The Rakesh Mohan Committee makes a strong case for opening up urban infrastructure. all it needs is political will.
PICTURE this: you get up in the morning to a hot shower from the geyser. The water is continuous and not from the pump. You then log on to the Net and check your mail. You connect at the first go and stay connected for more than 10 minutes. As you go out, the sanitation services have cleared the garbage and the road to office is clean and without bumps. On reaching office, you see that the goods from Indonesia have arrived on time and in good shape. Sounds like fiction?
Also picture this: Your electricity, water and sanitation bills are no longer subsidised. The service is there, but you have to shell out almost double. The flyover that you take to reach faster has a cost too. Welcome to the brave new world. A world that would emerge if the recently - released report on infrastructure is implemented.
The Rakesh Mohan Committee on Commercialisation of Infrastructure, whose report was released by Finance Minister P. Chidambaram last fortnight, is seeking the opening up of this sector to private investment in partnership with public institutions. In perhaps the strongest-ever stand ever taken on Indian infrastructure, the report makes a persuasive case for private investment in what has been the domain of the government power, telecommuni-cations, roads, ports, industrial parks and urban infrastructure (water, sanitation and waste management). Many of its recom-mendations call for radical measures and often clear attitudinal shifts. Will the Government act on the report or will it be relegated to something of historical interest for 21st century economists?
The one thought that resonates loudly across the report is that the Government has to realise that it has no option but to take these radical steps. Says Dr Rakesh Mohan, director-general, National Council of Applied Economic Research, and the draftsman of the report: "Times have changed. And we have to move with the times."
Where Will The Money Come From?
The report feels that the annual level of infrastructure investment must rise from the current Rs 60,000 crore to about Rs 110,000 crore by 2001-02 and Rs 180,000 crore by 2005-06. Thats a hell of a lot of money. Also, its a specific sort of money: usually very long-term debt, since infrastructure projects have a long gestation and breakeven period. The debt market in India is still quite weak. Insurance companies, provident funds and pension funds, the most important debt market lenders across the globe, operate in a regulatory maze in India that will not allow them to invest in infrastructure.
The Rakesh Mohan committee has some dramatic recommendations in this area:
The first four of these will definitely have the Left Front crying blue murder. The Left has made it clear already that any move to open up insurance could lead to its with-drawing support to the United Front Government. Provident fund, of course, is a holy cow. The fifth recommendation CRR and SLR abolition will mean that the government gives up a key tool it has and uses at will to regulate credit and infla-tion rates to meet its political ends. It takes away tremendous power from Finance Ministry bureaucrats and the RBI . Will they go along?
Many of the committees recommendations on specific sectors too could run into rough weather. For instance:
Urban infrastructure: It feels the current multiplicity of agencies handling the services one for water supply, one for sewerage, one for street lighting, and so on is a classic example of various entities working at cross purposes, tripping one another up, and making life miserable for the citizen. All these agencies, says the report, should be merged with the municipality, which should be in charge of all the services.
Thats stepping on a lot of toes. Yet it has to be done. About a fifth of urban households do not have access to safe drinking water. Only 23.35 per cent have toilet facilities inside their homes. Less than half does not have sanitation facilities. The coverage in terms of organised sewerage system ranges from 35 per cent in class IV cities and 75 per cent in class I cities. Drainage system for rain water disposal covers only two- thirds of the population.
The report makes a case for commercialisation by pointing out successful examples abroad and pointing out that the cost of government failures has been much higher than the possible cost of market failure. Some areas, like sourcing, treatment and bulk supply of water, the committee feels, can be privatised, while the retail distribution and pricing may remain with the public sector. It recommends differential tariffs for water for different uses, metering of water supply, and the introduction of micro- level systems to recycle water at the household level. The Group recommends the full privatisation, over time, of solid waste management and low cost sanitation. Dramatic measures, these.
Power: The committee bells the cat squarely by recommending cost- based pricing for each consumer segment in a phased manner through a 10 per cent increase in the average tariff per annum net of inflation. Other suggestions include a central Electricity Regulatory Commission outside the governments operative control , and autonomy for regulatory agencies at the Centre and the states.
The report nails the haphazard way governments have been pursuing the private power project negotiations by suggesting the fixing of a benchmark price per unit of energy as the basis for allowing the projects, and an unambiguous political mandate to secure the target price or break off negotiations. It has recommended the urgent restructuring of SEB s into compact, viable, corporatised units that separate to a feasible degree the generation, transmission and distribution functions. The committee feels that it is very possible to raise efficiency in the power sector to the extent of a 25 per cent capacity saving. Thats 25 per cent . But will anyone do any- thing about it?
Telecommunications:
The committee turns the countrys low telephone penetration figure 1.3 per 100 (world average: 10 per 100) into an opportunity rather than a dismal statistic. With no large sunk investments in technologies that are rapidly turning obsolete, India in fact has a great opportunity to leapfrog technologies.
The report recommends the opening up of inter- circle long distance services by 2001, and the replacement of the Indian Telegraph Act, 1885, with a new legislation that takes into account the vast advances in technology that have taken place in the last 100 years. It recommends the transfer of all telecom licence fees to an Infrastructure Fund, which will provide debt and equity to infrastructure projects, with telecommunications having the first option to utilise a portion of this fund. But till now, the government has looked at telecom licence fees as a nice easy way to generate some additional general resources to spend as it likes.
Most importantly, the Group has recommended the corporatisation of the Department of Telecommunications (DoT) as India Telecom, perhaps a holding company with subsidiary companies in each circle, and another as a long- distance company, akin to the AT & T model. Apparently, even as the committee was finalising its report, DoT officials opposed this recommendation.
Roads: Allocation for roads has dropped from 6.7 per cent in the First Five- Year Plan to 3 per cent in the Eighth Plan, resulting in the nations highway network not keeping pace with traffic growth: only 2 per cent of this network is as yet four- lane, and as much as 64 per cent is single- lane. The Expert Group has recommended that four- laning of some of the existing highways be taken up through the public toll- road method. It has suggested that supernational highways, bypasses and spot improvements be done through the private sector or in collaboration with it, following the development of comprehensive guidelines and procedures for the approval of private projects.
THE Expert Group has recommended the setting up of a Highway Development Fund as an extra- budgetary funding source, through levying a cess of 50 paise per litre of diesel, Re 1 per litre of petrol ex-storage point, and a cess on automobiles at Rs 10,000 per commercial vehicle, Rs 5,000 per car, and a 1 per cent cess on auto components. This could raise significant funding, beginning with Rs 2,700 crore in 1997 to Rs 10,100 crore in 2010. Most importantly, the committee recommends that substantial portions, if not all, of the revenues from taxes on motor vehicles and transportation fuel be earmarked for roads. This will take true grit from any government. For this will have an immediate effect on the oil pool deficit, which will mean raising the price of other fuels, most significantly kerosene, another holy cow for socialists of the genuine and pseudo varieties.
Chicken And Egg: The report presumes the countrys economic growth rate to rise from the levels of around 6 per cent today to 7.5 per cent by 2000- 01 and to 8.5 per cent by 2005- 06. This appears unachievable. And the twist in the tale is that one of the key reasons it may be unachievable is the poor state of our infrastructure. Power is collapsing; our road network is seriously lagging behind requirements; when the world has moved on to containerisation, our ports know little about it. The only way our economy can grow at around 7.5 per cent is if the government does most of the dramatic stuff that the the funds needed for growing infrastructure can be generated is if the economy grows at the envisaged rate. The two streams have to flow parallel to each other and accelerate each other.
More important than economics, however, is politics. And it is poor politics that has prevented the country from making any meaningful foray into privatisation. Unlike abroad, where sometimes even a whole ministry is devoted to privatisation, the case in India has been unorganised, almost chaotic. Consider, for instance, that while in the initial rounds of disinvestment, only institutional investors were allowed to buy. And that too only bundled groups of companies. That is, the funds did not buy companies, but groups of profitable and unprofitable companies.
A look- see at how other countries tackled similar issues. Take Uganda. Following Ugandas Economic Recovery Programme which was launched in 1987 that led to the liberalisation of the economy, the government adopted two basic policy objectives in relation to public enterprises: reduce the direct role of government in the Ugandan economy and promote a correspondingly greater role for the private sector; and improve the efficiency and performance of the public enterprises that will remain under the ownership and control of the government.
The Public Enterprises Reform and Divestiture ( PERD ) Statute, 1993, was, therefore, enacted to give legal effect to the above policy objectives, with the PERD Secretariat as the implementing agency. Following the presidential directive of January 4, 1995, the PERD Secretariat was restructured into two units: the Privatisation Unit to handle all matters related to divestiture, and the Parastatal Monitoring Unit to monitor financial flows to parastatals. A Minister of State for Finance (Privatisation) was appointed for overseeing the operations of privatisation. The privatisation mandate was reduced to three years by the end of which 85 per cent of the public enterprises 107 companies were to be fully transferred to the private sector. To date 46 PEs have been divested. Compare that with the haphazard manner in which the Indian disinvestment was undertaken.
Mohan, though, is optimistic. "Despite all the confusion in politics we have moved ahead and each sector has seen huge changes," says he. "You have to realise that times have changed and the economic environment is different." We sincerely hope so. For our sake.