Infrastructure Development In India By Tarun Das

COUNTRY REPORT ON INDIA: PART-C INFRASTUCTURE DEVELOPMENT IN INDIA- TRENDS, ISSUES AND PRIORITIES For THE ECONOMIC AND SOCIAL SURVEY OF ASIA AND THE PACIFIC 2007 ______________________________________________________________________

Dr. Tarun Das*, Professor (Public Policy) Institute for Integrated Learning in Management Lodhi Institutional Area, New Delhi-110003. And Consultant, UN-ESCAP, Bangkok, Thailand. Formerly, Economic Adviser, Ministry of Finance, India.

25 October 2006 ______________________________________________________________________ * The paper expresses personal views of the author and should not be attributed to the views of the organizations he is associated with. The author would like to express his gratitude to the Poverty and Development Division, UN-ESCAP, Bangkok for providing an opportunity to prepare this paper. ** For any clarification and additional information, EMAIL [email protected]/ [email protected]/ [email protected]

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INFRASTUCTURE DEVELOPMENT IN INDIATRENDS, ISSUES AND PRIORITIES Dr. Tarun Das*, Professor (Public Policy) Institute for Integrated Learning in Management Lodhi Institutional Area, New Delhi-110003. And Consultant, UN-ESCAP, Bangkok, Thailand. Formerly, Economic Adviser, Ministry of Finance, India.

Contents 1. Introduction 2. Recent Policy Shifts 3. Means of Infrastructure Financing 4. Roads Development

5. Electricity 6. Telecommunications 7. Seaports 8. Civil Aviation 9. Railways 10. Urban Infrastructure

11. Water Supply, Sanitation and Waste Management 12. Posts

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INFRASTUCTURE DEVELOPMENT IN INDIATRENDS, ISSUES AND PRIORITIES Dr. Tarun Das*, Professor (Public Policy) Institute for Integrated Learning in Management Lodhi Institutional Area, New Delhi-110003. And Consultant, UN-ESCAP, Bangkok, Thailand. Formerly, Economic Adviser, Ministry of Finance, India.

1. Introduction The infrastructure sector covers a wide range of services such as transportation (railways, roads, road transportation, ports, and civil aviation), communications (postal and telecommunications services), and other public goods (water supply and sanitation, solid waste management, urban transport). Each of these segments possesses 'public goods" characteristics of "non-rivalry" and "non-excludability". This implies that a simple reliance on competitive markets will not produce sound outcomes in infrastructure. As most of the infrastructure sectors have long gestation period with lumpiness of huge capital, high capital/output ratio, high risk and low return, traditionally in India the public sector has played dominant role for developing and maintaining infrastructure services. However, over the years, constraints on public funds and competing demands for public investments in social sectors have forced the government to encourage private participation including foreign investment in infrastructure sectors. Profiles of infrastructure and major policy initiatives are given in Table-1. India’s Infrastructure Spending Is One-Seventh of China’s Infrastructure constraints are the most important macro constraints on the Indian economy, holding back its average growth. India currently spends a miniscule amount compared with its infrastructure needs. In absolute terms, China spends seven and half times of Indian infrastructure investment (excluding real estate). In 2003, total capital spending on electricity, roads, airports, seaports and telecom was US$150 billion in China (10.6% of GDP) compared with US$21 billion in India (3.5% of GDP). There is a need to increase infrastructure investment gradually to US$100 billion p.a. (8% of GDP) by 2010, from an estimated US$24 billion (3.5% of GDP) in 2004, to push India on to a sustained growth path of 8-9 percent as envisaged by the Indian planners. Glaring Deficiencies in Infrastructure Except for telecom, the cost of most infrastructure services is 50-100% higher in India than in China. For instance, average electricity costs for manufacturing in India are roughly double those in China. Railway transport cost in India is three times that in 3

China! Similarly, the average cost of freight payments as a percentage of imports is about 10% in India, compared with average of 5% in developed countries and an overall global average of 6%. Besides high costs, the lack of basic infrastructure facilities is impeding efficiency and productivity and eroding competitiveness of Indian industries in global markets. The gap is evident in almost all areas of infrastructure, including roads, airports, seaports, railways, electricity and industrial clusters in special economic zones. While large companies can draw on their own resources for basic infrastructure services, such as a captive electricity plant or a diesel generator set, small enterprises suffer when public infrastructure support is lacking. In many cases, it is not cost per se but the sheer lack of infrastructure that holds back small enterprises. In addition to attracting domestic investors for aggressive capex, improved infrastructure should also pull in foreign direct investment in manufacturing and augment a sustainable recovery in the investment cycle and growth. Challenges for Big Push in Infrastructure The enactment of the Fiscal Responsibility and Budget Management (FRBM) Act in 2003 and setting medium term targets on reduction of fiscal deficit have put serious constraints on capital expenditure of the government. The political environment and the emergence of coalition government since the mid-1990s have created further problems. The pulls and pushes of the coalition government for continuance of popular subsidies on food, fertilizers and petroleum products and the lack of political will to enhance longer payback-period-oriented infrastructure spending inhibit a change in spending mix in favour of current expenditure. First, the current state of the government balance sheet does not allow a major rise in public expenditure on infrastructure. Second, over the years, the ability of the government administrative machinery to handle large infrastructure projects efficiently has deteriorated. Third, political interference has resulted in a large gap between user charges and the costs of operating infrastructure utilities. In many cases, the gap is due not just to legitimate subsidization, but also to widespread theft and leakage. Fourth, poor private participation is a hurdle to improving efficiency. For many infrastructure sectors (such as electricity), privatization is the only way to ensure significant improvements in services. The electricity distribution network is over 90%-owned by the government or government-owned entities. But, it will be difficult to achieve any major privatization of public utilities due to resistance by trade unions and political parties. Table-1 Profiles of Infrastructure in India Items

Roads

Ports

Telecom

Airports

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Railways

Power

Basic facts

Road and highways network covers 3.3 mn kms and 0.2 mn kms, respectively

12 major and 180 minor & intermediate ports, which carried 510 mn tons of freight in F2005

Third-largest telecom network in Asia with 63 mn mobile and 47 mn fixed line subscribers.

126 major airports, including 11 international airports. Domestic and international passenger traffic are at 40mn and 19.4 mn, respectively. India’s top 6 airports account for 65-75% of passenger traffic are overstretched and need expansion

Rail network spans 63,000 kms. Daily, it carries 14 million passengers and 1.5 million tonnes of freight.

131,400 MW of electricity generation with 76% (100,000 MW) controlled by the public sector

Efficiency Metric

Only 9% of India's national highways are four-laned; average speed is less than 50 km/hour

Freight payment as a percentage of total import value is about 10% in India, compared with the global average of 6% and 5% for developed countries

Current Spending p.a.

US$2.5-3 bn (0.4% of GDP)

US$0.7 bn (0.1% of GDP)

Telecom is one area where India has done well. Average per minute cost of mobile telephony services has declined by 90% to just 2-3 US cents over the Past 7 years. US$6.3 bn (0.9% of GDP)

The Chinese railways’ output in traffic units is 2.5 times that of the Indian railways

US$0.2 bn (0.03% of GDP)

US$3.1 bn (0.4% of GDP)

Industrial users pay 2.5 times that of China for Electricity. Cross subsidization for electricity supplied to farmers/households are very high. High level of theft is an added issue. US$6.5 bn (0.9% of GDP)

Major Policy Initiatives

Seven Phase National Highway Development Program

National Marine Development Program (NMDP)

Apart from the large number of measures already taken, the government recently increased the FDI limit in telecom to 74% from 49%. A new broadband policy was also announced

-Restructuring and privatization of Delhi and Mumbai airports -- Greenfield Airports at Bangalore/ Hyderabad and three other cities

-- Greenfield railway network dedicated for freight traffic (FreightCorridor ) -- Greenfield metro projects at Hyderabad, Bangalore and Mumbai

-- Accelerated Power Development Program -- Enactment & Implementation of Electricity Act

Estimated Spending (F2009) Funding Plans

US$ 6.2 bn (0.6% of GDP) -- Earmarked revenues collected from levy on POL -- Seeking private sector participation by providing

US$ 1.9 bn (0.2% of GDP) 65% of NMDP's investment to come from private sector; 26% from public sector and balance 8.8% from

US$ 11 bn (1.1% of GDP) Private sector to drive investment in telecom. Increased FDI/ FII should also support capex in

US$ 1.5 bn (0.2% of GDP) -- Mumbai and Delhi airports will be modernized by private players under long-term lease. -- Greenfield

US$ 7.5 bn (0.8% of GDP)

US$ 9.7 bn (1% of GDP)

-- Projects to be largely funded by the public sector (central and state governments) -- Japanese government has agreed to fund US$ 4 bn (30%)

Corridor project. -- 20% of the generation capacity will come from the private sector (developed for captive use) and the balance

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capital grants and longterm annuity support

internal accrual of ports

telecom.

airports in 5 major cities will be developed using public/ private partnership models.

of the cost of the Rail Freight

of 80% from the public sector. -- A large part of the distribution & transmission capex will come from the public sector.

Source: India Economics- Infrastructure: Changing Gears, Morgan Stanley, Nov. 2005.

2. Innovative Means of Infrastructure Financing in India India provides a good example of innovative measures for financing huge investment needs for infrastructure development. Traditionally, infrastructure investment was being financed mostly by the government due to long gestation period, high incremental capital output ratio (ICOR), low return, high risk and lumpiness of huge capital, which is mostly, sunk investment. However, over the years demands have increased tremendously and the available public funds are inadequate, especially at the regional levels, to meet growing demand. Private funding has thus become a necessity. Consequently, both the centre and state governments are encouraging private participation including foreign investment and foreign loans for infrastructure development. Some innovative measures have also been devised to attract private capital. For construction of roads, three such methods are the build-operate-transfer (BOT) route, the annuity method and the special purpose vehicle (SPV) method. Under the model BOT agreement, the concessionaire is required to build, operate and transfer the stretch of road after the concession period, which could range from 20 to 30 years. During this period the concessionaire has the right to recover his costs and make profits through the collection of tolls. The annuity method is a variant of the BOT scheme wherein the concessionaire does not collect toll but receives a fixed semi-annual payment during the concession period to compensate for capital costs and operation and maintenance of expenses. The bidder quoting the lowest amount is awarded the contract. This is the most risk-free variant o the BOT method since the traffic risks are not borne by the private sector. The SPV method involves setting up of a joint venture company with two or more promoters to execute the project. Participation by the state government and the National Highway Authority of India (NHAI) in the form of equity is significant in SPV projects. This method finds favour with aggressive investors who prefer to share risk in the hope of higher returns. SPVs are common for the port connectivity projects of NHAI. Recently, government has set up an SPV called the Infrastructure Development Finance Company (IDFC) as a public limited company to finance infrastructure projects in various sectors that are financially viable but face difficulties in raising resources. The

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projects will be appraised by the lead bank or the financial institutions. The SPV will lend funds, especially debt of longer-term maturity, directly to the eligible projects to supplement other loans from banks and financial institutions. The SPV will also refinance infrastructure projects. Government will communicate the borrowing limits to the SPV at the beginning of each year. Consistent efforts have been made by the government to fine-tune these policies. Various legal steps such as the amendment of the National Highway Act 1956 permitting private entrepreneurs to undertake national highway projects on a BOT basis and to recover their investments through tolls, the amendment of the Land Acquisition Act, permission of 100 per cent FDI, right to collect and rationalize tolls etc. have been taken by the government to facilitate private participation in infrastructure development. Today the extent of private competition among private operators is continuously growing. So much so that the private operators do not actually mind paying grants to the NHAI to win road projects. For financing road development, government has imposed cess on petroleum products, which accrues to a separate Central Road Fund (CRF). The proceeds are used to finance road projects under the National Highway Development Programme (NHDP) administered by the NHAI and the Pradhan Mantri Gram Sadak Yojana (PMGDY that means the Prime Minister’s Village Road Scheme). Multilateral funding agencies are also providing loans to finance these projects. World Bank, Asian Development Bank (ADB) and the Japan Bank for International Cooperation (JBIC) have been supporting many road projects. Besides providing project finance and refinance, these agencies also offer various consultancy services to the central and state agencies for infrastructure development. The World Bank has adopted a balanced approach by disbursing funds not only for national highway projects but also for state highways and rural roads. Unlike the World Bank, the ADB has maintained a focus on financing national highway projects. JBIC was formed by the merger of J-Exim, which specialized in semi-commercial loans for the private sector, with the Overseas Economic Cooperation Fund, which provided official development assistance ON BEHALF OF THE Japanese government. Like ADB, JBIC has focused on national highway projects. In addition to roads, multilateral agencies are also providing funds for development of railways, power, seaports, airports and telecommunications. 3. Recent Policy Shifts In the last decade, there has been a significant evolution of the role of the State in the provision of these public goods. Government has significantly shifted away from the production of public goods to focusing on the regulatory and policy framework that would generate adequate provision of these public goods. Through this public-private partnership, of government as regulator and the private sector as producers, many improvements can be made in the infrastructure sector.

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Major policy initiatives taken by the government in recent years for infrastructure development are indicated in Box-1. Union Budget for 2006-07 announced further measures for infrastructure development (Box-2). These measures are expected to raise infrastructure investment from $24 billion (3.5% of GDP) currently to $47 billion (4.7% of GDP) by F2009. Although this is a relatively moderate pickup, it should provide some push to the overall investment cycle, including the manufacturing sector.

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BOX-1 Major initiatives for infrastructure development Power • Electricity Act notified in June 2003 allows State Electricity Reforms commissions to fix tariffs through a transparent process of bidding as per guidelines issued by the Central government. • 28 States have signed the tripartite agreement for one time settlement of the dues of State Electricity Boards to the Central Public Sector Undertakings, and 27 states issued the Bonds amounting to Rs. 290 billion. • 50,000 MW hydro electric initiatives launched in May, 2003. Telecom • The FDI limit for telecom was recently increased to 74% from 49%. • Unified licensing regime for telecommunication services and license for Unified Access (Basic and Cellular ) service introduced • Interconnection Usage Charges (IUC) Regulation, 2003 notified • Universal Social Obligation Fund set up as a separate non-lapsable fund Roads •

The National Highway Development Plan has been extended to seven phases, covering 65,000 kms of national highways, from the previous two phases, involving 13,000 kms. • Bharat Jodo Project for development of 10,000 kms of roads connecting state capitals with National Highways launched. Railways • Rail Vikas Nigam set up in January 2003 • Metro Rail in Delhi city started operations. • A Greenfield railway network dedicated to freight traffic (Freight Corridor) has been planned, along with additions to Greenfield metro projects at three cities. Airports • The government has allowed the restructuring and privatization of Delhi and Mumbai airports and construction of Greenfield airports at six metros Seaports • The government has initiated the National Marine Development Program, which envisages investment of $13.6 billion ($1.4 billion a year) over 2004-2014. . • Sager Mala project launched for integrated development of ports, shipping and inland waterways. Rural Infrastructure • The “Bharat Nirman” banner has now a more focused approach to improving rural

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Box-2 Measures announced in Union Budget for 2006-2007 Infrastructure Finance • India Infrastructure Finance Company Limited incorporated; in principle approval granted for to three roads projects in Gujarat. • Telecommunication: to reach 250 million connections by December, 2007, provision of Rs.1, 500 crore for Universal Services Obligation Fund in 2006-07; more than 50 million rural connections to be rolled out in three years. • Power: five ultra mega power projects of 4,000 MW each to be awarded before December 31, 2006; to create an enabling and empowered framework to carry out reforms an Empowered Committee of Chief Ministers and Power Ministers to be setup; Tenth Plan target of 3,075 MW of installed capacity for non-conventional energy sources exceeded by December 31, 2005 with installation of 3,650 MW capacity; Rs.597 crore provided for non-conventional energy resources; Rajiv Gandhi Grameen Vidyutikaran Yojana: 10,000 village s in 2005-06 and 40,000 more villages in 2006-07 to be electrified. • Coal: reserves of 20 billion tonnes to be de-blocked for power projects; definition of captive consumption to be amended to allow mining by producers with firm supply contracts with steel, cement and power companies; capacity of Central Mines Planning and Development Institute Limited to drill in order to prove reserves to be expanded. • Petroleum: under NELP VI., 55 blocks and area of 355,000 sq kms offered; investment of Rs.22, 000 crore expected in the refinery sector, in the next few years. • Road Transport: Budget support for NHDP enhanced from Rs.9,320 crore to Rs.9,945 crore in 2006-07; special accelerated road development programme for the North Eastern region at an estimated cost of Rs.4,618 crore approved with allocation of Rs.550 crore in 2006-07; 1,000 kms of access-controlled Expressways to be developed on the Design, Build, Finance and Operate (DBFO) model. • Maritime Development: National Maritime Development Programme (NMDP) approved; work is in progress in 101 projects covering, inland waterways, shipping and ports including deepening of channels in Kandla, JNPT and Paradip ; plan allocation for Department of Shipping increased by 37 per cent to Rs.735 crore; study to identify a suitable location for a new deep draft port in West Bengal to be carried out ; National Institute of Port Management, Chennai, renamed as National Maritime Academy, to be upgraded into a Central University with regional campuses at Mumbai, Kolkata and Visakhapatnam.

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4. Roads Development Indian Roads: Basic Facts • India has a relatively dense road and highways network, which covers 3.3 million kms and 0.2 million kms, respectively. • India’s road network carries 75% of the country’s freight traffic and 85% of its passenger traffic. • Annual road development spending has averaged US$2.5-3 billion over the last three years. • The national highway network accounts for 30% of the total highway network and only 2% of the country’s total road length, but account for 45% of total traffic. • Of the total 65,000 kms of national highways, only 9% are four-lane, 56% are twolane, and 35% are single-lane. Huge Gap in Road Infrastructure India’s road and highway network of 3.3 million kms provides a relatively dense network by international standards. China’s expressway network is almost 30,000 kms, versus less than 2,000 kms in India. Most of India’s highway network is two-lane or single-lane, with low service and slow speeds. Average speed on these roads is typically less than 50 km/hour, except for a few quality stretches. India spends only US$2.5-3 billion/year (0.4% of GDP) on development of roads, compared with an average of US$25 billion/year (2.4% of GDP) in China since the mid 1990s. Measures for Development of Roads A series of initiatives have been undertaken in recent years, which have set the stage for a quantum leap in India's road system. These initiatives combine new institutional arrangements, building high quality highways, linking up major cities to the highways and constructing rural roads, founded on a self-financing revenue model comprising tolls and a cess on fuel. The Asian Development Bank (ADB) has agreed to support the development of rural roads in India. The projects would be awarded on a BOT basis with `viability gap funding', where the government only fills in the gap required by private vendors who also enforce user charges in the form of tolls. This model of financing serves to leverage public resources into a maximal impact on infrastructure investment. In terms of policy issues, there is a shift in focus from inaugurating roads to comprehensive `corridor management', which can maximize the velocity and throughput of the highways.

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5. Electricity Electricity Sector: Basic Facts (a) India has 131,400 MW of electricity generation capacity, of which 99,200 MW is thermal, 29,500 MW is hydro/wind and 2,700 MW is nuclear. (b) 76% (100,000 MW) of electricity generation capacity is with the public sector. Of the 31,400 MW of private sector capacity, 18,700 MW is for captive use set up primarily by large industrial users. (c) Electricity transmission and distribution capacity is controlled largely by the stategovernment-owned electricity boards (SEBs). Only about 7,000 MW (6%) of distribution capacity is with the private sector. (d) About 33% of electricity generated is lost in transmission and distribution (largely theft) and 20% is distributed to farmers almost free. (e) The electricity operations of the public sector incur annual losses of US$4-5 billion despite burdening industrial consumers with huge cross-subsidization charges. (f) According to the Planning Commission of India, 56% of households are not supplied with electricity. India needs immediate overhaul in the electricity sector A large part of the unfinished agenda for India’s reforms now needs the support of state governments, and reform of the electricity sector is one such example. About 94% of the distribution is owned by state-government-owned entities. Currently, about 25%of the electricity generated in the country is distributed to farmers at almost negligible charge. A further 35% is lost in transmission and distribution (a large part of it through theft). Hence, in all, about 60% of the total output yields virtually no revenues. The household sector is also subsidized. Thus there is a heavy burden on commercial sectors leading to high cost economy. The viability of this sector requires rationalisation of tariff rates. Power Shortages Are Common Worsening structural problems have far-reaching consequences for the economy. Power shortages have become a routine feature, not only in the rural areas but also in larger cities. The annual peak demand/supply gap (peak shortage) has risen to about 11% for the country and the aggregate shortage is at 7%. For some states, the peak shortage is as high as 25-30%. Moreover, according to the Planning Commission of India, these do not take into account suppressed demand and scheduled load shedding. SEB Losses Add to Fiscal Pressure State Electricity Boards (SEBs), which have traditionally been the key investors in the power sector, own most of the electricity distribution assets in the country. While they were expected to set base minimum tariffs that would allow them to earn a return of at least 3%, most SEBs are making significant losses. SEB losses rose to about Rs254 billion (1.2% of GDP) in 2001 from Rs41 billion (0.6% of GDP in 1992). Over the past

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few years, there has been a gradual reduction in the deficit as a percentage of GDP to 0.7% in 2005, but the burden is still fairly high. State governments do not consolidate these losses in reported fiscal deficit numbers. If the losses were added to the state budgets, the combined state government fiscal deficit would be about 20% more than is currently reported. Investment Growth Although the government has opened up the power sector to both domestic and foreign investors, and has allowed 100 percent equity for foreign investors, it has failed to attract meaningful investment due to non-remunerative tariff rates. Growth in power generation capacity decelerated to 4.1% in 2001-05 from 4.5% over 1991-2000, 8.5% over 19861990 and 8.8% over 1981-1985. The current operational environment is not conducive to investment by private companies. The most important investment deterrent is the poor financial condition of the SEBs, which are the counter-parties monopolizing the distribution and transmission of power. In addition to the SEBs’ poor financial health, complicated clearance requirements impede investment. Moreover, government investment has been slowing over the past few years because of financial constraints. As a result, capacity generation has been severely affected. Captive Power Projects Remain the Popular Choice The private business sector continues to build its own independent sources of electricity generation. Although this is an inefficient and fragmented way of building electricity capacity, business entities have no choice but to invest on their own for a reliable supply of electricity. Indeed, not only large manufacturing entities but even services sector companies – such as software and business process outsourcing companies – are forced to set up their small captive diesel generating plants. On average, about 20% of electricity capacity addition is now in the form of captive plants. This trend will only exacerbate the problems for SEBs as they continue to lose more and more industrial users, who currently bear the cross-subsidization charges. Unfortunately, this trend hurts small entrepreneurs most. These small businesses, which cannot afford captive power plants due to size constraints, end up suffering inconsistent power supply at very high costs. Key Issues Facing the Electricity Sector (a) Low tariffs for agriculture and domestic consumers: Although average tariffs rose during 1993-2000, they clearly did not keep pace with the increase in costs, and the tariff-to-cost ratio, which was 82% in 1993, dropped to 74% in 2000. While this ratio has improved over the past few years to 77% in 2005, the gap remains high. Besides, a large part of the improvement in this ratio has been achieved by increasing the cost burden for industrial users rather than reducing theft. (b) Imbalance between agriculture and industry

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The power tariff structure in the country continues to be dysfunctional and needs urgent attention, in our view. The SEBs have continued to meet the gap between revenue and cost by disproportionately raising tariffs for industrial users. The average tariff for industrial customers is more than nine times that for agricultural users. The average tariff paid by industrial users is 380 paise/Kwh, whereas the average tariffs for agricultural and domestic users are 40 paise/Kwh and 190 paise/kwh, respectively. Indeed, the industrial tariff in India is one of the highest in the world, whereas the domestic consumer tariff is one of the lowest in the world. (c ) Poor distribution infrastructure and theft While the government has attempted over the past 10 years to attract private investment in power generation, investment in transmission and distribution has been ignored. This has produced a poor transmission and distribution infrastructure, and a lack of metering and auditing systems has resulted in theft. There has been a significant improvement in power plants’ operating efficiency in the past few years, with the average plant factor improving from 55.3% in 1992 to 64.6% in 1999 and further to 72.8% in 2004. However, losses from transmission and distribution (T&D) worsened from 19.8% in 1992-93 to 25% in F1998, and further to 33% in F2004, largely because of theft. The losses due to theft have been in the US$4-5 billion p.a. range, according to the Power Ministry. As energy audits are almost nonexistent, losses from theft could be higher. These T&D loss rates in India are among the highest in the world. (d) Absence of meaningful peak load management The peak demand/supply gap could be reduced by introducing a differential tariff system, whereby power supplied at night is cheaper than power supplied during the day. This would reduce peak-hour demand pressure. In April 2005, the State Electricity Regulatory Commissions of all states decided to implement differential electricity tariffs from 2007 for peak and non-peak hours. This will be rolled out in a phased manner, with the first phase affecting commercial and industrial consumers. A few states, including Tamil Nadu and Kerala, have already installed special meters to enable the differential billing system. (e) Inefficient resource management Electricity is on the ‘concurrent list’ – i.e. both the states and the central government have authority for key policy decisions. Over the years, various state governments have set up electricity generation plants in their respective constituencies, ensuring adequate power supply to the voting population. Many power plants were established closer to the area of consumption than to resources. Ideally, power plants should be closer to resources. Transmitting power over long distances is easier than transporting coal. (f) Complex administrative framework Private investment is often also deterred by a difficult clearance process. Delays in land acquisition, rehabilitation and environment-related issues and law-and-order problems are

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some of the other hurdles associated with setting up projects, which often acquire political overtones when the private sector is involved. Reforms in Power Sector The enactment of the Electricity Act in 2003 One of the most significant measures for reform in the sector was the enactment of the Electricity Act in 2003. As electricity is under the ‘concurrent list’, participation by the state governments is critical. The central government has increased dissemination of information and interaction with leaders at the state level. Several rounds of chief ministers’ conferences have been held as a way of arriving at a consensus for reform. After consulting with the state governments, the central government passed the Electricity Act, which requires the state governments and state electricity boards to improve and restructure the operations of SEBs. This Act provides a legal framework for enabling reforms and the restructuring and modernization of India’s power industry. The Act calls for reorganization on commercial principles (cost recovery, privatization and market orientation) as well as transparency, accountability and efficiency. The Act also resulted in administrative simplicity by integrating the Indian Electricity Act, 1910, the Electricity (Supply) Act, 1948, and the Electricity Regulatory Commission Act, 1998, into a single Act.

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Electricity Act: Key Measures 1. State Electricity Regulatory Commission (SERC) to be set up within six months of enactment. 2. SEBs to be unbundled by a specific date decided by the state governments, with consent of the central government. 3. Generation of power is completely de-licensed and captive power generation is freely allowed. 4. Open access to the transmission network under regulatory supervision by 2009. 5. Any generation company is free to seek distribution license and vice-versa. 6. Generation and transmission projects not to require technological economic clearance from the government-owned Central Electrical Authority (CEA). 7. CEA’s role will be limited to national planning and technical development. 8. All supply to be compulsorily metered within two years of the act’s passage. 9. Cross-subsidy to be reduced and eventually eliminated; however, no time-frame was specified for this. 10. Central commission to fix generation and transmission tariffs; distribution tariff to be fixed by the SERCs. Source: Economic Survey, Ministry of Power, and Morgan Stanley Research Tight Financial Condition of States Is Driver of Change The total commercial losses of state-owned electricity boards (SEBs) were an estimated Rs207 billion (0.7% of GDP) in F2005. Not having much choice, many states have initiated reforms in the electricity sector. The central government and multilateral agencies are lending funds to cash-strapped SEBs with an undertaking to initiate critical reforms. The Central Government Is Pushing States to Implement Reforms The central government has encouraged states to implement reforms by providing conditional loans to ailing SEBs. The central government has implemented an incentive scheme for states under the Accelerated Power Development Program (APDP). The APDP is a separate program that receives an allocation from the central government budget. States undertaking reforms will be assisted through APDP grants. Under this scheme, states receive funds for power sector investment but must fulfill certain conditions. A few states have responded positively to these incentives. Similarly, in 2003 the central government undertook a US$7.8 billion financial bailout package for SEBs, which provided a one-time write-off of interest on loans due from the SEBs to central public undertakings (units supplying coal and providing electricity to SEBs). The bailout scheme required SEBs/state governments to accept reform-based performance milestones, such as metering of distribution feeders, reducing subsidies to farmers and controlling theft.

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Score Card of Reforms In addition to the central government’s efforts, the multilateral agencies have also been pushing states to initiate reforms by providing conditional loans. Over time, all states have signed a memorandum with the central government to implement critical reforms to gain access to financial support. Now 27 states have appointed regulatory authorities, 13 have corporatized and unbundled electricity operations into generation and distribution, and 18 have initiated tariff rationalization. Reform Progress Card (No. of States) Jun-2001 Mar-2003 1. Formation of regulatory body 14 20 2. Initiation of tariff rationalization 9 14 3. Unbundling taken up 6 10 4. Privatization 1 2 Source: Ministry of Power, Powerline, Infraline, Morgan Stanley

Mar-2005 27 18 13 2

Implementation of Reforms Still Slow charge’ Although on paper the Electricity Act provides a push to reform in the sector, the actual implementation is still suffering from a lack of political will on the part of the state governments. For instance, the Electricity Act required all SEBs to unbundle their operations into separate generation, transmission and distribution entities by June 2004. The Electricity Act was passed in April 2003, but still there are many states that have not unbundled their operations. The central government has been liberal in extending deadlines for these defaulting states. There are also various constituents who are lobbying for amendments to the Electricity Act (e.g., repeatedly relaxing the deadline by which cross-subsidization has to be removed and altering the power of regulators). In addition, finalization of the National Tariff Policy has been delayed by over six months with issues regarding the distribution of power between the Power Ministry and State Regulators continuing to be debated. The Power Ministry and the Forum of Power Regulators recently set up a panel to prepare an action plan for open access in distribution by 2009 (as envisaged in the Electricity Act). Implementation of this measure will allow consumers using power of 1MW or more to purchase electricity from their chosen generator (including captive power plants with surplus capacity) and transmit this to their area by paying a ‘wheeling, in addition to a surcharge that would be used to meet the cross-subsidy in that area. As many as 19 states have issued regulations allowing open access in their state. However, given that open access would take away paying industrial consumers from SEBs, we believe there will likely be resistance by SEBs to freely allowing open access.

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State Governments Still Indulging in Populist Measures Post the passing of the Electricity Act, many states have announced populist measures that go against the spirit of the Act. For instance, Tamil Nadu, Maharashtra, Punjab and Andhra Pradesh have started providing free electricity to farmers. These moves are only going to make it more difficult to improve the overall health of the sector. Hopes for a New Beginning of Privatization Fading? The bad experience in the first privatization of state-owned electricity distribution and generation entities in the state of Orissa in 1999 slowed the process of handing over management of more of these units to the private sector. There was greater caution in initiating the second privatization, which was undertaken for the state of Delhi in 2002. Recent moves by the Delhi state government, interfering in the determination of electricity tariffs, have dented the credibility of the government as regards creating an environment for successful privatization. However, privatization of distribution is by far the most critical reform to improve electricity supply at a reasonable cost in the country. Currently, the measures taken by the state governments are far from inspiring. No Quick Solution in Sight Over the past few years, a lot of new progressive measures have been initiated by the central government and state governments. However, some states have reversed some of these positive steps and many others halted efforts from time to time, resulting in a slow progress. Unless the states make serious efforts to improve revenue realization, there is little hope of SEBs building a sustainable financial position. The ratio of power supply charges to cost is still low, at about 77%. Many states are still focusing on increasing tariffs for industrial users instead of reducing theft and cutting cross-subsidization. While there is encouraging evidence of an increasing number of states initiating critical reforms, overhauling this crucial infrastructure sector is by far the biggest challenge the country is facing in its bid to accelerate economic growth on a sustainable basis to 8-9%. Public Sector Will Continue to Lead Investments in Electricity Considering the current slow pace of reforms, public sector utilities will have to maintain their lead in adding fresh capacity. Private sector participation will rise marginally but it will be largely focused on adding generation capacity for captive use. Investments in the electricity sector are expected to rise only marginally from 0.9% of GDP currently to 1% of GDP in 2009. 6. Telecommunications One of the Fastest-Growing Infrastructure Sectors Albeit from low levels of penetration, India’s telecom services sector has witnessed strong growth of 28% (in subscriber base terms) over the past five years. Most of the growth has been driven by the mobile telephony segment. The mobile telephony sector

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has recorded average annual growth of 95% and contributed 75% of lines added over this period. Penetration of fixed plus wireless telephone lines combined has nearly quadrupled over the past five years, and net monthly additional telephone line subscriptions have risen to 2.1 million, from 0.1 million five years ago. Internet penetration is still low, but growth in this sector is strong. India is a ‘narrowband’ market, with less than 10% of its 6 million Internet subscribers having broadband (minimum download speed of 256 kbps) connectivity. According to NASSCOM, internet subscribers in India have reached 10 million by June 2006 from 6 million in March 2005 and 4.4 million in March 2004. Rising Per Capita Income in Urban Market … The pickup in average growth in the industrial and services sectors has driven up urban per capita income. The combined real growth of the two sectors has accelerated to an average of 7.6% in the past 10 years, versus 2.1% for the agricultural sector (driver of rural incomes). This has been the key driver for strong growth in urban telephony penetration. Indeed, the urban market has accounted for about 85% of total additional telephone connections (fixed plus mobile) over the past five years. Falling Costs Have Been the Key Drivers Significant technological change has resulted in a sharp decline in the cost of accessing telecom services over the past seven years. For the telecom companies, capex per subscriber has declined by 70-80% over the past five to seven years. The average per minute cost of mobile telephony services (air-time, excluding rental costs) declined by 90% to just Rs1-1.2 (2-3 US cents) over the past seven years. The average cost of a mobile handset has also fallen sharply. For instance, the cost of a low-grade cell phone has declined to Rs2,000 (US$45) currently from Rs5,000 (US$115) five years ago. In addition to these cost reductions, Indian players have enticed users by providing access to telecom services in low-denomination billings – i.e. reducing the minimum bill commitment for users. Low-end users can access mobile telephony service for a minimum monthly commitment of just US$4.5. Reforms Initiated in Telecom Sector 1992 India’s telecommunication sector liberalized to bridge the gap in government spending and to provide additional resources for the nation’s telecom target. Private sector allowed to participate. 1994 National Telecom Policy announced. License for provision of cellular mobile services granted by the government of India for the metros (Delhi, Mumbai, Kolkata and Chennai). Cellular mobile service to be duopoly (i.e. not more than two cellular mobile operators to be licensed in each telecom circle), under a fixed license fee regime for 10 years.

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1995 19 more telecom circles get mobile licenses. Kolkata becomes first metro to have a cellular network. 1997 Telecom Regulatory Authority of India set up. 1998 Government monopoly on internet service providers (ISPs) lifted in November, with private ISPs allowed to operate in India. 1999 Tariff rebalancing exercise initiated. New National Telecom Policy announced. 2000 National Long Distance Service opened to private operators without any restriction on the number of operators. 2002 Government initiates divestment of stake in VSNL (Leading provider of international long-distance service from India). Government opens International Long Distance Service to private players. 2004 Government announces broadband policy. 2005 Government approves the increase in the FDI limit for the telecom sector to 74% from 49% Source: Cellular Operators Association of India, Morgan Stanley Research Given India’s pyramid structure of income distribution; such a sharp cut in access costs has enabled exponential growth in the addressable market. Similarly, broadband costs are falling sharply. The government, though late, announced its broadband policy in October 2004, which aims to increase broadband penetration. The key features of the policy include increasing the affordability and reliability of broadband services, allowing infrastructure creation through various alternative technologies and providing incentives for creation of additional infrastructure. The minimum monthly tariff for broadband connection has fallen to US$6 for 25 hours of usage from US$22 prior to the announcement of the policy. Favorable Policy Support from the Government The telecom sector policy environment is one of the most progressive among Indian infrastructure sectors. Of course, the sector had an advantage in that there was no legacy of political interference in determining user charges. The quality and the cost of the telecom infrastructure available in India have changed drastically over the past five years. Indeed, with increased competition from the private sector, telecom costs in India are already among the most competitive in the world. The Private Sector Is Leading the Way The favorable policy environment has encouraged the private sector to participate aggressively, and private investment has contributed significantly to growth in the sector. The share of the private sector in total telecom capacity has risen to 47% from 7.1% five years ago. Indeed, over the past five years, the private sector has accounted for 63% of total capacity additions in India.

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Telecom Capex Likely to Maintain Current Pace Telecom sector capital expenditure has risen over the past five years to an estimated 0.9% of GDP in 2005, from 0.7% in 2001. Over the next two to three years, it is expected that expenditure will rise to 1.1% of GDP. The domestic private sector will lead the charge in telecom capex. Increased foreign investment should also support capex in telecom. Although FDI has accounted for only 6% of the total investment in the sector in the past five years, rising demand and an increase in the FDI limit to 74% should attract more foreign investment. 7. Sea Ports Ports are a crucial part of the transportation infrastructure of the country. Transportation by ship is highly energy efficient. It can be increasingly used for intra-India traffic, and it is obviously essential for international trade. In the future, there can be a further blossoming of transportation by ship to include inland water transport (IWT). These alternatives - intra-India shipping on the coastline and along rivers - can become important new alternatives in the Indian transportation scenario. IWT today only accounts for 0.15% of domestic transportation, and there are opportunities for considerable growth. There has been a gradual improvement in port sector efficiency over the past few years, with the rising trend of privatization. However, overall efficiency is still low, and the cost of cargo movement at Indian ports remains significantly higher than the global average. Indian Ports: Basic Facts (a) India has 12 major and 180 minor and intermediate ports, dotted along 7,500 km of mainland coastline. (b) Seaports handle 95% of India’s foreign trade in volume terms and 70% in value terms. (c) Major ports accounted for 75% of the total cargo traffic of 345 million tons in F2004. Minor ports (largely captive private jetties) account for 25% of total cargo. (d) During F1996-F2005, average cargo traffic growth was 20% and 7% at small ports and major ports, respectively. (e) Each major port is managed by a port trust under the jurisdiction of the union government. Minor ports fall under the jurisdiction of state governments. (f) The first privatization of Indian ports took place in 1997 (project was commissioned in 1999). (g) The turnaround time at Indian ports was 3.4 days in F2005. About 80 per cent of total volume of port traffic handled is in the form of dry and liquid bulk, while the remaining 20 per cent consisted of general cargo including containers. There has been an impressive growth of container traffic in recent years in respect of vegetable oil and iron ore.

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Minor ports constitute an important competitive alternative to the centrally regulated `major ports'. A small subset of the 185 `minor ports’ is well developed, with all-weather berthing facilities. Cargo handling operations are undertaken in about 61 ports while the remaining are restricted to fishing and passenger traffic. States with a coastline are increasingly emphasizing modernization of these minor ports. Public investment in ports is about 15 per cent of the total investments while the remaining 85 per cent is raised through private investment. Ongoing activities include setting-up of new ports, modernization and expansion of existing ports, improvement in draft, productivity and efficiency of Indian Ports to benchmark them against international standards, improvement in hinterland connectivity, provision of navigational aids, maritime training facilities, ship-building and repairs etc. Seaports are one of the few infrastructure sectors where there have been significant reforms implemented by the government, which has helped improve productivity. Although a good beginning has been made, progress is somewhat slow, leaving the overall cost-efficiency at Indian ports relatively low compared with world averages. Private Sector Participation in Ports Rising foreign trade and technological changes have created a need for higher investment in the sector and required participation from the private sector. The government announced its policy for privatization of ports in 1996. The private sector was allowed to construct new facilities within existing ports, improve productivity at an existing port facility by upgrading and/or improving managerial practices, and/or develop new ports. However, the process has been slow and, so far, only the Ennore Port has been corporatized. The response from the private sector has been encouraging. The domestic private sector has taken the lead in adding capacity in the form of minor ports. A large number of international players have also set up operations in India. The first international private player in ports was P&O, which set up the International Container Transshipment Terminal at Nava Shava (near Mumbai) – a big success. Other significant international players are involved in the Indian ports sector, including Port of Singapore (PSA), Dubai Port Authority, Maersk Logistics and Stevedoring Services of America, along with domestic companies. Since 1996 (post the announcement of the guidelines for private sector participation), 19 projects involving private investment of over Rs64 billion have been approved, of which 14 have already started operation. Port Efficiency Has Improved Over the Past Five Years Increased private sector participation and privatization have helped bring about a significant improvement in the overall productivity of Indian ports. The average turnaround time at Indian ports improved to about 3.4 days in 2005, from 6.6 days in 1998 and 8.5 days in 1996. Despite this improvement, Indian facilities still lag ports like Hong Kong, which have turnaround times of 1-2 days.

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Overall Efficiency Still Lagging Lagging efficiency is evident from the higher ratio of freight payments to total import value of about 10% in India compared with the global average of 6% and 5% for developed countries. The higher costs at Indian ports are due to low productivity at terminals, insufficient hinterland infrastructure facilities and delays at customs. The inefficiency of port infrastructure results in higher lead-times for trade. The lead time for India’s exports is 22 days, compared with 7 days for China’s exports. Overall inefficiency at Indian ports has been a key reason for global shipping lines not making any of the Indian ports a hub in the region, preferring Singapore, Dubai and Colombo. A New National Maritime Policy Planned In order to enhance ports capacity for rising foreign trade, the government has recently drafted a comprehensive National Maritime Development Policy. The aim is to facilitate private investment, improve service quality, promote competitiveness and encourage more investment in the port sector. The key objectives of the draft policy with regard to ports are as follows. (a) Modernize existing ports and develop new ports to fully utilize coastline. (b) Increase the flow of private investment into ports, both domestic and foreign. (c) Corporatize major ports as and when necessary through enabling suitable legislative amendments to the Major Ports Trusts Act, 1963. State governments to pursue privatization of all minor ports. (d) Promote development of domestic connectivity to ensure least-distance access of the country’s cargo to the ports and vice-versa. To achieve the objective of higher investment, the Department of Shipping envisages investment of US$13.6 billion (an average of US$1.4 billion a year) in ports and related infrastructure over the next 10 years under the National Marine Development Program (Table-2). The bulk of the investment (65%) is expected to come from the private sector. In addition, the government has initiated the Sethusamudram Ship Channel Project, which envisages dredging of a ship channel across the Palk Straits between India and Sri Lanka at an estimated investment of Rs24.2 billion (about US$530 million). In addition, we believe that the private sector will continue to invest in captive private jetties. Table-2 Investment Under National Marine Development Program, 2004-2014 (Investment in Rupees billion) Project Head No. of Projects Govt.Support Connectivity* Internal Accrual Development Works 81 18 0 23 Deepening of Channel 17 48 0 1 Port Connectivity 35 13 46 6 Replacement of Equipment 30 3 0 11 Other Works 56 33 0 10 Total 219 114 46 51 Total (US$bn) 2.6 1.0 1.1

Private Investment 277 3 66 8 39 392 8.8

Total 318 52 131 21 82 603 13.6

* will be funded mainly by the Ministry of Railways, state governments and Department of Transport and Highways, hence can be considered public expenditure.

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8. Civil Aviation Physical constraints on airports and airlines infrastructure remain a crucial barrier to growth. In its report, A Road Map for the Civil Aviation Sector, India’s Ministry of Aviation acknowledged that the industry’s development is hampered by “outdated infrastructure, inadequate ground handling systems and night landing facilities, poor passenger amenities and the poor utilization of existing capacity. Major Changes Initiated by the Government After neglecting airport infrastructure for years, the government has initiated a number of policy measures to attract the private sector and improve efficiency. Some of the major initiatives taken by the government in this context are as follows: (a) India already has an Open Skies policy. (b) India has liberalized services with the UK, USA and other countries. (c) Increasing foreign investment limit to 100% in airports with FDI beyond 74% requiring government approval. Air traffic growth in both domestic and international sectors have been encouraging as a consequence of allowing private operators and adopting an open air policy. 9. Railways Rail transport is more efficient than roads as it is environment friendly, less energy intensive and less expensive for long and medium distance and bulk traffic. Yet, in recent decades, there has been a shift from Railways to roads in India. The National Highway Development Project (NHDP), in particular, poses a major challenge to the railways by offering a well implemented technology (truck transportation). Reforms in domestic civil aviation have also induced greater competition against the railways when it comes to premium passenger traffic. Indian Railways: Basic Facts (a) Indian Railways, a department of the Government of India, is almost a mini country by itself. As of 2002-03, the Indian Railways employed approximately 1.5 million people, making it the largest employer in India and one of the largest public sector employers in the world. (b) Daily, the railways carry 14 million passengers and 1.5 million tonnes of freight. (c) The Indian rail network is spread over a wide area, with 63,000 route kms (82,000 running track kms) and about 7,000 stations. (d) After the US, Russian and Chinese railways, it is now the fourth-largest railway system in the world.

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(e) The market share of railways in India has gradually declined from 89% in 1950-51 to about 30% currently in freight traffic and from 68% in 1950-51 to about 15% currently in passenger traffic. (f) This has not only affected IR adversely, but has hurt the national economy, railways being five to six times more fuel-efficient than roads. China’s Network Is Now Larger than India’s In 1990, India’s rail network was the third-largest in the world after the US and Russian networks. India’s network was then about 8% larger than China’s in terms of route kms. However, with aggressive investments over the past ten years, China’s rail network has moved ahead of India’s. China’s rail network route length of 74,400 kms (as of 2004) is about 18% higher than India’s 63,000 kms. As is evidenced by the following facts, Indian Railways are less efficient than Chinese railways. (a) Over 1990-2004, the Chinese railway network extended its route km by 16,608 kms (29% growth). During the same period, the Indian railway network grew by only 633 route kms (a mere 1% growth). (b) Investment in the Indian railway network over the 1992-2002 decade totaled US$17.3 billion (US$1.7 billion a year), in contrast to US$85 billion (US$8.5 billion a year) of investment in Chinese railways. (c) The Chinese railways’ output in traffic units (TU =PKM+TKM) is 2.5 times that of the Indian railways. (d) Between 1992 and 2002, the two railways carried almost exactly the same volume of passenger-km, but the Chinese railways carried four-and-half times the freight tkm carried by the Indian railways. (e) Average employee output for the Chinese railways is 2.1 times that for the Indian railways. Staff costs (excluding pensions) for the Indian railways are about 40% of ordinary working expenses versus just 25% for the Chinese railways. (f) The average passenger tariff in India is 55% lower than that in China. (g) The average freight tariff in India is almost 66% higher than that in China. 10. Urban infrastructure Importance of urban problems Roughly 30% of India's population lives in cities, and in absolute number (30 crore) India has the second largest urban system in the world. It puts a heavy pressure on urban infrastructure comprising drinking water, sanitation, sewage systems, electricity and gas distribution, urban transport, primary health services, and environmental regulation. These areas differ from telecom or highways in that the public goods involved are local public goods. The beneficiaries from improved urban infrastructure in a given city are limited to the citizens living in that city. This necessitates a different design of institutional mechanisms.

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International experience suggests that without reforms in the institutional framework for urban infrastructure, central or state level government funds directed into the urban sector will not have the expected economic and social returns. On the contrary, the urban sector could make larger fiscal claims when faced with acute problems of infrastructure or poverty, and thus exacerbate India's fiscal problem. The success of central or state fiscal reforms is thus dependent on the efficiency of the cities themselves. Urban transportation One key element of urban infrastructure is public transport. Public transport empowers the poor, who might otherwise be restricted to economic and personal activities within walking distance. Public transport systems maximize urban-rural linkages, and improve the extent to which rural citizens can access city centers for the purpose of labour supply, without the proliferation of slums adjacent to city centers. Public transport improves the energy efficiency of the economy, when compared with an accent on private solutions, and reduces the problems faced with air pollution. Indian capital Delhi has recently embarked on an important initiative in this regard. The Delhi Metro Rail Transit System (DMRTS) inaugurated on December 24, 2002 has been highly successful. Similar projects could now come about in many cities. Most urban areas suffer from poor road networks. Mass Rapid Transit Systems (MRTS) do not exist except in three cities (Mumbai, Kolkata and Delhi). According to the Planning Commission of India’s study, in developed countries cities start planning and building MRTS as their population level crosses a million and start operating by the time their population reaches two million. India was estimated to have 35 urban agglomerations with above one million population and 13 urban agglomerations with population above 2 million, as per Census 2001. Finally, a few state governments have now taken up some projects that aim to improve the urban transport system. For instance, Andhra Pradesh and Karnataka governments plan to invest in new MRTS for Hyderabad and Bangalore, respectively. Similarly, the Maharashtra government plans a 15 km metro system in addition to its existing suburban railway system. We have explained these projects in detail in the Railways infrastructure discussion. 11. Water Supply, Sanitation and Solid Waste Management About 60% of urban households are not connected to public sewerage systems. Similarly, management of urban solid waste has been poor. Garbage collection efficiency ranges from 50 to 90% of the solid waste generated. Most of the urban water supply and sanitation providers are not financially viable. They need large subsidy support and have not been able to collect the required user charges due to political interference. Reforming the user charge policy and granting greater independence to these providers would be necessary for making them financially viable and increasing investments in this area.

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Reforms Needed The Planning Commission of India (PC) has over the years emphasized urban infrastructure development, highlighting the need for structural reforms in municipalities and corporations. Some of the important measures suggested by the Planning Commission to augmenting investments in urban infrastructure investments are as follows: Decentralization of authority and responsibility to urban local bodies: Improving the functional and financial autonomy of urban local bodies (ULBs) is the key to enhancing the institutional capacity at the local level for urban infrastructure development. Although a few states have started moving in this direction by transferring the powers to ULBs and appointing metropolitan planning committees, according to the planning commission, functional and financial autonomy of ULBs remains a “distant dream”. Strengthening of ULBs’ finances: Most State Finance Commissions have recommended measures to devolve a share in tax and non-tax revenues to ULBs. Most states are still hesitant to devolve functions or provide autonomy to ULBs in terms of allowing them to raise financial resources. Collecting octroi (an indirect tax on inter-state goods movement) was one of the key sources of revenues for local bodies. However, with the new tax reforms, this tax has been abolished by most of the states taking away this main source of revenue for ULBs. Hence, ULBs have become more dependent on the state governments. Lack of rationalization of user charges on urban utilities and PPP: Increasing spending through public/private partnerships (PPP) should help to augment the overall efficiency and delivery of services. However, limited progress has been made in public/private programs because of the absence of properly designed PPP models and transparent regulatory framework related to user charges. Increase central assistance in urban development: During the tenth plan (2002 to 2007), an outlay of just Rs115 billion (about US$2.5 billion) or Rs23 billion a year (about US$500 million a year) was allocated by the central government as gross budgetary support for the ministries of Urban Development and Urban Employment and Poverty Alleviation. Despite the increase in allocation suggested by the Planning Commission, the central government has not paid much attention to this issue so far. The central government launched an urban reforms incentive fund to encourage states implement reforms such as repealing the Urban Land Ceiling Act, Reforming Rent Control Act and a levy of reasonable user charges. While many states came forward to sign the initial memorandum of understanding, they have been hesitant to implement the milestones agreed. The aggregate disbursement to state governments under the incentive schemes has been negligible. Except for the MRTS projects taken up by the three states, there is no major effort on the development of urban infrastructure being planned. Post the last general election, the government has initiated some plans targeting the rural poor, but there is a no major plan

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to address the problem of urban infrastructure. There is an urgent need for comprehensive planning by each state for urban infrastructure development 12. Posts The Indian postal network is among the largest network in the world in terms of area covered and population served, and constitutes an important mechanism of achieving transportation and communication. The Indian postal system currently provides 38 services which can be broadly divided into three categories: communication (letters, postcards etc.), transportation (parcels, money orders etc.), and other services (post office savings bank, postal life insurance, etc). The Post Office Savings Bank is the largest bank in India in terms of network, accounts and annual deposits. While India has a higher number of post offices per unit population than China, Indonesia, Malaysia or the US, India lags behind some other countries in this regard. User charges in the postal system only cover roughly 63% of costs, and there is a significant subsidy element. The advent of computers and communications has profound implications for the postal system. Telegrams have lost ground to faxes, long-distance telephony and email. In some countries, more letters are sent by email than are sent by post. Two internet-based initiatives of the department are `e-post' and `e-bill post'. Under Epost, email messages are downloaded and printed at the post office, and physically delivered to the recipient. Under E-Bill Post, customers are able to pay multiple utility bills at post offices.

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