that public authorities will bear in con- ty is owned by the private sector.The Gujarat nection with the concession.6 government intends to reduce its holding once the facility is operational. 4. For example, there are 35,000 workers at Mumbai, 13,000 at Calcutta, and 11,000 at Chennai. 5. There,an agreement was reached between the Port Trust and Indian Railways, allow- ing Indian Railways trains to run directly up to the port terminals without disruption. 6. These costs might include the mainte- nance of access and protection assets, repay- ment of loans (if any),and return on previous investments in the concessioned facility. 48 6 Airports · Policy objectives. Meet the future growth demands of air traf- fic, overcome congestion at airports, and upgrade facilities to world-class standards. · Private participation. One privately financed airport has been commissioned. Some airport operations may be privatized. · Key issues. Privatization of lease contracts, creation of a special regulator, and growth in passenger and cargo traffic levels. Market Structure and Performance other agencies.Its regulatory function is to oversee tech- nical and safety aspects of airport operation.The author- The Ministry of Civil Aviation is responsible for formu- ity also intends to take equity stakes in airports that are lating national policies and programs for public airports. largely financed privately.The Airports Authority plans The ministry's functions include overseeing airport facil- to provide air traffic control and navigational services at ities,air traffic services,and the carriage of passengers and these airports, including the new airport in Cochin. goods by air. The Ministry of Civil Aviation and the Office of the Directorate General of Civil Aviation also Cargo Traffic have regulatory and development functions.TheAirports India's air traffic is highly concentrated at a few airports. Authority of India is responsible for the operation of In fiscal 1996/97 Indian airports handled about 37 mil- civilian airports and subcontracts certain tasks. Of the lion passengers (67 percent domestic and 33 percent approximately 450 airports and aerodromes (airstrips) in international). The top five international airports-- India, five are classified as international gateways. Mumbai, Delhi, Chennai, Calcutta, and Trivandrum-- TheAirportsAuthority of India is a financially inde- service about 26 million passengers each year, pendent agency operating under the Ministry of Civil representing about 71 percent of total air traffic activ- Aviation. Established in 1994 following the merger of ity.2 In 1996/97 the total cargo handled at Indian air- the International Airports Authority of India and the ports was about 680,000 metric tons, up from 650,000 National Airports Authority, the Airports Authority of metric tons in 1995/96.About 71 percent of cargo traf- India owns and operates 120 airports.1 The Airports fic is international. In addition to air cargo, Indian air- Authority is also responsible for air traffic control ser- ports handled about 30,000 metric tons of mail. The vices, air safety, and search and rescue operations with Delhi and Mumbai airports together account for more 49 Airports than two-thirds of India's air cargo activity.India's share Private Sector Initiatives to Date of total international trade in air cargo has declined rel- The partially privately financed Cochin airport has ative to other modes of transport.The growth rate in recently been commissioned on a build-own-operate international trade (in terms of value of exports and (BOO) basis. It will operate both domestic and inter- imports) was more than 25 percent, while the growth national flights catering to passenger and cargo traffic. rate of air cargo was only 5 percent. The state of Kerala has offered guarantees for the entire The Airports Authority of India currently shows an amount of the term loan,while the Housing and Urban operating surplus, although costs lately have increased Development Corporation has provided financing up to faster than revenues.As a result,the operating surplus has Rs 98 crores.The government of Kerala also has pro- fallen from 33 percent of revenues in 1994/95 to 25 per- vided 26 percent of the equity.The Airports Authority cent in 1997/98.Indira Gandhi InternationalAirport in of India will provide air traffic control services,although Delhi has shown little revenue growth in recent years the terms for these services have not been finalized. from passenger or cargo traffic. During 1995­98 traffic Tata Industries Ltd. (India), Raytheon Engineering revenue increased by 1 percent and cargo revenue by 5 and Constructors (United States),and InformationTech- percent. Faster growth in nontraffic revenue meant that nology Park Investments (Singapore) proposed con- the overall increase for the period was 5 percent. How- structing an international airport on a BOO basis at ever,costs rose by more than 35 percent in the same peri- Bangalore, but the project was abandoned. Several key od, with staff costs increasing 54 percent. issues had to be resolved for the project to proceed.These included future traffic allocations, terms for the trans- Future Demand for Airport Capacity fer of ownership titles to make land available, and The Foundation forAviation and SustainableTourism fore- strengthening of related infrastructure activities. casts that growth in domestic air traffic will be 8.5 per- The government of Karnataka has recently taken ini- cent and growth in international air traffic will be 6 tiatives to restart the project.The AAI and a state gov- percent annually through 2005. Based on these projec- ernment agency signed a memorandum of understanding tions, passenger traffic should reach about 63 million for further action.Under the memorandum,the two par- people by the same date.The potential for growth in both ties have invited offers from firms to act as partners in passenger and cargo traffic could be significantly higher. the development and operation of the airport.It is pro- In China air travel growth has averaged about 20 per- posed that the airport be developed as a joint venture cent annually over the past five years.The need for addi- in which the public sector (through theAirportsAuthor- tional airport infrastructure is strongly linked to developing ity and the state government and its agencies) hold at competitive markets for air passenger and cargo traffic. least 26 percent of the equity.The joint venture agree- To meet future growth in demand for air traffic, ment will also detail responsibilities concerning provi- overcome airport congestion, and upgrade facilities to sion of basic infrastructure for the airport. world-class standards, the AAI has developed an invest- ment plan (under the Ninth Five-Year Plan) of about The Link with Civil Aviation $800 million,or a yearly investment of about $160 mil- The Directorate General of Civil Aviation oversees the lion.The investment gap of Rs1,100 crores is expect- regulatory aspects of civil aviation.It regulates air trans- ed to be financed by increasing private participation, port services to,from,and within India;registers civil air- borrowing funds in the domestic capital markets, and craft; formulates standards of airworthiness for civil raising airport fees. aircraft;licenses pilots,aircraft maintenance engineers,and others; and licenses airports. Private Sector Participation The growth in demand for airport infrastructure is clearly linked to the growth in demand for air travel from The Policy on Airport Infrastructure, approved by the both passengers and cargo. Development of greenfield Cabinet in December 1997,endorsed the government's sites would raise the question of how to allocate exist- focus on increasing private sector participation. ing traffic between new and old airports in the vicini- 50 Airports ty.The government has introduced some liberalization and land use.The regulator would be expected to reg- measures,but also has maintained restrictions on the par- ulate leases according to contract terms. Experience in ticipation of foreign airlines in domestic routes. The India suggests that entrusting these activities to regula- government owns two major service providers,Air India tors rather than to government departments can pro- and Indian Airlines, which are candidates for disinvest- vide greater transparency. Environmental issues such as ment. The government therefore faces a conflict of noise, emissions, water, sewage, fuel storage, and waste interest in opening the internal sector to further com- disposal would have to be addressed,as would squatters petition.Similarly,because the government owns exist- and dwellers on airport properties. ing airport facilities, there may be a conflict of interest in the allocation of traffic, much of which affects The Link with Aviation Policy government-owned airlines. Developing airport infrastructure must be placed with- in the broader context of growth in air travel and devel- Policy Directions: Redefining the Public Sector's opment of the aviation sector. Key issues to address Role include the future deregulation of the Indian aviation industry and its effect on market size, the role of the The government considered the corporatization of theAir- public sector in providing airline services (both domes- portsAuthority of India but is now leaning toward offer- tically and internationally), and bilateral arrangements ing long-term leases for operating some or all activities and alternative mechanisms to increase traffic for sched- at the Delhi,Mumbai,Chennai,and Calcutta airports.The uled and nonscheduled carriers. Airports Authority is currently a multipurpose entity The plans for airport expansion must be viewed in operating in markets where business conditions are chang- the light of traffic levels, which include modest growth ing rapidly.A restructuring program that would separate in traffic at some international airports, such as Delhi. policy and regulatory roles from operational roles could be achieved by corporatization. However, a wide-rang- ing leasing program could also separate operational func- tions from planning and statutory functions,which would then be undertaken by the residualAAI.The precise strat- egy to be followed--including whether land and air activ- ities are both concessioned and,if so,whether this is done jointly or separately--has not yet been defined. Economic Regulation for the Sector The principal focus of air travel regulations are tech- Notes nology and safety. Economic and environmental con- 1. Of these 120, 28 are civil enclaves at siderations receive little attention. The Directorate defense airfields. General of Civil Aviation should continue to play the 2. The top five airports account for about vital role of technical and safety regulator.Economic reg- 285 million passengers a year in the United ulation should be handled by a separate independent States; about 200 million passengers in authority, which may require legislation. As with all Europe;about 180 million passengers in the infrastructure regulatory agencies, the authority's pow- Asia/Pacific region; and about 40 million ers should be clearly defined to ensure that it concen- passengers in Latin America and the trates on areas where competition is restricted. Caribbean. In China the top five airports Economic regulation would encompass pricing for (Beijing, Guangzhou, Shanghai, Shenzhen, and Chengdu) collectively account for more air and land activities,performance and service standards than 50 million passengers. for concessionaires, market access and the impact of horizontal and vertical integration, and asset valuation 51 PART 2. INSTITUTIONAL ISSUES 7 Developing Infrastructure Regulatory Institutions With the creation of the Telecom Regulatory Authority of India and the Central Electricity Regulatory Commission, there are now two special economic regulatory agencies for the infrastructure sectors at the central level.The Tariff Authority for Major Ports has more restricted bounds, limited purely to tariff setting. Eleven state electricity regulatory commissions have been created so far. Regulatory agencies such as the Telecom Regulatory Authority of India and the Orissa Electricity Regulatory Commission have already enhanced scrutiny of the performance of public sector service providers. However, the experience of regulatory bodies offers lessons about the political economy of regulation within India and about designing bodies that can fulfill their mandate as independent regulators. In particular, there is a need to effectively delineate the responsibilities of regulators and policymakers and to place the creation of an independent regulator within a broader restructuring of the sector. Regulatory Independence and responsibilities of the regulatory bodies that have been established in India's infrastructure sectors. Some of the key factors in establishing an autonomous Removing an infrastructure regulator from office agency are funding methods for appointing and remov- usually requires court approval.The exceptions are the ing commissioners,review of decisions and the govern- TariffAuthority for Major Ports and the State Electricity ment's authority for specifying changes to these decisions, Regulatory Commissions established by central gov- and the consultative process used by the regulator in ernment legislation. The State Electricity Regulatory interactions with consumers,service providers,and other Commissions are created by notification and therefore groups.Tables 7.1 and 7.2 summarize the characteristics can be de-notified as well. 53 Developing Infrastructure Regulatory Institutions Table 7.1 Functional Characteristics of Regulatory Bodies Appointment and Consultative Appeal of decisions, relation Regulator removal of commissioners Funding process to government policy Telecom Regulatory Seven commissioners. Chairman Currently funded Article 11:The Authority shall High Court. Authority of India to be Supreme Court Justice through central ensure transparency. or High Court Chief Justice. government's budget. Consultative Review on Central government Appointment by the central Provision to charge methodologies and proposals decides whether its government. fees, establish (such as recent tariff- directives constitute policy. Removal by the central government Telecom Regulatory setting exercise). following recommendation of Authority of India dismissal by Supreme Court General Fund to meet expenses. Central Electricity Five commissioners, including Consolidated Fund Central Advisory High Court. Regulatory Chairman of CEA ex-officio. of India. Committee. Commission Selection committee established Article 37: Commission shall Central government by the central government. ensure transparency. decides whether its Removal by the president of India, directives constitute policy. following recommendation of dismissal by the Supreme Court. Orissa Electricity Three commissioners (at least one State Consolidated Commission Advisory High Court for appeal on Regulatory with electrical engineering, and Fund. Committee. question of law. Commission one with economics, accountancy, Public tariff hearings. law, commerce, administration background). Selection committee constituted by Consultative paper on CEA resolves disputes the state government. tariff approach. between OERC and the Removal by the state government, state government over following report by judge of the whether its directives High Court of Orissa. constitute policy or not. State Electricity Three commissioners. Selection State Consolidated State Advisory High Court. Regulatory committee appointed by the Fund. Committee. Commission state government. (following 1998 Removal by the governor, following Article 37: Commission State government decides Act) recommendation of dismissal by shall ensure transparency. whether its directives the High Court. constitute policy Tariff Authority Three commissioners (with Central government, Public tariff hearings, public Central government may for Major Ports backgrounds in ports, economics, through Ministry of consultations on tariff require authority to and finance, respectively). Surface Transport. principles (although there charge certain rates. Appointed and removed by are no specific legislative Central government can the central government. clauses relating to this). suspend authority on notification in the Official Gazette. Source: World Bank staff. Recent disagreements between the Telecom Reg- tives concern policy or whether they enter into detailed ulatory Authority of India and the Minister of Com- issues under the regulator's purview.To reduce the risk munications have highlighted the role that policymakers of arbitrary and ad hoc policy interventions, principles can play in sector regulation by using policy directives. on key issues (such as pricing, competition, and inter- In the case of the Orissa Electricity Regulatory Com- connection) need to be specified up front in sufficient mission,an external body,the Central ElectricityAuthor- detail.The regulator can then work within the parameters ity, will arbitrate whether directives issued by the state allowed by policy. government represent policy or not. However, in most Of the regulatory agencies that have been estab- other cases the government decides whether its direc- lished so far, only the Telecom Regulatory Authority 54 Developing Infrastructure Regulatory Institutions Table 7.2 Responsibilities of Regulatory Bodies Regulator Pricing Licensing Dispute resolution Other Telecom Regulatory Notify tariffs for all Recommend need, Settle disputes between Ensure effective compliance with Authority of India telecommunications timing, and terms of service providers and universal service obligations. services. new service providers. between service providers Advise the government on Regulate revenue sharing Recommend revocation and consumers. telecommunications between service of license. Protect consumer interests. providers, and between Ensure compliance of Facilitate competition and efficiency technical aspects of terms of license. in the sector. interconnection. Maintain a register of interconnect agreements. Monitor quality of service, conduct periodic surveys. Central Electricity Generation: plant owned Interstate transmission Settle disputes between Promote competition, efficiency, and Regulatory or controlled by the entities (under the generators and/or economy. Commission central government, or Amendment to the transmitters that come Associate with environmental agencies selling to more than 1948 Electricity Supply under CERC's tariff to develop environmental regulations one state. Act passed in 1998). regulation purview. for the sector. Interstate transmission. Frame guidelines for tariff setting. Orissa Electricity Regulation of prices Licensing of entities Settle disputes between Promote efficiency, economy, and safety. Regulatory charged by licensees. involved in transmission license holders. Promote competition and progressively Commission and distribution of power. involve the private sector. Regulation of quality of Collect relevant data, forecast demand, service of licensees. require licensees to formulate required plans in coordination with others. State Electricity Determine rates for By notification of the By notification of the Promote competition, efficiency, and Regulatory wholesale, bulk, grid, state government: state government: economy. Commission and retail; use of Issue licenses. Regulate Settle disputes between By notification of the state government: (following transmission facilities. workings of license license holders and utilities. Regulate investment approval in sector. 1998 Act) Regulate power purchase holders and exit and . Regulate operation of the power system. and procurement, entry into industry. Set and enforce sector service and process of transmission .Require license holders safety standards. and distribution utilities, to formulate plans for Promote privatization. for in-state sources. meeting state electricity Coordinate with environmental needs, including power agencies to develop environmental purchase schemes. standards. Tariff Authority for Major Ports Set tariffs at all major ports, including private licensees at ports. Source: World Bank staff. of India has the authority to establish its own fund. Multi-Sector or Single-Sector Regulatory Agencies? Other agencies rely on the consolidated fund or, in the case of theTariff Authority for Major Ports, the minis- Different countries have arrived at different institutional terial budget. Although regulatory agencies have gen- structures for regulating their infrastructure sectors (table erally been well-funded, there is a case to be made for 7.3). Some countries with federal systems of govern- establishing funding through a small charge on regulated ment have opted for systems in which agencies at the companies. Providing for scrutiny of the regulators' national level handle a single sector,while commissions budgets through the legislature and by auditors should at the state level handle multiple sectors. Some small ensure accountability. countries in the Caribbean and Central America have 55 Developing Infrastructure Regulatory Institutions Table 7.3 Alternative Approaches to Structuring Regulatory Agencies Industry-specific Sectoral (for example, electricity, gas) (energy, communications, transport) Multiple Argentina Brazil (federal) Australia (state) Chile Canada (federal) Bolivia India Guatemala Brazil (state) Nicaragua Colombia Canada (state) Peru Hungary Costa Rica United Kingdom (telecommunications, water) Mexico El Salvador Venezuela United Kingdom (energy) Italy United States (federal) Panama United States (state) Source: World Bank staff. opted for multisector regulatory agencies.Other coun- power sector) receive the bulk of initial regulatory atten- tries have adopted industry-specific regulatory agen- tion. Nonetheless, some consolidation of regulatory cies, most notably the United Kingdom (although it activities may be appropriate,perhaps at the sector level recently combined electricity and natural gas regulators). for energy (for example, electricity and gas) and at the There are several advantages to multisector regula- state level for a broader set of sectors. tory agencies. These include sharing scarce human resources, particularly individuals with the experience to be regulatory commissioners, and lowering agency costs.The ability to cope with unclear sector bound- aries (between electricity and gas,for example) is anoth- er advantage. Some argue that there is also a better chance of maintaining an arms-length relationship between the regulator and the regulated industry. Multisectoral agencies have potential drawbacks as well. Some of these, such as a lack of industry-specific expertise, can be tackled by adequate staffing. One key implementation issue is the extent to which the pace of reform, and therefore the need for regulation, varies among sectors.This pace differs in the power and water sectors in some states in India. Some countries tackle this problem with legislation that establishes a regula- tory authority and defines its main functions, selection of members, internal procedures, funding, and so on. Sector-specific legislation can then be used to define the role of the regulatory authority.In India there also may be questions about which level of government should provide services.This is particularly so for urban services, which would require adjustments to the scope of the agency's powers. (The 74th Amendment makes munic- ipalities responsible for such services as water supply and sewage treatment.) A multisector regulator would require a corre- spondingly larger budget.There may also be a need to ensure that sectors being restructured first (such as the 56 8 Infrastructure Finance:The Role of the Domestic Debt Market Domestic sources will have to provide most of the additional funding for infrastructure. India's sustainable account deficit (by definition the amount of net foreign funding) is generally thought to be under 3 percent of GDP.The current account deficit has worsened in the last year to around 2.2 percent of GDP in 1998/99.Thus additional foreign funding is likely to be no more than about 1 percent of GDP annually.1 Meeting demand from domestic sources would require creating a genuine marketplace for long-term, fixed-income instruments.At present the number of providers of long-term debt is limited, they have broadly similar incentives and investment patterns, and the regu- latory system limits their willingness to provide financing for infrastructure projects. Developing a secondary market for debt is also constrained to some extent by existing taxes and regulations. These factors are reflected in India's relatively large primary debt market and its low level of secondary market trading. Funding for Infrastructure extent by the increased investment activity of the bank- As originally interpreted,Section 10 (23) G of the Income ing sector,notably by government-owned regional banks. Tax Schedule, which allows a tax exemption for gross Due to the leveraged nature of the banking system,how- interest,briefly increased the amount of infrastructure fund- ever, banks favor shorter term instruments with strong ing provided directly through the bond market.A more credits and greater liquidity. In addition to the limited recent reinterpretation of this section allows a tax exemp- upside incentives for and considerable downside reper- tion only for net interest.This reinterpretation has meant cussions of innovation among government banking offi- that the bulk of infrastructure financing (95 percent) is cials,this preference for shorter term instruments may help once again provided through the loan market by banks explain why bankholding of government bonds exceeds and financial institutions.The recent growth in debt cap- the statutory liquidity requirements,currently 37 percent ital markets in India has been powered to a considerable of assets instead of the required minimum of 25 percent. 57 Infrastructure Finance:The Role of the Domestic Debt Market The government has attempted to encourage invest- ing it the largest single investor in India.Accretions are ment in infrastructure by offering tax concessions through around $6.5 billion per year. About 10­12 percent of other means as well.Under the provisions of Section 80 annual accretions go toward infrastructure projects (includ- I (A) of the Income Tax Schedule, a five-year tax holi- ing housing),primarily through loans.The Life Insurance day followed by 30 percent deductions for companies is Company typically buys debt issues to hold to maturity available for investments in all infrastructure sectors except due to the lack of secondary market liquidity and the telecommunications.However,it is uncertain whether this absence of alternative investments.The relevant legislation provision applies to new projects only or whether it can to open the market has yet to be passed. be applied to the extension and rehabilitation of exist- The 1998 budget also allowed the provident funds to ing facilities. Individuals receive annual tax credits up to invest up to 10 percent of their incremental accruals in Rs 10,000 for investing in infrastructure bonds. infrastructure instruments rated as investment grade by two rating agencies. So far, the provident funds are reluctant The Impact of the Budget Deficit to invest in infrastructure and are requesting full guaran- The large public sector deficit crowds out private invest- tees.The public sector, noncompetitive nature of many ment through high borrowing levels,which raise interest provident funds,their often guaranteed rate of return,and rates and risk premiums.Policy measures such as the statu- limits on their investments all reduce the potential pen- tory liquidity reserve and the cash reserve requirement and sions for contributors and the potential demand for sound, investment guidelines for provident funds and insurance long-term debt and equities from the private sector.2The companies also encourage funds to be invested in financ- imposed rate of return for provident funds binds the ing the deficit.Cutting the statutory liquidity reserve and trustees to conservative investment strategies.They have cash reserve requirement without cutting the deficit will been reluctant,for example,to accept equity investments. simply increase market borrowing by the public sector and Provident funds have a concentration of purchases in crowd out private borrowing through even higher inter- securities of five to seven years.These funds largely hold est rates,which will particularly hurt long-term lending. investments until maturity,creating a portfolio and exclud- The central government's deficit was estimated at 5.8 per- ing special deposits, with an average life of three to four cent in 1998/99. This was higher than forecasted, but years.The rationale for short maturity is that fund partici- approximately the same as in the previous two years.The pants are generally required to withdraw their money when states'combined deficit has increased sharply in recent years they change employment.They may also make withdrawals and is expected to continue to do so. for certain purposes.The provident funds are prohibited from selling securities except to meet a cash shortfall. Providers of Long-Term Debt Capital The government announced in its 1998 budget two mea- Debt Market Functioning sures to channel long-term funds toward infrastructure. The first is the introduction of competition into the insur- India has a relatively large primary bond market,although ance sector.Promoting competition and allowing greater it is still dominated by the public sector (box 8.1).How- freedom in the insurance industry's investments would cut ever, activity in the secondary market is relatively lim- insurance costs.Lower costs would encourage use of insur- ited. Improving the market infrastructure to introduce ance by the public, while stimulating the demand for greater transparency and reduce fraud and amending cer- sound long-term bonds. Legislation has recently been tain aspects of the financial regulation system would approved by Parliament to open up the insurance sector increase activity in the secondary debt market and lay to competition,with foreign companies being allowed up the ground for entrance of new investors. to a 26 percent equity stake in an insurance company oper- ating in India.The Life Insurance Company, the current Government Bond Repossession and Short Trading state-owned monopoly supplier,is quite unusual because Only banks and primary and satellite dealers are allowed it holds little long-term, fixed-income investments.The to conduct repossession transactions.3 All financial market company's investment portfolio is about $26 billion,mak- participants are allowed to conduct"reverse repossessions." 58 Infrastructure Finance:The Role of the Domestic Debt Market Box 8.1 The Government Bond Primary Market The government sells bonds and bills through 13 primary deal- tary authority currently announces the cut-off rate. It does not ers, all controlled by government-owned financial entities.The publish the tail (the margin between the highest and lowest schedule of auctions and amounts to be sold are not pre- acceptable yield). announced or irrevocably fixed prior to auction.Bonds are also A portion of the auction may devolve to the RBI, in which underwritten by the primary dealers and a group of satellite case the yield at which bonds are allocated to underwriters dealers.The Reserve Bank of India (RBI) occasionally revises bears little relation to the bids received. In addition, there is the amount that is underwritten.Currently, 60 percent of bond no rule to determine how much, if any, of an auction the under- auctions are underwritten. writers will receive.The RBI also retains the right to sell fewer The underwriters work for a commission that is deter- bonds than the amount announced. mined through a Dutch auction process. In this process, a The RBI's ability to determine the amounts assumed by commission level is set covering the full amount that the RBI underwriters and award paper at off-market prices when it wishes to be underwritten.All participants who bid at a com- chooses is likely to influence the behavior of market participants mission level at or less than the cut-off rate (the weighted aver- significantly. It is also likely that overseas investors, who see age of accepted bids and the amount of bids received) are themselves as having an information disadvantage, would be awarded the amount for which they bid. The central mone- deterred from participating in the Indian debt capital markets. Banks and primary dealers may conduct repossessions and unlike equities,continues to be levied at the state level. invest in the those of other banks or primary dealers. The tax is charged on primary issuance and secondary Repossession transactions are permitted only in central trading.It varies by state and is sometimes high enough government securities and therefore cannot be made for to preclude trading,while in some states it is 2 percent. corporate debt.Selling securities short,including govern- The tax is charged according to where the issuing enti- ment securities, is not permitted.The development of a ty is located rather than where the trade occurs. Cen- secure dematerialized trading system for debt instruments tral government securities are exempt,creating a further would reduce the risk of fraud that the RBI worries will bias in favor of government paper. return if repossession transactions are permitted again. Since May 1997 foreign institutional investors have However, it may be difficult to develop a dematerialized been permitted to open accounts that are completely system until stamp duties on secondary trading are removed. dedicated to fixed-income investment.Foreign investors Many market participants have highlighted the absence face a 20 percent deduction of interest paid and it has of a short-term interbank rate,such as the London inter- been difficult for them to avoid dividend withholding. bank offered rate (LIBOR),for the Indian market.Bor- This situation is unlike that of equity funds,which have rowing from longer term floating rate instruments is been able to circumvent dividend withholding through currently indexed to the prime lending rate,which lend- Mauritius or Cyprus.Because a large proportion of for- ing institutions can determine arbitrarily.A market index eign investors are not taxpayers, the 20 percent with- such as the LIBOR is the product rather than the source holding is a significant disincentive to overseas investors. of a dynamic and competitive market.Removing imped- iments to the natural development of a free market in Policy Recommendations: Developing a short-term money would encourage the creation of Genuine Market for Long-Term Debt such an index. However, much money market activity is dominated by a small number of government-owned Passage of the Insurance RegulatoryAuthority Bill will banks that share similar views on market direction. allow competition in the insurance industry.This will benefit customers and increase the number of buyers The Impact of Taxes of fixed-income securities. Phasing out guaranteed Stamp duties are widely seen as one of the primary returns on provident funds, special deposits, and postal obstacles to developing an active secondary market in deposits also would eliminate some market distortions. debt securities. The stamp tax on debt instruments, Reforming the management of provident funds (by 59 Infrastructure Finance:The Role of the Domestic Debt Market appointing independent, private sector managers, for who can purchase private placements as those who example) would ensure that the absence of a guaran- can understand the risks is better than directly lim- teed rate of return will not be detrimental to partici- iting the number of investors. pant interests.Such reforms would encourage investment · Support securitization. Securitization has greatly facili- in infrastructure. Greater freedom in portfolio choice tated funding for infrastructure projects in many coun- also requires better regulation to avoid malfeasance. tries.Legal reforms allowing for securitization without Fully funded pension schemes would increase nation- perfection of the security will advance securitization al savings and the demand for long-term debt, making in India,as will facilitating special purpose vehicles and more funds available for infrastructure. In the short- permitting provident funds and insurers to invest in run,however,these schemes would crystallize the pub- securitized instruments and transactions.Securitization lic sector deficit.Existing retirees would have to be paid would require several parallel reforms.These include from public funds, rather than from new worker con- the development of appropriate accounting standards, tributions, which would instead go into fully funded a reduction in transactions costs related to stamp duties accounts. Defined contribution allows fund managers and registration, and clarification of the status (under to make investments with a higher expected return but the IncomeTaxAct) of a special purpose vehicle struc- greater volatility. tured in the form of a trust. · Simplify and harmonize the RBI's debt auction procedures. Making the Debt Market Work Better The government should consider using only one type · Simplify taxes to reduce distortions.The current stamp of debt auction,allowing"when-issued"trading and duty on secondary market transactions in bonds "noncompetitive bids," increasing competition in penalizes trading, thus discouraging investors from the underwriting process by opening auctions to all purchasing longer term corporate securities and investors, auctioning debt in specific amounts that hindering efficient portfolio allocation by investors. are sold in full, and permitting interest rate "strip- Removing the stamp tax on secondary debt mar- ping" of government bonds.The government bond ket trades would allow the establishment of a dema- market sets the tone for the Indian fixed-income mar- terialized settlement system for fixed-income kets as a whole. Complicated and varied auction instruments. Such a system would provide a reli- methods make it difficult to use the government able and secure settlement process and reduce trans- bond market for risk-free benchmarks. actions costs and the potential for fraud, which is Notes still a significant obstacle to secondary market trad- ing. If a secure dematerialized settlements system 1. A smaller government deficit would indi- rectly make more foreign funding available were created, a repossession market for securities for private infrastructure. could be permitted again,allowing traders to finance 2. The rate of return can often be met by the inventory required for market-making. The investing in government securities. ability to go short is essential to making efficient 3. In a repossession transaction, a holder of markets.It will also provide leverage for long-term a security enters into a transaction to sell investors, such as banks, helping them buy longer that security for immediate delivery to a sec- term securities. ond party.At the same time the holder con- · Regulate the debt private placement market.The current tracts to repurchase the security from the situation does not provide adequate protection to same party at a predetermined future date. institutional investors.The private placement mar- The transaction seen from the perspective of ket needs to be regulated so that issues may be sold the party purchasing the security for imme- only to genuine and sophisticated institutional diate transaction and agreeing to resell it to investors. Standards of documentation should be the same party for future delivery is known improved to provide a reasonable basis for making as a reverse repossession. an investment decision.Defining the type of investors 60 9 The Public-Private Interface An increasing emphasis on private provision of infrastructure services is placing new demands on the public sector's con- tracting and supervision skills.This frequently results in putting projects out to bid after inadequate preparation.The need for greater interministerial coordination, at both the central and state levels, is also highlighted by private sector developers as a constraint--particularly in sectors such as power, where many actors are involved. Contracting and Implementing Private hol power project.Examples in other sectors are numer- Infrastructure Projects ous. In Delhi 18 different bodies must give clearances for the location and height of transmission towers.There Developers say that the large number of government is an obvious need to reduce the required number of agencies involved in implementing an infrastructure clearances and clarify the clearance process. Some state project in India leads to significant delays. A recent governments (for example,Gujarat and Rajasthan) have example is the expansion of private telecommunica- established specialist bodies for preparation of projects tions services.The Ministry of Surface Transportation to be contracted to the private sector. and various municipalities contested right-of-way for The central government this year proposed creat- network roll-out, despite the licenses granted by the ing a Foreign Investment Implementation Authority. Department of Telecommunications giving private The authority would not grant clearances, but would operators the same rights as those enjoyed by the assist investors in handling the government agencies department. and ministries that are required to provide clearance.The proposal,now before the cabinet,provides a role for the Institutional Structures: Single Window Clearances central government and for states,whose representatives To date, developers have by and large been required to would be involved in their state's projects. obtain consent through their own efforts.There is noth- ing approaching a single clearance. Enron Corporation Project Contracting and Preparation has reported that more than 270 different clearances were There is increasing use of government agencies that required for approval of the second phase of the Dab- have a more commercial outlook than the civil service 61 The Public-Private Interface in developing and awarding privately financed infra- Sharing Risks between the Public and Private structure projects. In Tamil Nadu, for example, several Sectors agencies are charged with this responsibility, including the Tamil Nadu Infrastructure Financial Services Lim- Governments worldwide that are seeking private invest- ited, the Tamil Nadu Industrial Development Corpo- ment in infrastructure hope to reduce their financial ration, and the New Tiruppur Area Development exposure. But in many cases--and India is no excep- Corporation Limited, which was established solely for tion--governments are asked to bear residual risks asso- theTirapur water project.Gujarat has recently established ciated with these projects, which can amount to the Gujarat Infrastructure Development Board (GIDB), substantial contingent liabilities.These include exchange a specialized agency for the preparation of infrastruc- rate risk,nonpayment by public sector purchasers,expro- ture projects to be contracted out to the private sector. priation, and low demand.The danger of the govern- Rajasthan has adopted streamlined procedures for infra- ment assuming these risks is that it blunts the private structure project contracting,through the creation of an sector's incentive to screen projects rigorously. In addi- Infrastructure and Investment Promotion Board at the tion, governments are usually not good at accounting ministerial level,which will grant government clearances, and budgeting for contingent liabilities. a Standing Committee on Infrastructure at the secre- There is growing concern about the level of con- tarial level, which will screen and approve projects to tingent liabilities that state governments incur.Thus far be concessioned to the private sector, and a specialist these liabilities have been predominantly for state-owned project preparation company, PDCOR Ltd., in part- public enterprises.However,with an increasing number nership with financial institutions. PDCOR will iden- of privately financed infrastructure projects, further lia- tify which projects are financially viable,prepare detailed bilities will be incurred.Reporting on the levels of guar- project reports prior to their being offered to the pri- antees is relatively sparse, although it is recorded in vate sector via competitive bidding, and seek necessary comptroller and auditor general reports on state finances clearances. and evaluated by the major rating agencies. Gujarat One of the most important capabilities is the prop- recently set a Rs 11,000 crore cap on the amount of out- er identification and assignment of risk for a project.In standing guarantees from 1998/99 onward.Several coun- states such as Gujarat,Rajasthan,andTamil Nadu,which tries, including New Zealand, Colombia, and the have undertaken many transactions, there is increasing Philippines, have been publishing information on their awareness of the concept of risk analysis in projects contingent liabilities.Most approaches initially relied on involving the private sector. However, no comprehen- reporting maximum levels of liability and some estimate sive risk matrix or similar methodology is in place, of the expected value. More advanced techniques for although the use of special financial and legal advisors quantifying the risks involved have been used in Colom- does help remedy the problem. bia and the United States. Table 9.1 Summary of Principal Legislation Law Purpose Land Acquisition Act (1894, amended 1984) Acquisition of land for public purposes. The 1984 Amendment included a list of public activities.The Amendment also allowed land to be acquired by the government for firms for specific purposes. Forest Conservation Act (1980) Permission of the central government is required for converting forestlands to nonforest purposes. Indian Forest Act (1927) Framework for forest management. Environment Protection Act (1986) Umbrella legislation for environmental protection. Wildlife Protection Act (1972) Regulation of trade in wildlife and their products; establishment of a network of protected areas (National Parks and Sanctuaries). National Highways Act (1956, amended 1997) Specific provisions related to land acquisition for highway purposes. National Highways Authority of India (NHAI) The Amendment gives NHAI authority to acquire land and to entrust this function to Act (1988, amended 1998) others on its behalf. Source: World Bank staff. 62 The Public-Private Interface Environmental and Social Impact Legislation Policy Recommendations: Efficiency and Transparency in Contracting Infrastructure Many infrastructure investments have substantial envi- Projects to the Private Sector ronmental and social impacts. Land acquisition and the subsequent displacement of people residing on that land, Several countries have attempted to improve the effi- use of natural resources such as surface and groundwa- ciency of public sector contracting by establishing spe- ter, and harmful discharges from facility operations are cial government agencies and enacting overarching obvious examples.Several pieces of Indian legislation aim legislation on the granting of concessions. India has a to regulate the use and acquisition of land.This legisla- political tradition in which states and the central gov- tion makes distinctions on the basis of the locations of ernment have different roles in the infrastructure sec- a proposed development and on whether it will use pro- tors and involved ministries have a reasonable degree tected areas such as forests or coastal zones (table 9.1). of autonomy.The proposed Foreign Investment Imple- The Ministry of Environment and Forests is the mentationAuthority may improve coordination between government's central agency for planning, promotion, states and the central government in handling foreign and coordination of environmental and forestry programs. investments in infrastructure. The ministry uses environmental impact assessments as State governments could consider establishing a body the basis for its decisions on each project. Numerous that provides a one-stop shop for private developers court appeals to overturn ministry rulings led to the 1997 and investors to interact with, as is being implemented creation of a special appellate body, the National Envi- in Gujarat. This body would be responsible for con- ronment Appellate Authority, which is currently head- tracting and obtaining necessary clearances. The key ed by a retired Supreme Court judge.The authority has would be to ensure that the body coordinates effectively the right to decide appeals on clearances (or rejections) with public sector agencies, including the State Elec- of projects granted by the ministry. tricity Board,the PublicWorks Department,and munic- ipal bodies that provide water services. The central Legislation Regarding Rehabilitation and Resettlement of government will continue to provide some clearances, Displaced Persons and the Ministry of Environment and Forests will pro- The displacement of populations for large-scale devel- vide the bulk of environmental clearances for infra- opments has been an ongoing problem in India.Because structure projects.The Supreme Court has established the government has neither a national law nor a policy several such bodies, both for the nation and for specif- on this subject,the Ministry of RuralAreas and Employ- ic zones, indicating the court's concern about the abil- ment is devising both.Generally,specific policies designed ity to enforce the country's existing environmental to fit a particular situation are often adopted. In many legislation.1 cases private companies are responsible for implement- ing rehabilitation and resettlement with relatively little Reporting and Valuing Contingent Liabilities direct involvement from concerned state governments. There is growing concern about the potential level of The states of Karnataka,Maharashtra,and Madhya Pradesh contingent liabilities that state governments are incur- have general legislation on rehabilitation and resettlement. ring as more infrastructure projects reach financial clo- Rajasthan is also developing a resettlement policy. In all sure.As the number of privately funded infrastructure three states the legislation addresses primarily resettle- projects increases, there will be a greater need for state ment issues related to water resource projects,with pro- governments to monitor their contingent liabilities sys- visions allowing the government to apply the legislation tematically.State governments now report guarantees to to other projects at its own discretion.The definition of the state legislature.However,"letters of comfort,"which people affected by the projects includes those not dis- are not legally binding but represent a strong statement placed physically but affected as a result of land acqui- of commitment, are not required to be reported.2 The sition.The definition does not usually cover people who government of Andhra Pradesh does report these"soft- are displaced but have no legal title to the land. er"contingent liabilities.In addition to measuring their 63 The Public-Private Interface liabilities,public agencies need to create liquid funds that will allow agencies to meet liabilities as they arise,rather than wait for the next annual budget cycle. Auditing Public Support to Private Infrastructure Projects Given the substantial support that public-private infra- structure partnerships are likely to receive from the gov- ernment, India should work toward establishing capabilities to audit the award of these projects. The goal would be to assure the public that the government had achieved value for its money.A public sector agency would undertake project design,contracting,and nego- tiation.The agency also would provide documentation on why award decisions were made. In the United Kingdom,the NationalAudit Office supplements its own skills with those of professional advisors, including lawyers, investment bankers, and accountants. Skills within government units in India could be augmented through a similar system. Notes 1. In addition to the National Environ- mental Appellate Authority,the court estab- lished several ad hoc regional bodies,such as the Loss of Ecology Authority for the State ofTamil Nadu and the Environmental Impact AssessmentAuthority for the National Cap- ital Region. 2. For example, the government of Gujarat granted a letter of comfort to the GujaratTor- rent power project. 64 PART 3. POLICY RECOMMENDATIONS 10 Overview of Policy Recommendations There has been some progress since the infrastructure sectors were opened to private investment. But a deepening of reforms will be required if the private sector is to make a full contribu- tion to meeting India's infrastructure needs. Telecommunications · Initiate the liberalization of international services. · Introduce new entrants to cellular,concomitant with Strengthen the regulator's role the proposed migration of existing license holders · Amend legislation so that TRAI has clear author- to a revenue-sharing regime. ity over interconnection and all tariffs for service · Lift the restriction on Internet telephony--because provision in the sector. it is difficult to enforce, hinders competition in the · Develop clear policy guidelines that the Telecom sector,and prevents consumers and service providers Regulatory Authority of India (TRAI) can observe from benefiting from technology convergence. when making rulings to reduce the scope for ad hoc, after-the-fact intervention by the central Clarify universal service obligations government. · Assess what genuinely constitutes noncommercial · Strengthen TRAI's role in influencing opening of service. sector and introduction of new service providers by · Reimburse the Department ofTelecommunications giving it a formal role in the licensing process and through the NewTelecom Policy fund proposed to the introduction of new service providers. encourage expansion into noneconomic areas.Base this reimbursement on the excess costs that the Open telecommunications markets department is incurring to meet its universal service · Liberalize long-distance voice and data services with- obligations, not on its cellular license fee. out delay. · Establish standard qualification requirements for Allocate the spectrum efficiently opening fixed services and allowing qualified new · Relocate defense and security use from parts of the players to enter. commercially attractive bands and provide suitable · For long-distance and local fixed services,set license compensation. Consider auctioning the spectrum, fees at low levels that recover the costs of regulation particularly in areas where there are constraints on alone. its availability. 65 Overview of Policy Recommendations Power · Provide a policy framework so that informal water providers can continue to provide services to the poor. Privatize the power sector · Address water resource and allocation issues,partic- · Make distribution the priority for privatization.Cor- ularly in water-deficient areas. poratization, while a necessary starting point, is unlikely to produce the conditions required for Establish a regulatory framework improving performance and stopping the theft of · Ensure the continuity and stability of the contrac- power. tual environment,to aid private participation in the · Introduce comprehensive legislation that transfers water sector. state electricity board assets to successor companies, · Give to an independent agency the role of overseeing outlines the new industry structure,and creates a reg- concessions to insulate tariff and investment decisions ulator with appropriate powers as the starting point from political interference. for privatization. · Allow municipalities to grant contracts and licens- es, but give powers of enforcement and monitoring Create strong regulatory agencies to ensure that tariffs to a state regulatory agency. reflect costs · Create these regulatory agencies through legislation Institute central government policies to compare performance rather than government notification. of water systems and enhance fiscal support for municipalities · Grant a wide range of powers to regulatory agen- · Develop a benchmarking scheme to help stimulate pub- cies through this legislation, including licensing, lic debate by comparing the technical and financial per- resolving disputes among service providers,and reg- formance of water systems in towns across India. ulating their quality of service, in addition to set- · Enhance fiscal support for municipalities attempt- ting tariffs. ing to reform water distribution. · Curtail the scope for ad hoc policy interference through the legislation. Roads Encourage power reform through central government support Monitor and gradually reduce public support for private road · Require beneficiary states to undertake these reforms projects through further support from the central government · Review the need for certain forms of public sector to private power projects--for example, from the support for roads,such as covering senior debt in the Power Trading Corporation. event of a concessionaire default, following the first phase of successful concessions. In addition, devel- Urban Water and Sewer Systems op public sector support mechanisms that are well targeted and easy for the government to monitor. Introduce private participation into urban water systems · For sustainable improvement in performance, allow Establish incentive structures and demand risk in road full management control to the private sector (includ- concessions ing the authority to hire and fire workers and the · Consider establishing a system for the government to ability to provide incentives for good performance). award projects on the basis of the lowest present value · Phase in price increases over time to match improve- of gross revenues at a concession auction.The con- ments in water availability and better quality--and cessioning authority would set toll and discount rates, to allow a transition from the current low prices. and the concession would not have a fixed term but · Include targeted government support to finance rev- would end when the concessionaire earns what it bid. enue gap,with explicit targets for reducing them over · Establish a measurable value of the concession to time, or provide capital investments to match pri- simplify issues related to compensation for early vate sector resources. termination. 66 Overview of Policy Recommendations Consider other countries' approaches to public support for · Improve the interface between railways and ports, privately funded road projects possibly using agreements at Jawaharlal Nehru as a · Shadow tolls. A capacity payment is made as long as model, to eliminate long delays in cargo transfer. the concessionaire complies with certain key tech- nical or social parameters.The capacity payment can Address labor practices at the major ports be sized to cover a certain proportion of the pro- · Realign the workforce consistently with modern ject's fixed costs.Or it can be a variable payment based traffic and cargo handling requirements. on actual usage by vehicle type (the greater the · Allow private operators to adjust their workforce to weight on the variable payment,the lower the gov- actual operational requirements over time if the pri- ernment's exposure to demand risk). vate sector is called in before this issue is resolved. · Toll road utility. Project financing is converted into · Provide retraining, voluntary retirement, indemnity corporate financing once several projects are oper- payments for voluntary departure, and a temporary ating successfully. workers' pool as needed. Ports Establish efficient award criteria for concessions · When competition in the market is strong,the gov- Restructure the ports sector ernment would take bids on the highest price paid · Develop a new institutional structure for the sector, for the assets or shares of the enterprise being pri- separating policy, regulatory, and commercial func- vatized,the highest concession fee (one-time),or the tions clearly and providing a nexus for central and highest net present value of discounted revenue local interests. streams over the concession period to accrue to the government. Include the following elements in this new structure · When competition in the market is weak or · Corporatized Port Trusts--with private and public nonexistent,the government would be alert to the operating companies conducting commercial activ- risk of rent-seeking behavior, and therefore take ities related to ship services and cargo traffic man- bids on the basis of the lowest tariff charged to agement and handling. consumers · National Ports Council--to determine national port policy and strategic planning objectives, and define Airports main sector regulations to be enforced by the Port Authorities.The council would comprise represen- Undertake a wide-ranging privatization of operations at tatives from the Ministry of Surface Transportation existing airports, in addition to concessioning out greenfield (MOST), the Ministry of Railways, and the Min- sites to the private sector for development istry of Environment and Forests (MOEF), mayors of port cities, and Port Authority managers. Shift the functions of the Airports Authority of India away · PortAuthorities--autonomous public institutions that from operations and focus on its policy, planning, and statu- enforce navigation safety measures and environ- tory functions mental protection regulations,monitor concessions, lease contracts governing private sector activities in Create a separate independent authority to handle eco- the port area,and market the port facilities to attract nomic regulation for the sector: new investors. · Define the authority's powers clearly to ensure that it concentrates on areas where competition is restrict- Improve interministerial coordination ed.This would include oversight of the terms and · Improve cooperation between such actors as Indi- conditions of leases and concessions. an Railways, the Container Corporation of India, · Continue to have the Directorate General of Civil and the Central Warehousing Corporation. Aviation handle technical and safety aspects. 67 Overview of Policy Recommendations Developing Infrastructure Regulatory Bodies · Institute reforms to promote securitization. · Institute legal reforms to allow for securitization Establish regulatory independence through clearly defined without perfection of the security, facilitate special provisions in legislation purpose vehicles, and permit provident funds and · Clearly separate the policy role and reduce the scope insurers to invest in securitized instruments and for ad hoc policy interventions by government in transactions. the decisions of regulatory agencies. · Develop appropriate accounting standards and clar- ify the status (under the Income Tax Act) of a spe- Place the creation of an independent regulator within a cial purpose vehicle structured as a trust. broader restructuring of the sector · Simplify and harmonize the Reserve Bank of India's debt auction procedures. Fund regulators from sources outside the regular govern- ment budget Improving Efficiency and Transparency in · Consider establishing funding for regulatory Contracting Infrastructure Projects to the agencies through a small charge on regulated Private Sector companies. · Provide for scrutiny of the regulators'budgets by the Consider establishing a one-stop shop for contracting legislature and by auditors to ensure accountability. · Establish a single state government body responsible for contracting and obtaining necessary clearances and for Consider establishing multisector regulatory agencies at the interacting with private developers and investors. state level · Ensure that the body coordinates effectively with public sector agencies, including the state electrici- Developing a Genuine Market for Long-Term ty board,the PublicWorks Department,and munic- Debt ipal bodies that provide water services. Institute pensions and insurance reform Report and value contingent liabilities · Pass the Insurance RegulatoryAuthority Bill,which will allow competition in the insurance industry. Create liquid funds that will allow public agencies to meet · Phase out guaranteed returns on provident funds,spe- liabilities as they arise, rather than wait for the next annual cial deposits, and postal deposits to eliminate some budget cycle market distortions. · Reform the management of provident funds to Audit public support for private infrastructure projects ensure that the absence of a guaranteed rate of return · Have one public sector agency undertake project will not be detrimental to participant interests and design and contracting, negotiating, and providing to encourage investment in infrastructure. documentation on why award decisions were made. · Establish fully funded pension schemes to increase · Supplement the skills of central government units national savings and the demand for long-term debt, with the skills of professional advisers, including making more funds available for infrastructure. lawyers, investment bankers, and accountants. · Work toward establishing capabilities to audit the Make the debt market work better award of public-private infrastructure projects to · Simplify taxes to reduce distortions. 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