india i

Transcription

india i

INDIA INFRASTRUCTURE REPORT 2002
Editor: SEBASTIAN MORRIS
Associate Editor: RAJIV SHEKHAR
Project Co-ordinator: ANUPAM B. RASTOGI
T.C.A. Anant
R.V. Anuradha
Samir K. Barua
Atanu Chakraborty
Puneet Chitkara
Amita Chudgar
Atiyah Curmally
Bernard D’Mello
Keshab Das
Bithin Datta
Lokesh Garg
Subir Gokarn
Mahendra Gujarathi
Shreekant Gupta
Rekha Jain
Abha Singhal Joshi
Piush Joshi
Gopakumar K.
Prem K. Kalra
Bhavin Kothari
Brij Kothari
Praveen Kulshreshtha
P. Nandini Kumar
Venu Madhav
S. Manikutty
Mukesh P. Mathur
Sebastian Morris
Nirmal Mohanty
Ajay Pandey
Avinash Pandey
Samuel Paul
B.P. Pundir
G. Raghuram
K. Ramakrishnan
T.V.S. Ramamohan Rao
Anupam B. Rastogi
Binayak Rath
Dheeraj Sanghi
Kaushal K. Saxena
Mukesh Sharma
Rajiv Shekhar
Jaivir Singh
Sidharth Sinha
S. Sriraman
Biju Varkkey
Jayanth Varma
Delhi School of Economics
Independent Consultant, Mumbai
Indian Institute of Management, Ahmedabad
Gujarat Water Infrastructure Limited, Gandhinagar
Indian Institute of Technology, Kanpur
Infrastructure Development Finance Company, Mumbai
Management Development Institute, Gurgaon
Gujarat Institute of Development Research, Ahmedabad and Maison de Suds, Bordeaux
National Council for Applied Economic Research, New Delhi
Bentley College, Waltham, MA
Delhi School of Economics and Massachusetts Institute of Technology
Commonwealth Human Rights Initiative, Delhi
Independent consultant, Mumbai
Public Affairs Centre, Bangalore
National Institute of Urban Affairs, Delhi
Public Affairs Centre, Bangalore
Steel Tubes of India, Indore
Department of Economics, Kirori Mal College, Delhi
Department of Economics, University of Mumbai
INDIA INFRASTRUCTURE REPORT 2002
Governance Issues for Commercialization
3iNetwork
Infrastructure Development Finance Company
1
PREFACE
During this past year, the 3iNetwork has greatly grown in strength. Besides working on the India Infrastructure Report
(IIR) 2002, the network is engaged in several projects as part of its endeavour to fulfill its mission: to bring intellectual
capital to the infrastructure sector. It is heartening to see that the network has been the principal catalyst in bringing
infrastructure issues to the focus for policy-analysts and researchers at various institutions. There are several studies and
research projects under its programme agenda that aim to further the development of infrastructure in India, especially
in the areas of power, telecom, environment, and coastal shipping. A number of theses and dissertations are being undertaken
by students at IIT, Kanpur and IIM, Ahmedabad. Much of the credit for this heightened interest in infrastructure-related
issues goes rightfully to the faculty members.
It is also gratifying to note several professors at IIT(K) and IIM(A), who have been among the founders of the network,
are contributing to the efforts by the Central and some state governments to tackle the problems of infrastructure in the
country. Sidharth Sinha is a member of the Committee to Review the Orissa Reforms in the Power Sector, constituted
by the Government of Orissa. S.G. Dhande has played an important role in conceptualizing the Media Lab (MIT) project
in India. V.N. Asopa is carrying out a study on infrastructure support for agriculture exports. Sebastian Morris is a member
of several committees reviewing power sector reforms.
IIR 2002 focuses on one of the most fundamental building blocks of a reform agenda, namely, governance frameworks
for commercialization. It was in December 2000 that we first mooted the subject of governance for this issue of the IIR.
Subsequent developments, such as the Enron saga, the Orissa power sector reforms, delays in the introduction of the
Convergence Bill, and the CNG vehicle programme in Delhi, against the backdrop of further deteriorating infrastructure
services, all played a role in forcefully proving the point we had been trying to make all along—good infrastructure needs
good governance.
Governance should encompass the creation, protection and enforcement of certain basic rights such as rights to land,
clean air, information, and to earn a livelihood. Our approach to these rights defines the framework in which our societies
operate and the extent to which we can tolerate inequities and unbalanced growth of opportunities. Thus, it has implications
both for welfare considerations within a country as well as at the international level. The inability to solve the problems
of dispossessed peoples around the world lies at the root of international terrorism. The right to good governance in terms
of policies to promote ‘public good’ arises precisely from these foundations. We ignore these fundamental issues at our
own peril.
What we are witnessing in India is the failure of the government to re-invent itself to meet the changing realities of
our times. It was amply evident the world over that an omnipresent government attempting to do everything from
maintaining law and order to providing goods and services to people, is not feasible. The business of the government is
to provide good governance at least cost. This cost is the yardstick of success. The citizen comes first in any governance
framework.
In India, we saw the government provide services, but this came with enormous wastage of resources, deteriorating
service quality, an inability to invest in improvements and safety standards, high and rising subsidies, large and unfounded
pension liabilities for employees of the system, massive cost and time overruns of crucial projects, and, above all, an inability
to reform encrusted institutional mechanisms that oversee this juggernaut. Many of these symptoms are illustrated in
government owned and operated infrastructure services in the past such as railways, airlines, hotel and tourism services,
vi Preface
road building and maintenance, hospitals, and education. Clearly we need a new paradigm that will gradually dismantle
what we have built since independence and replace it with an enabling environment which encourages private participation.
The answer to many of our problems lies in public–private partnerships that use available resources effectively. Defining
these partnerships in a manner which can be operationalized, is the challenge for the coming decade. IDFC is working
on this paradigm, using UK’s Private Financing Initiative, which has enormous implications for India: privatize where
possible (where commercialization possibilities exist and users of services are in a position to cover the full cost of its
provision); and where this is not possible and where the government retains its accountability, to tax payers for service
provision (such as education, health services, national savings, and defence), use private financing and management of
services with governments paying the final bill and thereby reaping huge efficiency gains.
There are many possibilities that can bridge the transition from where we are to where we wish to go. It is not the
choice of means that poses a problem, as the clarity in determining the ends and setting-up objectives to be attained. This
can only be done through good governance mechanisms. If one does not know to which port one is sailing, no wind is
favourable. The challenge for India is to decide in which direction we wish to head.
This report fulfils a gap in our understanding of governance issues for successful commercialization of infrastructure
services. I am confident that IIR 2002, like its predecessor IIR 2001, will achieve widespread readership and acclaim.
Nasser Munjee
ACKNOWLEDGEMENTS
Nasser Munjee put forward the idea of governance in the context of commercializing infrastructure as a possible theme
for this report at a time when the topic seemed rather nebulous to us, since few of us had the formal experience to discuss
the theme. Within days though Nasser had convinced us all that most often the person or group trying to bring about
the right policy is fighting bad ideas and bad decisions that then go on to become a precedent for other actions. The
importance therefore of the political, institutional, organizational, economic and ideological basis of governance stands
out starkly, especially in our society where there is so much visible governance failure.
All of us have experienced as citizens and consumers of public services, the working of governments and its departments.
We owe it to Nasser who urged us to boldly write, based on our convictions and experience. In writing we have learned
much—from each other, and from ourselves—because we had to become conscious and clear about our own ideas and
communicate them. As we went along we realized the enormity of the task since there was little definitive in the literature.
We did not write with a particular framework, or conceptualization, or ideological standpoint. Such an approach would
obviously have had the advantage of binding the report well, but would have been constraining and perhaps not true to
the task of coming to grips with the problem of improving governance. We also realized that some of the more basic failures
of governance are political and structural, and solutions within the current paradigm of policy may not be possible. Yet
writing about them is important. The only guiding track that we followed was that our descriptions, diagnosis, and analysis
ought necessarily to have the pragmatic aspect of suggesting actions and changes in policy and law, and in designing of
organizations and institutions to improve governance. We appreciate and acknowledge IDFC’s support in this broad agenda.
We are grateful to Partha Mukhopadhyay, Vinita Sinha, Y.M. Shivamurthy, M.Y. Rao, Ajay Narayanan, Shubhagato
Dasgupta, Sri Kumar Tadimala, Vandana Bhatnagar, Saugata Bhattacharya, Anupam Srivastava, Bharati Solanki and
Soumen Bagchi, for their comments and suggestions during the initial brainstorming session. The subsequent writers’
workshop to discuss the papers was held at Mussorie at the Lal Bahadur Shastri National Academy of Administration.
We thank the Academy and its faculty, Binod Kumar and Y. Mathur, for their support, and Rajil Saraswat and Gaurav
Shukla of the 3iNetwork at IIT(K) for the arrangements. Anupam Rastogi worked tirelessly to make these sessions fruitful.
Without the remarkable dynamic scheduling of the presentations by Binayak Rath, the seminar would hardly have been
possible.
We owe significantly to the discussions and communications, formal and informal, we had with many people including
the authors of the papers. We especially thank A.K. Mittal, Abha Singhal Joshi, Abhay Mehta, Ajay Narayanan, Ajay Pandey,
Ajay Shankar, Ajit Kapadia, Alice Morris, Amita Shah, Anish Nanavaty, Anupam Rastogi, Ashok Jhunjhunwala, Ashok
V. Desai, Atanu Chakraborty, Atiyah Curmally, Aurobindo Banerjee, Bernard D’Mello, Bharti Solankey, Bhavin Kothari,
Biju Varkkey, Bimal Giri, Bimal Patel, Binayak Rath, Binoy Acharya, Biswajit Das, Bithin Datta, B.R. Marwah, Brian
Hunter, Brij Kothari, Carol Upadhayaya, D. Subrahmanyam, Dheeraj Sanghi, Dinesh Awasthi, Errol D’Souza,
G. Gopakumar, G. Raghuram, Gajendra Haldea, Gautam Navlakha, Girish Sant, H.P. Jamdar, Jahar Saha, Jaivir Singh,
Jayanth Varma, Jeemol Unni, Jerome Morris, J.N. Singh, Joel Ruet, Keshab Das, K.J. Joseph, K.K. Gupta, Lokesh Garg,
Mahesh Vyas, Manubhai Shah, M.H. Jowher, M.K. Iyer, M.N. Thippeswamy, Mohan Pandey, M.S. Verma, Mukesh
Mathur, N. Venkiteswaran, Naishadh Parikh, Nayan Parikh, N.G. Janodia, Nirmal Mohanty, P. Panneervel, P. Bhaduri,
Pakki Reddy, Pallavi Paul, P.I. Suvrathan, P.K. Taneja, Prabir Purkayastha, Praveen Kulshreshtha, Prem Kalra, Prem
Pangotra, Premchander, Puneet Chitkara, R. Mohankumar, R. Ramanujam, Rakesh Basant, Rekha Jain, Sadashiv Rao,
viii Acknowledgements
Samir K. Barua, Sanjay Dhande, Sanjay Shah, Sanjeev Ahluwalia, Shantanu Dixit, S.K. Deshpande, Shreekant Gupta,
Subodh Wagle, Sunil Parekh, T. Vijaysarathy, Tara Nair Das, T.C.A. Anant, T.K. Moullik, Trilochan Sastry, Tushaar Shah,
T.V. Prabhakar, Ujwala Rajadhyakshaya, Usha Ramchandran, Venu Madhav, Venugopal Reddy, Vijay Ranchan, Vinita
Sinha, Vivek Rawal, V.L. Mote, W. David Hopper, Y.M. Shivamurthy, Yudhbir, Rajil Saraswat, Gaurav Shukla and
Gyan Bajpai.
Ajay Pandey, S.K. Barua and Anupam Rastogi provided useful input for editing and organizing the contributions to
this report.1 Sanjay Dhande and Prem Kalra must be thanked for and providing institutional support to the activities
of the 3iNetwork at Kanpur and Mussoorie. T.V.S. Rammohan Rao, Dheeraj Sanghi, Rahul Varman, Puneet Chitkara
and Prem Kalra also provided valuable editorial support.
Mahesh Vyas went out of his way to help with the data. The entire data appendix, which we hope will be a regular
and growing feature, is due entirely to his efforts. We thank him and the Centre for Monitoring the Economy for
contributing to the report. Laxmi Raghavan Murali at the CMIE extracted the appendix data which Bhavin Kothari and
Baidyanth Guru formatted.
Urmil Anjaria virtually lived in the office ever ready to make those painful corrections on to the soft copies many times
for each paper at all odd hours. Bhavin Kothari, Deepa Keskhani, Trupti Patel, Baidyanath Guru helped as assistants at
IIM(A). Jaya Singhania, Gracinda Rodrigues and Babu Nambiar at IDFC helped with the coordinaton. We cannot thank
them adequately for their tireless efforts. To Kavita Iyengar and Shreemoyee Patra of Oxford University Press we owe our
heartfelt thanks, not only for working with a very tight schedule, but also for their valuable comments and suggestions
that helped us organize the report better.
On behalf of all the contributors, we thank all those who have helped us put together this report. However, we as
editors are responsible for any errors that remain.
Sebastian Morris
Rajiv Shekhar
1
To Jahar Saha I owe a most personal thanks, for reposing the confidence he did in me and encouraging us at IIM(A). (S.M.)
CONTENTS
List of Tables
List of Boxes and Figures
List of Abbreviations and Acronyms
1.
xiv
xvi
xviii
OVERVIEW
Sebastian Morris
1
Challenges for Governance and Policy-making 1 • An Opportunity for Change 2 • Good Governance in
an Inequitious Society 3 • Displacement, Resettlement, Rehabilitation and the Land Constraint 3 • The
Constitutional and Legal Framework 5 • Access to Information 6 • Environmental Pollution 7 •
Contextualizing Regulatory Choices 8 • Corruption and Bribery 8 • Accounting for Transparency 9 •
Lessons from Governance Failures 9 • Rural Poverty, Infrastructure and Gyandoot 9 • The Urban Situation
10 • Urban Water 11 • Developments in the Electricity Sector 11 • Transport 12 • Technology Moves
as Consumers Wait for WLL (Telecom Sector) 13 • ‘Voice’ Governance and Networking 14
2.
THE CHALLENGE
Sebastian Morris
TO
GOVERNANCE
IN INDIA
15
Institutions, Economic Development and Governance in India 20 • Mode of Subsidization and Corruption
23 • Shortages and Corruption 27 • Contracts Regulation and Governance 30 • Conclusion 34
References 35
3.
THE INFRASTRUCTURE SECTOR
3.1
IN INDIA,
2000–1
37
A Review of Sectors 37
Anupam B. Rastogi
Highlights 37 • Initiatives at the State Level 39 • Power and Energy 39 • Power Sector Reforms
and States 42 • Other Sectors 45 • Conclusion 53
3.2
WLL, Governance, Corporatization and SWANS: A Review of Institutional Developments 54
Rekha Jain
State Wide Area Networks for Governance 56 • Creation of VSNL 57 • Convergence Bill Highlights
59 • Major Functions of the Regulatory Commission 59
References 59
4.
THE CONSTITUTIONAL
4.1
AND
LEGAL FRAMEWORK
FOR
GOVERNANCE
The Framework of Regulation 60
T.C.A. Anant and Jaivir Singh
Instruments of Regulation 61 • Governance Structures: Legislature, Executive and Judiciary 63
60
x Contents
4.2
How Public Feedback Aids Public Accountability 66
Samuel Paul and Gopakumar K.
The Disabling Environment of Public Services 66 • Exploring the Potency of ‘Voice’ Through Report
Cards 68 • Evaluating and Benchmarking Civil Services in Bangalore 68 • Developing Ward Based
Indicators in Mumbai 70 • Business Environment in Karnataka 71 • Creating Public Awareness
72 • Stimulating Agency Reforms 72 • Strengthening Civil Society Initiatives 72 • Democratic
Responsiveness 73 • Critical Success Factors 73 • Conclusion 74
4.3
The Legal Framework for Private Participation 74
Piush Joshi and R.V. Anuradha
Constitutional Provisions 74 • Essential Features of the Legal Framework 75 • A Critique of the
Legal Framework for Private Participation 77 • Contractual Framework 79 • Uniform Law for
Infrastructure Projects 80 • Gujarat BOT Law 82
4.4
Opening Doors to ‘the Outsiders’: The Right to Information 83
Abha Singhal Joshi
Right to Information Laws Elsewhere 84 • Obligation to Publish in Acts of Certain States 86 •
Procedures for Obtaining Information Ignored 86 • Godbole’s Critique 88 • World Bank’s Push
for Transparency 88 • Using the Right to Information 89 • The MKSS Experience 89
4.5
Community Participation Makes a Difference: Water and Sanitation Projects in Rural India 90
S. Manikutty
Findings 90 • Impact on Project Outcomes 92 • Conclusion 94
References 94
5.
ENVIRONMENT
5.1
AND
REHABILITATION
Environmental Governance and Regulation in India 96
Atiyah Curmally
Legislative Efforts 96 • The Prevailing Form of Governance 98 • Perverse Incentives under CAC
100 • Suggestions to Facilitate More Effective Regulation 101
5.2
The Assault on Workers in Land Use Policy and Practice in Delhi 108
Delhi Janwadi Adhikar Manch
The Legal Context 109 • The High Price of Survival 114 • The Struggle Over Urban Space 115
5.3
Railway Slums in Mumbai 119
Prem K. Kalra and P. Nandini Kumar
Genesis of the Mumbai Slums 119 • The Story so Far 121
5.4
Power Projects Development: Review of Social and Environmental Issues 121
Binayak Rath and K. Ramakrishnan
Issues in the Development of Power Projects 122 • Mitigation Measures 123 • Building a Framework
for R&R 124 • Recommendations for Effective R&R 124
5.5
The CNG Vehicles Programme in Delhi 125
B.P. Pundir
CNG in Delhi 126 • Supply Infrastructure 127 • Challenges 128 • Conclusions 129
5.6
Environmental Impacts of Large Dams: A Social Critique 130
Bernard D’Mello
The Narmada Campaign and PIL 130 • EIAs and SIAs 132 • Conclusion 134
References 136
96
Contents
6.
REGULATORY
6.1
AND
CONTRACTUAL FRAMEWORK
xi
138
Private Finance to Private Entrepreneurship 138
Jayanth R. Varma
Market-driven Resource Allocation 138 • Reasons for the Emergence of the Current Model 139
• The Way Forward 140 • Excessive and Premature Regulation 144 • Pro-competitive Regulation
146 • Strategic Infrastructure Projects 146 • Conclusions 148
6.2
The Gujarat Gas Bill and Its Genesis 148
Atanu Chakraborty
Antecedents 148 • Features of the Gas Act 149
6.3
Corruption and Governance: Insights from the Literature 150
Ajay Pandey
Economic Analysis of Corruption and Evidence 151 • Infrastructure Sectors and Corruption 157
6.4
Accrual Accounting for Infrastructure Assets: A Review 159
Mahender Gujarathi and Samir K. Barua
Accounting Standards for Infrastructure 160 • Rationale and Soundness of the GASB 34 Provisions
161 • Accrual Accounting: A Square Peg in a Round Hole? 161 • Conclusions 163
6.5
Crises in the Governance of Financial Infrastructure 164
Samir K. Barua
Financial Infrastructure: A Brief Overview 164 • The Securities Scam of 1992 165 • MMCB Scam
168 • US-64 Crisis 169 • Lessons from the Scams 171 • Summary 174
6.6
Is Bribery Welfare-promoting? 174
A Basic Framework of Rationing-by-Waiting 175 • Rationing-by-Waiting in the Presence of Bribery:
Efficiency and Welfare Implications 176 • Conclusion 177
6.7
The Enron Disaster 179
Prayas Energy Group
The Malady 179 • The Remedy 182 • Conclusion 184
References 185
7.
RURAL INFRASTRUCTURE
7.1
Endowments and Rural Infrastructure: Issues Today 187
Keshab Das
Planning and the Rural Sector 187 • Chronic Rural Poverty: The Bitter Reality 189 • State or Market
190 • Sanitation Facilities 190 • Drinking Water Supply 191 • Roads 192 • Housing 193
7.2
Transforming Gujarat Villages into Gokul Grams: Can it Happen? 195
Keshab Das
The Idea 195 • Little Community Participation 197
7.3
Gyandoot: Can it be the Harbinger of Knowledge? 198
Brij Kothari, Avinash Pandey and Amita Chudgar
Investment 199 • Control over Soochanalayas 199 • The Gyandoot Software 200 • Service Charges
200 • Observations 202 • Feedback 203 • Conclusion 204
References 205
187
xii Contents
8.
URBAN INFRASTRUCTURE
8.1
206
Management of Infrastructure Projects in Urban Local Bodies: Case Study of Kanpur
Development Authority 206
Bithin Datta
The Kanpur Development Authority 206 • Procedure for Planning and Implementation 207 •
Problems in Planning 208 • Problems in Implementation 209 • Private Participation 210 •
Encouraging Signals at KDA 211
8.2
Transfer of Development Rights: An Alternative to Conventional Land Acquisition 212
Bhavin Kothari
Transfer of Development Rights (TDR) 212 • TDRs in Mumbai 213
8.3
Issues in Municipal Water Supply: A Case Study of Kanpur 214
Mukesh Sharma
Current Water Pricing 214 • Water Losses and Revenue Collection 215 • Pumping and Water
Treatment 216
8.4
Water Reforms through Water Markets: International Experience and Issues for India 217
Nirmal Mohanty and Shreekant Gupta
Water Markets and their Rationale 217 • International Experience with Water Markets 219 • Water
Markets in India 221 • Introducing Formal Water Markets in India 222 • Conclusion 225
8.5
Alandur Sewerage Project: A Unique Experiment of Public Participation in Project Financing 226
Mukesh P. Mathur
Project Particulars 226 • Project Cost and Finance 227 • Public Participation 228 • Project Status
on March 2001 229
8.6
SWM and Scope of Peoples’ Participation: A Case Study Of Kanpur Nagar Nigam 229
Binayak Rath
Solid Waste in India 229 • Government Policies 230 • Management of Solid Waste in Kanpur 231
• Abortive Attempts at Change 234 • Bringing in the Informal Sector 235
References 236
9.
FRAMEWORK
9.1
FOR THE
ENERGY SECTOR
238
Regulatory Objectives, Processes, and Outcomes: First Power Tariff Norms 238
Ajay Pandey
Issues in the Consultation Paper 240 • Consultant’s Reports on Rate of Return, Depreciation and
O&M Costs 241 • CERC’s Order on Tariff Norms 244 • On Process and Outcome 248
9.2
Inter-state Transmission of Electricity: Lessons from the Northern Regional Grid Collapse 249
Puneet Chitkara, Rajiv Shekhar and Prem K. Kalra
The Collapse 249 • Reliable Transmission 251 • Responding Swiftly to Emergencies 253 • Maintenance
and Monitoring 253 • Communication 254 • Power Quality 254 • Transmission Ownership 256
9.3
Orissa Power Sector Reforms: Getting Back on Track 260
Sidharth Sinha
Tariff Setting and T&D Losses 262 • Privatization of Distribution 264 • Performance of Privatized
DISTCOs 266 • GRIDCO’s Financial Performance 267 • Role of Government in the Reform
Process 268 • Getting Back on Track 269
9.4
Power Sector Reforms and Proposed Electricity Bill 271
Ajay Pandey
Draft Electricity Bill, 2001 272 • Proposed Bill and the NCAER Draft 275 • Power Sector and
Electricity Bill, 2001: An Assessment 276
Contents xiii
9.5
Oil and Gas Contracts: Lessons from Mukta–Panna Oil Fields 277
T.V.S. Ramamohan Rao, Puneet Chitkara, and Kaushal K. Saxena
The Background for Re-structuring 277 • Emergence of a New Organizational Structure 278 •
New Exploration Licensing Policy 279 • Model Production Sharing Contract 280 • The Mukta–
Panna Contract 282 • Lessons and Recommendations 285
References 287
10.
INTEGRATED TRANSPORT
288
10.1 Experiences of Various Forms of Commercial Partnerships in Indian Railways 288
G. Raghuram
Container Corporation of India 288 • Palace on Wheels 289 • Railway Sidings 290 • Piplav Railway
Corporation Limited 291 • Konkan Railway Corporation 292 • Ro-Ro Services on Konkan Railway
292 • Own Your Wagon Scheme 293 • Catering Contracts 294 • Conclusion 294
10.2 Civil Aviation in India: Deregulation and Constraints to Growth and Efficiency 296
Subir Gokarn
Impact of Partial Liberalization 296 • Airports 297
10.3 State Road Transport Undertakings in India: Issues, Constraints and Options 300
S. Sriraman
10.4 Governance Issues in Airport Development: Learnings from Cochin International Airport Ltd 303
Biju Varkkey and G. Raghuram
The CIAL Experience 303 • Implications for Governance 310
References 312
11.
TELECOMMUNICATIONS
313
11.1 Untangling Wireless in Local Loops 313
Rekha Jain and Dheeraj Sanghi
TRAI’s Recommendations 313 • Incumbents and Regulatory Agencies 315 • Spectrum Management
316 • Is WLL Really an Extension of Basic Service? 317
11.2 Spectrum Allocations in India 318
Sidharth Sinha
11.3 Telecom Regulation and Internet Telephony 323
Dheeraj Sanghi
Technology 324 • Current Regulatory Model and Internet Telephony 325 • Regulating Internet
Telephony 327 • Conclusion 328
11.4 State Wide Area Networks: The First Initiatives 328
Rekha Jain and G. Raghuram
APSWAN 329 • GSWAN 329 • RSVAN 329 • WBSWAN 331 • A Preliminary Assessment 331
11.5 Mergers and Acquisitions in the Indian Telecom 332
Lokesh Garg and Venu Madhav
Award of Licences 332 • Consolidation 333 • Value Drivers for Indian Telecom M&As 334 •
Conclusion 337
References 337
STATISTICAL APPENDIX
338
TABLES
3.1.1
3.1.2
3.1.3
3.2.1
4.2.1
4.2.2
4.2.3
4.2.4
4.2.5
4.2.6
4.2.7
4.2.8
4.3.1
4.5.1
4.5.2
5.2.1
5.2.2
5.5.1
5.5.2
5.5.3
6.7.1
7.1.1
7.1.2
7.1.3
7.1.4
7.1.5
7.2.1
7.2.2
8.1.1
8.1.2
8.2.1
8.2.2
8.3.1
8.3.2
8.3.3
8.5.1
Sanctions and Disbursements of Major DFIs
Power Sector ‘Reforms’: A ‘Score Card’ for States
Some Examples of Infrastructure Initiative Funds (IIFs)
Comparison of Telecom Indicators in Different Countries
Overall Satisfaction with Public Agencies in Bangalore (General Households), 1993
Bribes Paid to Various Agencies in Bangalore, 1993
Satisfaction of Users in Interactions with Public Agencies/Service Providers in Bangalore
Bribes Paid to Various Agencies in Bangalore, 1994 and 1999
Availability, Usage and Satisfaction with Pubic Services in Mumbai, (per cent), 1998
Reasons for Dissatisfaction Among Urban Poor in Mumbai with Regard to Certain Services, 1998
Ranking of Disabling Factors in Karnataka’s Industrial Environment
Satisfaction of Medium Scale Investors in Karnataka
Distribution of Activities in Accordance with the Seventh Schedule and Article 246 of the
Constitution
Community Participation Index in Certain States
Outcomes With and Without CP
Land Use Pattern Proposed by MPD
Area Under Squatter Settlement in Delhi
CNG Vehicles in Delhi
CNG Filling Stations in Delhi
Emission Potential of Engines
TAPing the Three Main Governance Agencies
Dimensions of Poverty and Inequality in Rural India, 1973–2000
Sanitation Facilities in Rural India, 1985–99
Sources of Drinking Water in Inhabited Villages in India
Profile of Housing Loans advanced by GRUH Finance Ltd
Agricultural Workers in Rural India, 1951–91
Villages Targeted Under GGY
Works Completed Under GGY, 1995–2000
Annual Income of KDA
Annual Expenditure of KDA
TDR Programmes at Various Urban Centres
TDRs in Mumbai
Salient Data on Municipal Water Supply in Mumbai
Tax Valuation and Size of Connection
Water Charges as Share of Income
Basic Information on Alandur
38
43
53
58
69
69
70
70
71
71
72
72
82
90
93
116
117
127
127
128
184
189
190
192
194
195
197
197
207
207
213
214
214
215
216
226
List of Tables
8.5.2
8.5.3
8.5.4
8.6.1
8.6.2
9.3.1
9.3.2
9.3.3
9.3.4
9.3.5
10.1.1
10.1.2
10.1.3
10.3.1
10.3.2
10.3.3
10.3.4
10.4.1
10.4.2
10.4.3
11.5.1
11.5.2
Project Costs
Sources of Project Finance
One-time Connection Deposits
Waste Generation in India
Waste Generation and Collection in Kanpur
Retail Tariff Increases
T&D Losses: Proposed and Approved
Financial Performance of DISTCOs (2000–1)
Details of Collection of DISTCOs
Distribution Losses
Stake of the Indian Railways
Performance of Ro-Ro Services
Attributes of Commercialization by the Railways
Magnitude of Profits and Losses, 1999–2000
Recovery–Cost Trends
Haryana Roadways: Share of Private Sector
Performance of Haryana Roadways
Initial Financing Plan (1992)
Project Cost
Capital Structure
Cellular Licences in Certain Countries
M&A Deals in the Indian Telecom Sector, c. 2001 and Earlier
xv
217
228
228
230
232
262
263
265
265
266
288
293
295
300
300
301
302
304
304
310
333
333
BOXES AND FIGURES
BOXES
2.1
2.2
2.3
2.4
2.5
2.6
3.1.1
3.1.2
3.1.3
3.1.4
4.2.1
4.3.1
4.4.1
4.4.2
5.1.1
5.1.2
5.2.1
5.2.2
5.2.3
5.2.4
5.2.5
5.5.1
5.6.1
6.1.1
6.1.2
6.1.3
6.3.1
6.5.1
6.7.1
8.1.1
8.3.1
8.5.1
9.2.1
9.2.2
9.2.3
States, Governance, and Industrialization: A Historical Review
Corruption in China
Institutional Efforts for PSU Management Fail
Creating Governance Failure in the Oil Sector
The Indian Experience
The Tragedy of Indian Administration
Infrastructure Sector in the Report of the PM’s Economic Advisory Council
The Central Road Fund
The Rakesh Mohan Committee Report
The Sukthankar Committee Report
Making an Informed Choice
Legal Framework in Electricity, Telecom, and National Highways
The Freedom of Information Bill
Information and Atomic Programmes
GBUS: Greens See Red Over Project Clearance Norm Changes
The Politics of Pollution
Industrial Closures in Delhi
Restructuring the City
Evictions
Who are the Land Grabbers?
Life at Relocation Sites
NGV Programmes Elsewhere
‘Large Dams: Indian’s Experience
Standard Times in Nineteenth Century United States
Right of Way for US Railroads
Oil Pipelines in Nineteenth Century United States
Why Governance Matters: A World Bank Perspective
SEBI Report: A Damp Squib
The Godbole Committee’s Findings
Failed Housing Projects
Composition of UFW
Willingness to Pay
Why Does the Grid collapse
Other Grid Accidents in 2000
Dynamic Line-Rating System
17
18
22
24
29
31
40
46
49
51
73
76
84
87
105
106
110
112
113
117
118
126
135
141
141
142
152
173
180
208
215
229
250
250
252
List of Figures and Boxes
9.2.4
9.2.5
9.2.6
9.3.1
9.5.1
9.5.2
9.5.3
9.5.4
10.2.1
11.2.1
11.2.2
11.2.3
11.4.1
xvii
Intelligent Systems and Condition Monitoring
Power Factor versus Displacement Power Factor
Issues for Transmission Management related to ABT
Measurement of T&D Losses
Functions of the DGH
Ravva Fields Contract
Enron selling its stake
Public Interest Litigation
Regulatory Institutions in Civil Aviation in India
Spectrum Management in India
Recommendations of Spectrum Management Committee, Steering Group of the WPC and TRAI
Issues in Spectrum Licensing
Precursors to SWANs
255
256
260
263
280
282
283
284
299
318
319
321
330
Illustrative Contractual Framework: Power Project
Gujarat Gas Act: The Actors and Relationship
P ≥ V/b
P < V/b
P ≥ V/b
P < V/b
Hutchison’s Footprint in the Indian Cellular Market after the Fourth Round of Licensing
Bharti’s Footprint in the Indian Cellular Market after the Fourth Round of Licensing
BATATA-BPL’s Footprint in the Indian Cellular Market after the Fourth Round of Licensing
Reliance Telecom’s Footprint in the Indian Cellular Market after the Fourth Round of Licensing
Four Layer Structure of Communication under Convergence
81
149
177
177
178
178
335
335
335
335
336
FIGURES
4.3.1
6.2.1
6.6.1
6.6.2
6.6.3
6.6.4
11.5.1
11.5.2
11.5.3
11.5.4
11.5.5
ABBREVIATIONS AND ACRONYMS
ABT
ABTO
AERA
AM
APERC
APIIF
APTransco
APTS
ASP
BARC
BBMB
BBUL
BCAS
BHEL
BOD
BPCB
BPCL
BSES
BSO
BT
BWSSB
CAA
CAPM
CARD
CDMA
CDSL
CEA
CERC
CESCO
CESL
CETP
CMS
CMWSSB
CNFSTT
CNS/ATM
COAI
availability based tariff (of the CERC)
Association of Basic Telecom Operators
Airports Economic Regulatory Authority
Alandur Municipality
Andhra Pradesh Electricity Regulatory Commission
Andhra Pradesh Infrastructure Initiative Funds
Andhra Pradesh Transmission Company
AP Technology Services
Alandur Sewerage Project
Bhabha Atomic Research Centre
Bhakra–Beas Management Board
Bharat Bari Udyog Limited
Bureau of Civil Aviation Security
Bharat Heavy Electricals Ltd
biological oxygen demand
Bihar Pollution Control Board
Bharat Petroleum Corporation Limited
Bombay Suburban Electricity Supply Company
basic service operator
British Telecom
Bangalore Water and Sewerage Services Board
Civil Aviation Authority (of India)
capital asset pricing model
Computer-Aided Administration of Registration Department
code division multiple access
Central Depository for Securities Limited
Central Electricity Authority
Central Electricity Regulatory Commission
Central Electricity Supply Company (in Orissa)
Consulting Engineering Services Limited
common effluent treatment plant
cellular mobile services
Chennai Metropolitan Water Supply and Sewerage Board
curtailable non-firm short-term transaction
communication, navigation, surveillance, air traffic management
Cellular Operators Association of India
Abbreviations and Acronyms
CONCOR
CRTC
CSJ
CTU
CWCL
CWSE
DANIDA
DBEC
DCA
DECT
DEL
DFID
DGA
DGCA
DGH
DLD
DOA
DoT
DPC
DPCC
DPF
DPS
DRDA
DSL
DST
DTO
DTS
DVB
ELD
EMS
EOGIL
EPCA
ERCA
ERG
ESA
FACTS
FASB
FAST
FFUIDC
FIPB
FM
FRP
FSI
FSP
FSTT
GAIL
GAP
GASB
GEB
GIDA
GIDB
GMB
Container Corporation of India
Canadian Radio-television and Telecommunication Commission
Centre for Social Justice
central transmission utility
Central Warehousing Corporation Limited
City Water and Sewage Establishment
Danish International Development Assistance
Dakshin Bharat Energy Consortium
Department of Companies Affairs
digital enhanced cordless technology
direct exchange line
Department for International Development
dissolved gas analysis
Director General of Civil Aviation
Directorate General of Hydrocarbons
domestic long distance
distribution operations agreement
Department of Telecom
Dhabol Power Corporation
Delhi Pollution Control Committee
displacement power factor
delayed payment surcharge
District Rural Development Agency
digital subscriber loop
Department of Science and Technology
Department of Telecom Operations
Department of Telecom Services
Delhi Vidyut Board
economic load dispatch problem
energy management system
Enron Oil and Gas India Limited
Environment Pollution (Prevention & Control) Authority
Electricity Regulatory Commissions Act
eastern region grid
Electricity Supply Act
flexible AC transmission system
Financial Accounting Standards Board
fully automated services of transport
Feedback Finance Urban Infrastructure Development Company
Foreign Investment Promotion Board
frequency modulation
financial reconstructing plan
floor space index
fixed service providers
firm short term transactions
Gas Authority of India Ltd
Ganga Action Plan
Government Accounting Standards Board
Gujarat Electricity Board
Gujarat Infrastructure Development Act
Gujarat Industrial Development Board
Gujarat Maritime Board
xix
xx Abbreviations and Acronyms
GOG
GOPL
GOT
GPPL
GRIDCO
GRPS
GSM
GSPC
GSPL
GSWAN
GTE
HFCL
HPCL
HSD
HSE
HUDCO
HVDC
IASC
IBRD
ICAO
ICD
ICF
ICI
ICICI
ICOLD
ICRA
ICT
IEA
IEGC
IIF
IIP
ILD
ILS
IOC
IPP
IPSAS
IRDP
IRFC
ISTS
IWAI
JNPT
JPC
JTG
KDA
KEB
KIAS
KNN
KPTCL
KRC
KSEB
KWA
LEC
Government of Gujarat
Gujarat Online Private Limited
group on telecommunication
Gujarat Pipavav Port Limited
Grid Corporation of Orissa
general pocket radio services
group special mobile
Gujarat State Petroleum Corporation
Gujarat State Petronet Ltd
Gujarat State Wide Area Networks
government trading enterprises
Hindustan Futuristic Communication Limited
Hindustan Petroleum Company Limited
high speed diesel
Harmonic State Estimation
Housing and Urban Development Corporation
high voltage direct current
International Accounting Standards Committee
International Bank for Reconstruction and Development
International Civil Aviation Organisation
Internal Container Depot
Integral Coach Factory
Imperial Chemical Industries
Industrial Credit and Investment Corporation of India
International Commission on Large Dams
Investment and Credit Rating Agency
Information and Communication Technology
Indian Elecctricity Act
Indian Electricity Grid Code
Infrastructure Initiative Fund
index of industrial production (of India)
international long distance
instrument landing system
Indian Oil Corporation
independent power producer
International Public Sector Accounting Standards
Integrated Rural Development Programme
Indian Railway Finance Corporation
Inter State Transmission System
Indian Waterways Authority of India
Jawharlal Nehru Port Trust
Joint Parliamentary Committee
Joint Telematics Group
Kanpur Development Authority
Karnataka Electricity Board
Kochi International Airport Society
Kanpur Nagar Nigam
Karnataka Power Transmission Corporation Ltd
Konkan Railway Corporation
Karnataka State Electricity Board
Kerala Water Authority
local exchange carriers
MBI
MbPT
MERC
MGRA
MJP
MKSS
MMC
MMCB
MNA
MNES
MNP
MOEF
MPFI
MPSC
MRTPC
MSEB
MTNL
MUTP-II
MRVC
NABARD
NATPAC
NBA
NCA
NELP
NESCO
NFAP
NHAI
NHB
NHDP
NHP
NHPC
NLC
NLDC
NOC
NREP
NRG
NRLDC
NSDF
NSDL
NSE
NSSO
NTP
NTPC
NWDT
ODRC
OERC
OHPC
OIDB
OIL
ONGC
OPF
OPGC
market-based instrument
Mumbai Port Trust
Maharashtra Electricity Regulatory Commission
Maharastra Groundwater Regulatory Authority
Maharashtra Jeevan Pradhikaran
Mazdoor Kisan Shakti Sanagathan
Monopolies and Mergers Commission
Madhavpura Mercantile Cooperative Bank
Mukhya Nagar Adhikari
Ministry of Non-conventional Energy Sources
minimum needs programme
Ministry of Environment and Forest
Multi-point fuel injection
Model production sharing contract
Monopolies and Restrictive Trade Practices Commission
Maharashtra State Electricity Board
Mahanagar Telephone Nigam Limited
Mumbai Urban Transport Project -II
Mumbai Rail Vikas Corporation
National Bank for Agriculture and Rural Development
National Transport Planning and Research Centre
Narmada Bachao Andolan
Narmada Control Authority
New Exploration Licensing Policy
Northern Elctricity Supply Coportation
national frequency allocation plan
National Highway Authority of India
National Housing Bank
National Highway Development Plan
National Housing Policy
National Hydroelectric Power Corporation
Neyveli Lignite Corporation
National Load Dispatch Centre
National Oil Companies
National Rural Employment Programme
Northern Region Grid
Northern Region Load Dispatch Centre
National Slum Dwellers’ Federation
National Security Depository Limited
National Stock Exchange
National Sample Survey Organisation
National Telecom Policy (1994 and 1999)
National Thermal Power Corporation
Narmada Water Disputes Tribunal
optimized depreciation replacement cost
Orissa Electricity Regulatory Commission
Orissa Hydro Power Corporation
Oil Industry Development Board
Oil India Limited
Oil and Natural Gas Commission
optimal power flow
Orissa Power Generation Company
xxi
xxii Abbreviations and Acronyms
OSEB
OYW
PCM
PDC
PET
PETP
PFC
PGCIL
PIB
pkm
PLF
PMS
POL
POSCO
PPA
PRA
PRCL
PROPER
PSC
PSCoT
PSM
PSTN
PUC
Puhca
PVC
RAC
RBO
REB
REC
REDA
RIAP
RKS
RLEGP
RNFC
RSDF
RSP
RTDC
RTPS
RWSS
SACFA
SCADA
SDCA
SEBI
SEC
SENSEX
SERC
SIL
SLDC
SMC
SOC
SOQ
SOS
Orissa State Electricity Board
Own Your Wagon (Scheme) of the Indian Railways
pulse code modulation
project development company
polyethylene terephthalate
primary effluent treatment plant
Power Finance Corporation
Power Grid Corporation of India Limited
Project Implementation Board
passenger kilometres
plant load factor
Portfolio Management Scheme
petroleum, oil, and lubricants
Pohang Steel of South Korea
power purchase agreement
participatory rural appraisal
Pipavav Railway Corporation Limited
Program for Pollution Control, Evaluation and Rating
Production Sharing Contract
Parliamentary Standing Committee on Telecommunications
payment security mechanism
public switched telecom network
pollution under control (certification)
Public Utility Holding Companies Act.
poly-vinyl chloride
regional advisory committees
river basin organization
Regional Electricity Board
Rural Electrification Corporation
Renewable Energy Development Authority
revenue improvement action plan
Rationing Kruti Samiti
Rural Landless Employment Guarantee Programme
route navigation facility charge
Railway Slum Dwellers’ Federation
rural service provider
Rajasthan Tourism Development Corporation
Raichur Thermal Power Station
Rural Water Supply and Sanitation
State Advisory Committee on Radio Frequency Allocation
Supervisory Control and Data Acquisition
short distance calling area
Security and Exchange Board of India
Securities Exchange Commission
Sensitive Index of the Bombay Stock Exchange
State Electricity Regulatory Commission
surge impedance loading
state load dispatch center
Spectrum Management Committee
specific oil consumption
statement of qualification
strategic operation study
SOUTHCO
SPV
SRG
STP
STPS
SWERF
TAMP
TAXES
TC
TDRs
TDSAT
TIL
TNEB
TNUDP
TRA
TRAI
TRYSEM
TWINS
UDPFI
UGS
UHRA
UPS
UPSRTC
USHDT
VHF FM
VPN
VSAT
VSNL
WARP
WCD
WEBEL
WESCO
WLL(LM)
WPC
WRG
WWC
Southern Electricity Supply Corporation
special purpose vehicle
Southern Region Grid
sewerage treatment plant
Super Thermal Power Station
solid waste energy recycling facility
Tariff Authority for Major Ports
trunk automatic exchanges
taluka centre
transfer of development rights
Telecom Dispute Settlement and Appellate Tribunal
Tata Infotech Limited
Tamil Nadu Electricity Board
Tamil Nadu Urban Development Project
trust retention account agreement
Telecom Regulatory Authority of India
Training of Rural Youth for Self Employment
Twin Cities Network Project
Urban Development Plan Formulation and Implemention
Underground Sewerage Scheme
Upstream Hydrocarbon Regulatory Authority
uninterrupted power supply
UP State Road Transport Corporation
US heavy duty transient test cycle
very high frequency (frequency modulation)
virtual private networks
very small aperture terminal
Videsh Sanchar Nigam Ltd
Watch Your Ward Program
World Commission on Dams
West Bengal Electronics Development Corporation
Western Electricity Supply Corporation
Wireless in Local Loop with Limited Mobility
Wireless Planning and Coordination
Western Region Grid
Ward Water Committees
xxiii
Overview 1
1
OVERVIEW
Sebastian Morris
CHALLENGES FOR GOVERNANCE
POLICY-MAKING
AND
The liberalization of the early 1990s, if it is to prove anything
more than episodic raising of expectations, has to ensure
high growth for several decades to come. In Chapter 2 it
is argued that while conservative economic policy including
tame pricing of the currency has brought about recession,
continued fiscal conservatism deepens it. The more recent
downward pressure on consumer expenditures in the US
following already existing recessionary conditions can be
expected to put a brake on world expenditures1 and hence
bring world down incomes. This spells difficult times for
India, already in the midst of an industrial recession. The
scope of increasing demand through monetary expansion
which was there until the latter part of 1998, is now most
certainly absent. Nothing short of a fairly large fiscal boost
accompanied by a relative decline in the real value of the
rupee will work. The current fall in the value of the rupee
against the dollar needs to be actively accelerated, since in
the world economy with shrinking demand, India must try
to match the structurally undervalued currencies of China
and the East Asian economies. The currency crisis has pushed
the already structurally undervalued currencies of Thailand,
Korea and Taiwan even further down.
This is not the time for ideological histrionics. The undue
fear of fiscal deficit and inflation has to be overcome. With
an expenditure multiplier of around two and half over the
year, and a tax to GDP elasticity much in excess of one, the
danger of a ballooning fiscal deficit with some (controlled)
boost in government expenditures is greatly exaggerated. In
any case, the industrial sector, more than others, is in deep
1
Unless the war results in major expenditure increases.
recession. Taxes have a large base in industrial output, and
it is industrial output that would rise steeply with a fiscal
boost. Consequently, the fiscal position of the government
would not deteriorate much. The need of the hour is therefore
a coordinated fiscal and monetary expansion with a sharp
depreciation of the currency2 and major and quick reform
of infrastructure policies especially in the power sector to
draw in private investment once the economy restarts and
the private sector needs to meet demand.
Unfortunately the move in that direction by the Prime
Minister’s office has been watered down by conservative
economists who currently monopolize macroeconomic
policy-making, both within the government and the RBI.
They refuse to recognize that the limits to reducing the
fiscal deficit via active reduction of the primary fiscal deficit
have long been reached, probably by the end of 1999–2000.
The only realistic measure now is to grow out of the fiscal
deficit, and (in a smaller way) inflate away part of the debt.
The faster this begins the better it would be for the economy.
The task of pursuing high growth without bringing about
fiscal crisis is the first challenge today.
The large buffer stocks of food also ought to bolster
confidence to increase fiscal expenditures. There is, of course,
the fear of fiscal boost bringing in wastage inherent in
government expenditure. This is true even in the case of
investment expenditures. The fear is shared even by those of
a more Keynesian persuasion. Despite this, unless the economy
is lifted up in the next year or so there is a very high chance
that benefits from the reforms so far are lost. As support for
reforms vanishes among the industrialists and the poor, who
have to face the situation of stagnancy or decline in the
2
Instead of waiting for speculators to beat it down.
2 India Infrastructure Report 2002
number of jobs, the danger of a political backlash and the
end of privatization is real. Many structural reforms, awaiting
the scope that is there in a growing economy may be lost
for another decade at least. These are reforms in the labour
markets, administration of subsidies and introduction of
user charges in many publicly provided goods.
The opportunity to bring about changes in subsidy
administration in electricity, water, food, fertilizer and fuel
was never better. Chapter 2 outlines the vast benefits in
right administration through direct subsidies. Most
importantly, it would cut the Gordian knot that has hindered,
true reform in water and electricity. Here it is important
to recognize that the mountains of food could be turned
into infrastructure, alleviating hunger and poverty if the
right structure of administration and governance for an
efficient and productive food for work programme could be
found. (The starting point really is direct subsidization).
This is the second challenge today. If met, it has the potential
of making policy, organizational development, and
governance itself the leverage points of change.
In IIR 2001, it was emphasized that the demand
(depressionary) effects of declining infrastructural investments
had been one of the reasons for the slower growth of the
economy as a whole. Budgetary cuts on public investments
which largely hurt physical infrastructure like power and
irrigation, in so far as their expenditure effects were concerned,
had been more than compensated by the rising private
investments in manufacturing which continued right up to
1995–6. The only way private investment could have kept
its higher pace of growth would have been through
infrastructure investments. But lack of regulatory clarity
and policy risks kept the private sector away. The problem
continues perhaps with even more severe depressionary effect.
Since then, important positive developments have come
about but they are not adequate to bring large-scale private
entry into infrastructure. The notable achievement, as
Anupam Rastogi brings out in Chapter 3, has been the
creation of a road fund and the commitment of the
government to complete and modernize the golden
quadrilateral and the north-south and east-west corridors.
The Draft Bill on Electricity although in the right direction
of open access and towards a market for generation, has
many problems that are brought out by Ajay Pandey in
Section 9.4. The bill while necessary, given the inevitability
of the decentralized and plural mode of the electricity system,
is not adequate by itself. Unless the problem of cross subsidy
and agency failure that it creates in distribution entities,
whether public or private, is overcome via direct subsidization,
private investments would not flow into the sector. In the
telecom sector after National Telecom Policy, 1999 (NTP
99) and the promise of the convergence bill, the retrograde
step of wireless in local loop (WLL) and the limited mobility
WLL that followed, while restoring a fair equilibrium between
the players in the industry is patently against the consumer
interest. Denying the technological benefits of WLL via
code division multiple access (CDMA), group special mobile
(GSM) or corDECT (DECT of Tenet Corporation) is not
right at this juncture when the network (given network
economies) is poised to expand rapidly.
These developments apart, there is little that has taken
place along the direction of bringing about regulatory and
policy clarity that was highlighted in the previous issue.
Why have developments been so weak or slow? Closer
examination shows that the working of the government
particularly in its detailed policy, rule and law making roles
has been maimed by inadequate skills, knowledge and
activism, and perhaps most by the systemic ills which we
discuss in Chapter 2 in a generic fashion and cover in many
of the papers in specific contexts. Besides competency, the
power of vested interests, graft and corruption, and turf
wars between specialist catalyst organizations like the Gujarat
Infrastructural Development Board (GIDB) and the rest of
the governmental system have been responsible. The third
challenge today is therefore to improve the governance of
economic institutions, be it the financial sector, industrial
development boards or courts dealing with economic issues.
It is a challenge of governance in the usual sense of the term.
And much of this report is concerned with that task i.e. the
challenge of governance in the context of commercializing
infrastructure. At its core this task is one of better design,
writing better contracts, bringing clearer, and transparent
rules, avoidance of internal contradictions in policy and
laws. It also means right manning of key regulatory and
governance institutions, better and appropriate incentive
structures, and working with newer and potent institutions
and laws that bring in the citizen and the consumer into
governance as a participant, evaluator and user.
AN OPPORTUNITY
FOR
CHANGE
Liberalization, precisely because it succeeded in the sense of
creating a more open and market oriented economy, has
resulted in the present situation, where the three challenges
mentioned earlier arise and need to be overcome. The first
is a challenge for economic policy, the second for both
policy and organizational development and governance, and
the third is essentially a challenge of governance. Policymakers and people with the power to take decisions are
today in the enviable position of having a particular
autonomy. But this window of opportunity is narrow and
the constraints will soon reassert to deny any leeway. More
usually, the scope of decision making is limited to the small
decisions that help to maintain the system and any attempt
at bold decisions to make significant change is usually
Overview 3
frustrated. But today there is a difference. Politically and in
an economic sense the moment is right to take the big
decisions that would change the course of the economy and
the society for many years to come. In other words we are
at the crossroads and there is autonomy for action. Such
opportunities have been few and far between. The period
immediately after independence, the period following the
crisis of the late sixties, the year after the second oil shock,
and the crisis year of 1991–2 have provided such
opportunities in the past. Our economy and society is what
it is today because of the particular decisions that were taken
(or avoided) then.
Unfortunately we do not see a coherent response to the
situation today. As already mentioned, the bind of orthodoxy
on the economy has been particularly severe. The costs of
learning imposed by the Reserve Bank of India (RBI), the
Securities and Exchange Board of India (SEBI) and the
electricity regulators and policy makers have been onerous.
There is no discussion as yet on the opportunity and need
to right structure subsidy administration, not even in the
crucial electricity sector. Neither is there the appreciation
that transparency (necessary in commercialization and
privatization) would demand that ‘clever’ sections inserted
by the bureaucracy do not take back the power that is
‘granted’ in the very same law to the independent regulator.
The problems of governance today are severe and solutions
are not easy. The task is really to go under the skin of the
general tenets of transparency, accountability and consumer
interest (and often participation of citizens), to be able to say
how these can be brought about. In this report we do not
pretend to have the final answers. In the last report on
regulation and market structure our studies lead us to
somewhat definitive conclusions. In this report besides certain
definitive conclusions and suggestions, we have also raised
basic issues, questioned fundamental assumptions that are
often made in discussions of governance and its role in
development. We hope to highlight interesting and thus far
underplayed aspects of law, policy, administration, structure
of organizations and institutional arrangements. The
overarching design of political institutions can constrain
regulatory organizations. Political economy naturally cannot
but be a part of the discussions. For the specific and contextual
understanding which would lead to recommendations for
improvement, sectoral and specialist knowledge is also
necessary. As such the papers cover a wide range from the
social and political situation, to sector specific descriptions,
to institutions in general. The focus in most papers is on the
constraints that stand in the way of the development of
infrastructure in the country, and on how they can be
overcome. As such, despite the detours into theory and concepts
and case facts, the purpose is pragmatic. In some very basic
problems we do not have ready solutions but nevertheless
since they are very important we have discussed them. One
such problem is of deprivation and extreme inequality in the
country, correction of which is a larger problem.
GOOD GOVERNANCE
IN AN
INEQUITIOUS SOCIETY
The limitation of the very notion of good governance in
societies with extreme inequalities and severe deprivation is
a theme that runs through Chapter 2 and is also picked up
again by Keshab Das in the discussion of the problems with
rural infrastructure (Section 7.1). It is also covered by
D’Mello in the discussion on why social impact and
environmental impact analysis thus far have been farcical.
Similarly, in the story of the brutal evictions of industrial
workers and slum dwellers from Delhi (Delhi Janwadi
Adhikar Manch, Section 5.2), the facts of repression and
denial of living spaces are brought out without much
comment. The authors’ pessimism in these cases is not
difficult to understand. They justifiably take the position
that it is capitalist development which is at the root of this
oppressive behaviour of the state, and the experience in
India as also possibly in many other countries, including in
England during its industrialization, are testimony enough.
Nevertheless late industrializing East Asia has been able to
avoid such exclusion through the egalitarian income
distribution that they started with, thanks to their land
reforms. So it is not growth per se through the market, but
the fact that we have started out on the wrong foot in not
ensuring basic endowments to all, that is the source of the
problem. We underscore this theme in Chapter 2. The
pathos of the poor in India is not the suffering per se but
its futility. If through that suffering a capital strong enough
to unambiguously carry through the industrial transformation could have been assured then that suffering, however
unfair would not have been in vain, since at least future
generations would have gained. So today praxis, whether
arising out of guilt, or hope and confidence, demands the
assurance of endowments to those without it, to bring them
into the market. Without that all infrastructural effort
including those directly targeted at the poor and otherwise
neglected villages would come to naught. Das (in Section
7.2) brings out the fate of the much touted rural
infrastructure project of the Gujarat government, the
eventual failure of which could have been anticipated given
a reasonable familiarity of such target-oriented schemes,
and the rural situation.
DISPLACEMENT, RESETTLEMENT, REHABILITATION,
AND THE LAND CONSTRAINT
It is a moot point that today the concern for displacement
and the poor arise because of the risks they impose upon
infrastructure projects, the so called land acquisition and
environmental risks. Even then it is good that the matter
has come out into the open. Private and accountable financial
institutions like Development Finance Institutions (DFIs)
rather than governments and their parastatals, have brought
these issues to the fore, even if for their own enlightened
self interest.
So justice may still be possible, if only to expand the
railways and provide better roads. The way ahead as we had
brought out in IIR 2001 was in replacing the existing
colonial land acquisition act with one that defines the public
purpose, and creates the space for negotiated settlement,
and involves the displaced in the projects. In the cities it
lies in less of master plans and more of land markets, less
planning and more adherence to basic rules relating to land
use. Nothing could help slum dwellers and others facing
eviction better than higher floor space indices (FSIs). Elitist
abhorrence of concrete jungles apart, it is the growing and
densely built up cities that cheapen and make feasible the
task of infrastructural coverage for the majority of the
population. These are ideas that need to be brought out
with greater force and discussed, hopefully, in a future issue
of the IIR.
In the present report the solution to the problem of
urban land for the poor has been only sketchily discussed.
Transfer of development rights (TDRs) (see Kothari, Section
8.2) which allows public services to come up quickly is one
important possibility in large cities with considerable
difficulties in acquiring land due to both valuation asymmetry
and contingent titles—illegal squatters, slums etc. The
appreciation that results through TDRs (the social or external
gain) is rendered internal through the allowed higher densities
in the transfer location. In growing cities subject to severe
distortions, and unscientific land use, TDRs can help to
correct these distortions.
A less general but eminently practical solution to some
of the slums that stand in the way of vital infrastructural
development is provided by the story of Mumbai’s railway
slums, covered by Nandini and Prem Kalra (Section 5.3).
The essential value of the approach lies in giving up the
pretence of the legal title and recognizing the de facto rights
of slum dwellers to some urban space. With that approach
the railway slums could in fact be removed or circumscribed
in a manner that allowed railway operations to be conducted
smoothly and to even expand, for the benefit of all. It is
this exploration and pursuit of win-win solutions that is the
key to all problems of social existence. There are of course
better and more global solutions which can come through
development that is labour absorbing at the same time.
Slum clearance when combined with TDRs can be a potent
force if there is clarity on the objective and functions of a
city and the elitist hijack of land use as in Delhi is avoided.
Delhi’s land has been preferentially allotted to institutions,
defence personnel, and upper middle classes with very little
or none of the land being earmarked for the working class.
This exclusion by design would most certainly make land
beyond the reach of all but the very wealthy and corrupt.
Absurdly small floor space indices have brought about a
virtual vacuum in the middle. A strange, monstrous and
other-worldly city with the president having an airfield in
front of his residence and most of the powerful having acres
of garden space around their spread out bungalows, hogging
vital central space, has grown. The rest of the people have
to spend vast amounts of fuel, time and effort criss-crossing
this centre of gardens and palaces every day. It is important
for radical scholars to understand that monstrosities such
as Delhi or Bombay are not a necessary creation of capitalist
development. Successful transformations in the West and
elsewhere in East Asia have created London, Philadelphia,
New York and what is of greater relevance to us Shanghai,
Seoul and Kuala Lumpur with spaces for all, unconstrained
by elitist architectural considerations and monopolization
of central places. Similar dysfunctional cities though none
on the scale of Delhi are to be found in societies that have
not successfully carried out the industrial transformation—
much of Latin America, Mexico and the Philippines. Extreme
inequality in these societies creates spaces for vast informal
sector and so slums as also for palaces in city centres. When
the exclusivity inherited from colonial rulers in the
administration of the country is additionally located in such
cities a Delhi results. Had Islamabad been created in
Rawalpindi, a Delhi would have resulted.
In Section 5.4, Rath and Ramakrishnan bring out their
vast experience with resettlement and rehabilitation (R&R)
with power and other large projects. The National Thermal
Power Corporation’s (NTPC) record of R&R is far better
than that of government parastatals because of a certain
degree of professionalism, a seriousness with regard to the
laws of the land, and an ability to afford the costs of R&R.
Much more though is desired especially with regard to the
management of ash pits. Recently as activism among those
affected has increased and the expectations of the displaced
have gone up, the attempt has been to minimize
displacement. This has large negative consequences. The
lands acquired are such as to leave large pockets of people
without a sufficient buffer between them and the project.
Negative externalities have therefore to be borne by those
who are technically not displaced but who hardly have the
resources to mitigate the ill effects of these externalities.
This is the most abhorrent development and needs to be
corrected. In our discussion of a possible approach to land
acquisition in IIR 2001, I had argued that in land acquisition
there is a case for collective decision making—an all or none
approach with uniform base prices for all—since partial
Overview 5
acquisition for carrying out activities incompatible with the
prior activities in the area would impose heavy burden on
those whose lands are not acquired. Also such a process
would avoid the manipulation of the average price of
acquisition.
Very importantly Rath and Ramakrishnan stress the need
for professional bodies, perhaps organized as non-profit
organizations that can carry out R&R on behalf of companies
and enterprises investing in infrastructure. In unbundling
project related activities to professionalize a distinctly different
activity from the rest of the project the scope for specialization
and skill development is large. R&R is far too technical to
be left entirely to local non-governmental organizations
(NGOs). And is too different from the activities of managers
who are used to dealing with people in organizations and
consumers, not groups, organized or otherwise. Moreover,
the project affected people are from a strata of society about
whom they have little experience. Such arrangements would
not let the experience that worthy productive enterprises
like the NTPC and others have in R&R activities to go
waste. The experience could then be more widely available.
So should not NGOs, FIs, and companies like the NTPC
come together to set up specialist R&R organizations? They
also highlight the need for project affected people to be
involved in their own R&R especially in house construction.
The ritualization of the environment and social impact
analysis that goes on is the theme of D’Mello’s paper (Section
5.7). He goes on to argue why an environment impact
assessment (EIA) and social impact assessment (SIA) need
to go together. More substantially in a labour surplus
economy it would be wrong to assume that those displaced
with money compensation for their lands would be able to
restore their livelihoods. The actual practice of R&R today
is ‘antithetical to the values of a liberal and plural society’.
The fact that infrastructural projects, especially dams, have
attracted many public interest litigations (PILs) imply that
those affected and displaced are not being treated fairly. A
good E/SIA would according to the author have to necessarily
recognize the existence of different classes since they are
vulnerable in varying degrees. Typically poor peasants, tribals
and agricultural workers (unless they are able to migrate to
the irrigated areas) generally suffer most. An aseptic cost–
benefit analysis would not do. Given the current modes of
R&R, and the framework for land acquisition, PILs and the
courts have been the only solace for those affected by large
projects like the Narmada. Struggle was important in being
able to get the settlement, but the tide has turned. Courts
have turned away from judicial activism in the interest of
the poor. But courts cannot be expected to reflect much
more than the class orientation of the state of which they
are a part. Thus the judicial activism of the eighties and
early nineties has given way to rulings that have upheld
executive actions even when they have hurt the poor as in
the Delhi pollution-related evictions (Section 5.2).
Reacting to strong pressure from the environment groups
and with a concern for mounting levels of air pollution in
Delhi the closure of industries has hurt workers and the
poor. Pushed out from their original jhuggi–jhopris they
have no work in their new locales where they are forced to
resettle.
THE CONSTITUTIONAL
AND
LEGAL FRAMEWORK
We have a parliamentary democracy in which the separation
of the roles of the executive and the legislature is not as clear
cut as in the presidential form in the US. Anant and Jaivir
Singh (Section 4.1) discuss the implications of the
overarching constitutional framework for regulation and
governance in the context of commercialization of
infrastructure. Transparency of the regulator is particularly
challenging since unlike in the US, the separation of powers
between the executive and the legislature is not complete
and not subject to the concurrence of the judiciary in the
regular course. This carries over into the functioning of the
regulator. This means that regulators, to be effective, have
the onus of promoting voice and equity decisions. This
means that right structuring of the regulatory authority,
and appointment of the regulator are crucial tasks. If errors
are made therein, the consequences are likely to be severe.
This explains well the experience of regulation in the financial,
electricity and telecom sectors. The last case is discussed in
the paper. The government’s and the TRAI’s (Telecom
Regulatory Authority of India) powers are obfuscated in the
act itself. Moreover it has now become standard practice ‘to
construct [regulatory] institutions to include a wing that
acts as a court’. While this general trend has come about
because ‘civil courts are overwhelmingly clogged that it is
felt that special/tribunals will speed up justice …This
fragmentation of the court system might speed up cases but
surely lead to inefficiencies that are generated by ambiguous
jurisdiction. The key problem with such fragmentation is
that it inhibits the development of a unified legal system
[in this case] in an important area of contract law.’
The notions of public hearings and consultative papers
that the regulators go through do not in themselves amount
to giving voice or equity. There is nothing in the law that
makes regulators decide in favour of consumers or the
people. Most of the reform acts or the specific acts that have
created regulators do not start with the consumer interest.
Neither are the advisory, overseeing bodies specified under
the law representative of the consumer interest. Thus Ajay
Pandey’s study of the case of the first power tariff norms
fixation by the Central Electricity Regulatory Commission
(CERC) (Section 9.1) shows that despite the consultation
studies, reports of the consultants, and the motion of inviting
the public to participate, the decisions as such were
circumscribed by its own limited understanding of the issues.
We cannot exclude the possibility that it may have been
influenced only by those who made themselves heard. All
parties involved were not equally vociferous and the CERC
did little to have the voice of the SEBs brought into the
discussions. Similarly, the Draft Bill 2001 which lays down
the membership of the selection committee that would
appoint the State Electricity Regulatory Commission
(SERC)/CERC members and chairpersons, indicates that
they are all officials of the government. This in itself is not
the problem, but the law allows the choice of the commission
to be a legal person—a retired judge, in which case the
conditions pertaining to skills and experience can be overruled
by the government. The danger of regulatory capture is also
highlighted by the Prayas Group (Section 6.7). Anant and
Singh also see much harm in judicial activism however well
intentioned the motives, since the judiciary is best at hearing
out competing claims to make a ruling, not prima facie
making a choice. Such activism is also violative of the
doctrine of separation of powers and as such long term
degradation of the institutions of governance is likely, if
such trends continue.
Anant and Singh in Section 4.1 discuss the functionality
of instruments of regulation especially for the control and
management of externalities. The choice between liability
rules and property rights would have to be made not
arbitrarily, but based on the nature of the damage or effects
that the externality in question can bring. When these are
not predicted then property rules or rights work better.
Thus, ‘The advantage of the liability rule is clearly related
to the ability to correctly assess average harm. If the system
(legal, administrative and procedural) systematically
underestimates harm then the liability principle can do
much worse than the property rule. If the problem at hand
is such that it involves idiosyncratic valuation of the resource
in question where the two parties have different private
valuations then property rules dominate over liability rules.
Under a property rule, transfers take place only if the
valuation of the owner is less than the valuation of potential
takers, and that too through a compensation acceptable to
the owner. If liability rules were used in such instances with
compensation being based on averages of values, more than
optimal level of takings or dispossession will take place.’
Joshi and Anuradha (Section 4.3) bring out the features
of an ideal framework for a law relating to commercialization
of infrastructure, and posit the existing legal framework in
several sectors, to point out their limitations and constraints
in bringing about private participation and ownership. Even
without laws through an executive order private sector can
be brought in, but the risks would tend to be high in such
cases, because executive decisions and policies can be reversed.
Some of the important lacunae in the existing laws are that
the law:
• may not allow for private interest to be created;
• may have only inadequate protection of private
investment;
• may not vest all relevant rights required for the
development of the facility;
• may not provide for due recognition and enforcement
of lenders’ rights;
• may not have provision for the imposition of tariff/
fee/toll;
• may not provide for an adequate independent
regulatory mechanism;
• may not provide for adequate dispute settlement
mechanism.
As several states go past BOT (build, operate and transfer)
laws for private sector participation, some of these but not
all are getting rectified.
ACCESS
TO
INFORMATION
Abha Singhal Joshi (Section 4.4) building on her report in
IIR 2001 on the freedom of information bill, makes a
comprehensive assessment of the same, concluding that the
bill does not go very far in ensuring that people will have
the right to information. Too many exclusions, many of
them of the blanket type, too many situations where public
interest can be used to deny information and the noninclusion of private companies with a large public aspect,
have all marred the bill. They would mean that while we
would have a law in form, in spirit it would hardly provide
for information the way the right to information provides
in the US and in a few other progressive countries. The
processes gone through by the Shourie Committee were not
laudable enough. Few people outside the bureaucracy and
the government were contacted before the draft was drawn
up. Many of the criticisms made against the draft do not
find recognition. The right to information is all the more
vital in India where, the law that has created regulators does
not give adequate independence to the regulator, and also,
there are no directions on the regulator specifying his
principal task to lie in ensuring the consumer interest. With
much privatization of infrastructure envisaged, disclosure to
users and citizens and to those being displaced, could have
been explicitly brought under the ambit of the law. What
is most strange is that there is no effective remedy in the
proposed law when the government denies a particular
information. All that the citizen can do is to appeal to the
designated officer within the government.
Citizens’ monitoring of infrastructure services, and more
generally of government functioning, is one way of putting
Overview 7
pressure on public bodies and civil servants to improve
performance and bring about accountability. The idea could
indeed be extended to monitoring and participation (even
in the design of various activities and facilities). One may
well ask why the media cannot carry out this function.
Media can be very useful in drawing attention and concern.
Its power therein is unchallenged but media has its own
constraints of what is news or worthwhile to report. The
Public Affairs Committee (PAC)—a Bangalore based civil
society organization reports (Paul and Gopakumar, Section
4.2) its pioneering experience in monitoring of public services
and more generally of providing feed back to local bodies
and others that have the responsibility of providing these
services. The success of their efforts whenever there has been
some interest on the part of the local bodies to improve is
indicative of the potential in the approach. Key to the
success is the objective assessment through reliable and
validated schedules. This objectification even if not entirely
justifiable is very important since it provides a yardstick to
measure the local bodies’ performance, and we know from
motivation theory that performance measurement on a
regular and objective basis can be a powerful motivator.
From the point of view of the citizen the institutionalization
of the feed back, and monitoring that the approach provides,
overcomes the free rider problem that is always there in any
such collective effort. And this is what makes the money
spent on building organizations like the PAC worthwhile.
In a very active democracy that has taken root very early
in our development these initiatives point to the right
direction for action.
Manikutty (Section 4.5) finds that active promotion and
creation of an institutional mechanism for community
participation can greatly improve the efficacy and efficiency
of public services. The case studied is of drinking water in
two different locales, one with and another without
community participation (CP). Not only the additional
local knowledge that CP brings in at the design stage but
also the sense of ownership and commitment that it brings
about are important. Cost and effort can come down
dramatically if monitoring of the service quality and levels
is done by the potential beneficiaries. They have a natural
incentive to correct failures once an institutional/
organizational framework that involves them is in place.
ENVIRONMENTAL POLLUTION
In IIR 2001 we had briefly touched upon the problem of
environmental pollution bringing out the dimensions of
failure in this aspect. India probably has one of the poorest
records on control of environmental pollution. We had then
suggested that in having bitten more than they could chew,
the pollution control boards of most states have more or
less failed completely. Very ambitious laws exist merely on
paper and even when there is some monitoring the
punishments have been too little. Recent court based closures
of polluting units have only compounded the problem since
they do not recognize the costs and benefits of mitigation
and ignore far better and appropriate approaches to the
problem. We had also suggested that some states like Gujarat
in widely dispersing polluting industries ostensibly for
backward area development have maximized their negative
externalities.
In this report we have taken the matter further. Atiyah
Curmally (Section 5.1) reviews the literature on approaches
to the control of pollution and makes that wide-ranging and
most relevant literature accessible to the policy maker. In
worrying about the choice of instruments like permits
(tradable or otherwise) and in general property rules, fines,
and liability rules under various situations and in
contextualizing them to the situation current in India, she
is able to lead to the understanding that there is much that
the state can do to reduce the effects of environmental
pollution. I have elsewhere argued that historically after a
certain stage in the transformation process when incomes
are high, the concern for the environment suddenly increases
leading to a flurry of changes in rules and governance to
result in a rather quick clean up of the environment. This
has happened in Japan and Korea and will soon happen in
China. Nevertheless it is possible, without much cost, even
before such a stage is reached, to mitigate the worst effects
of pollution if an economic and participatory approach is
adopted, rather than the blanket ban or the command and
control approach that is current today. The elements of
these would be to prioritize and distinguish between various
kinds of pollution and choose the instruments for tackling
the same carefully. In other words to worry integrally about
not only pollution but its differential effects—the costs of
mitigation, monitoring and policing, the value of punitive
measures and deterrent, and the appropriateness of the
instrument before instituting measures.
Experiences of other countries that have used some of
these alternative measures are also discussed. The paper also
comprehensively reviews the initiatives thus far, to provide
an explanation of why these have generally failed. Waiting
for growth to take care of pollution may be quite misplaced
in India. Not only is the transformation of the economy not
assured but even if it were to happen it would hardly be
the quick process that is current in East Asia. Vast income
inequalities would mean that the poor and the marginalized
would bear a very large part of the pollution and
environmental costs as they do today. The Delhi Janwadi
Adhikar Manch (in Section 5.2 and in Box 5.1.2 of 5.1)
bring out the tragic effects of pollution control on the poor
in Delhi, via the usual command and control approach
discussed by Curmally. The political economy of pollution
and its control is today in Delhi a case of systematic assault
by the state on the poor. (An equally abhorrent case is that
of displacement—both in rural and urban areas which we
have already mentioned). In both these situations although
we do not have ready and well honed solutions we are able
to say what is dramatically wrong with the current system
and indicate the more workable and fair approaches possible
today.
CONTEXTUALIZING REGULATORY CHOICES
Excessive and premature regulation, even when formal as
through legally constituted and independent regulators, may
itself be a cause of governance failure. Electricity, telecom,
and the current proposals for water and gas have the potential
of this dysfunctionality. Historically, (in the now developed
economies) regulation has usually been a post development
phenomenon. There is a natural contestability or functionality to the monopolist pricing that arises when the
network is rapidly expanding wherein therefore only light
supervision, not amounting to regulation but some
intervention around standards and rules is all that is necessary.
This viewpoint which goes against the current approach of
bringing about complex regulatory mechanisms3 needs
serious consideration.
The current proposals would if pushed4 create a
humunguous superstructure of regulators that would dwarf
the 5000 active regulators who existed in the US prior to
deregulation. Areas like gas pipelines, water, telecom and
electricity in rural areas, where much network expansion
can quickly take place face a real danger of getting into
regulatory quagmires. The possibility of capture by the
regulated to ensure high returns without efforts to overcome
risk and develop the market is large. Jayanth Varma discusses
this theme in Section 6.1 and then goes on to develop the
insight that what is required out of private infrastructure
(today) is not just private finance as such but private
entrepreneurship. ‘The private sector would then bear the
risks and reap the rewards of infrastructure projects. The
design and location of these projects would follow economic
logic [most vital for the country today], rather than the
dictates of political considerations’. The gains in allocative
efficiency in bringing the private sector are far larger than
3 It is interesting that in all the regulatory initiatives in India
thus far, the option of an index based incentive regulation, which
could have been much lighter than the current cost plus detailed
regulation in electricity and telecom, has been entirely ignored. In
the last IIR I had argued strongly for such mechanisms.
4 More than being pushed there would be an autonomous tendency
for expansion and growth of the regulatory apparatus since there
would be new space for the bureaucracy to expand.
merely in project construction and management. And the
private sector would enter in a big way if the rewards in
entering, in bringing in technology and new modes of
working, and contesting are high. (The benefits for the
consumer too would be very large particularly through the
expansion of the network and in the use of innovative
technologies and modes of working.) This is not to deny
that a ‘small number of strategic infrastructure projects may
remain that the state considers important, but the private
sector does not consider attractive. It is only for these few
projects that the state needs to step in either by undertaking
the project with public funds or by providing subsidies or
credit enhancement’.
Atanu Chakraborty (Section 6.2) brings out the salient
features of the proposed Gujarat Gas Act. As one actively
involved in its creation he is best placed to outline the pulls
and pressures that worked against the Gujarat government
going ahead with the act. The jurisdiction of the Gujarat
(state) government to legislate on gas was contested, though
the matter is rather clear. The act creates a common carrier
mode for gas transport separating the trade in gas from the
pipes business. It can serve as a working model for other
state governments serious about gas network development.
Chakraborty reports that the apprehensions that the regulator
would be weak, and a state owned enterprise in gas
transmission is unwarranted, are quite misplaced. ‘Removal
of a member of the Commission is fairly difficult, and the
Act lays out a comprehensive procedure.... Transmission
being a natural monopoly had to be structured carefully and
it was that consideration that led the state to set up a
venture where all the stakeholders are represented. It is not
the usual government company but one that has formal
participation of stakeholders’.
CORRUPTION
AND
BRIBERY
Ajay Pandey (Section 6.3) reviews the economic literature
on corruption to bring certain insights into the discussion
on governance. Thus we learn that the welfare prompting
aspect of corruption, much in vogue some time ago, arises
only under special conditions and only if second order
effects are ignored. It makes sense to define various types
of corruption since their sources and effects could be
dramatically different. Decentralization, competition among
officials, supervision by key decision making authority, greater
role of markets and private sector in public services go along
with much less corruption than otherwise. Generally the
empirical evidence supports the contention that corruption
reduces growth, as revealed in cross country regression studies.
Praveen Kulshreshtha (Section 6.6) presents a model of
bribery where he is able to argue that previous contentions
showing bribery as welfare promoting is wrong even in
Overview 9
terms of the first order effects. In my own discussion of
corruption in Chapter 2 (which is a more general
phenomenon than bribery) I present the case of China
which despite its highly corrupt society is growing most
rapidly and suggest that while corruption does generate vast
rents, if these are invested in productive businesses the
growth impetus is large. Corruption therein is a means for
the emergence of the bourgeoisie out of the party elite and
hence its functionality. This situation is changing very rapidly
though as corruption has now become dysfunctional, and
expectedly the Chinese government is cracking down severely
on it. Kulshreshtha next (Box 6.3.1) documents very briefly
the World Bank’s approach to governance, important aspects
of which have been capacity building for administration
especially for management of public services and institutional
development. Success though has been mixed because of
technocratic orientation of its projects, weak contextualization, and uniform prescription of what is best practice.
Moreover governance related actions do come in conflict
with traditional project lending. Until recently the World
Bank ignored the available options for institutional reform.
Thus mechanisms of decentralization or voice and
competition were overlooked by the Bank.
ACCOUNTING
FOR
TRANSPARENCY
Gujarathi and Barua (Section 6.4) look at the attempt by
state and local governments (SLGs) in many countries to
find the appropriate accounting and reporting of
infrastructure assets. ‘In many cases, standard-setters have
embraced accrual accounting for infrastructure assets as a
part of the larger efforts to institute better accountability
regimes and improved governance in the public sector’. But
there is no magical accounting solution to the problem of
reporting the worth and contribution of public
infrastructure. When the accrual systems have been grafted
on to public infrastructure nothing very significant is gained
by investors and users as the set-ups are public, with long
and extendable lives. The solution may well be increased
disclosure of information that goes beyond the financial to
cover physical and analytical information, demand studies,
etc that may have been made. Cash flow based methods may
still be all right if supplemented with adequate information.
LESSONS
FROM
GOVERNANCE FAILURES
The two most visible cases of governance failure have been
in the electricity sector (with regard to the independent
power project (IPP) policy and subsidization) and in the
financial sector. The results have also been very severe. The
failures therein would have in a major way also contributed
to the recession and to the negation of the fruits of reform.
They have also created an adverse climate and opinion
against reform. I have come across umpteen bureaucrats
arguing against any kind of reform in the electricity sector
because of what happened with Enron and Orissa. Both the
IPP’s policy and the reform of SEBs are primarily intellectual
failures, despite the obvious governance failure and
probability of high corruption in the case of Enron. These
had been brought out in the IIR 2001.
In this report using the Godbole Committee’s findings
Subodh Wagle of the Prayas Group (Section 6.7) draws out
the failures in the case of Enron and the harm it poses to
consumer interest (and of course to the Maharashtra State
Electricity Board (MSEB)). The kind of massive and sequential
failure at many administrative and decision making levels in
the Enron case can only be countered by a vigilant citizenry
working hard for transparency, accountability and participation
of the people. The Prayas Group’s activities, including their
struggle in courts and in public hearings of the Maharashtra
regulator were instrumental in bringing to the fore the sordid
details of the arrangement that took the nation and the
consumer for a ride.
The financial sector’s story has been a string of regulatory
failures of the SEBI and what is not generally appreciated
of the RBI in a very crucial aspect of any modern economy
viz. in the regulation of banking. The learning from past
mistakes has been at best weak in these organizations. Many
factors have been responsible—poor skills and ability, the
lack of professionalism, and an inability and unwillingness
to crucially monitor key aspects of the financial sector.
Barua analyses three scams—The Securities Scam of 1992;
the (Section 6.5) Madhavpura Mercantile Cooperative Bank
(MMCB) Scam of 2001; and the US-64 Crisis of 2001—
to argue that ‘there is an urgent need to harmonize the
regulations for different segments of the financial sector to
reflect the basic inter-connected nature of operations of
different segments’, for possible unification of regulations,
for separation of the functions of development of the sector
and its regulation, and the ‘extensive use of appropriate
statistical tools for data analysis to anticipate and defuse a
developing crisis’ and for speedier processes for dealing with
frauds. The key to achieving these is professionalization of
the regulatory functions. The financial sector’s health is
crucial to all other sectors including infrastructure and the
sector as such has a large regulatory aspect.
RURAL POVERTY, INFRASTRUCTURE,
GYANDOOT
AND
The approach to poverty has been to mitigate the same by
acts of redistribution. It is well known that all of these have
had very little effect because of the vast leakages and the
very high costs of their administration. The Integrated Rural
Development Programme (IRDP) programmes and the
various special employment programmes are of this genre.
Their true role may have been little more than to create
space for the expansion of the bureaucracy and counter
potential dissent among the poor. Keshab Das (Section 7.1)
reviews very briefly the rural growth and development
experience with a focus on infrastructure arguing that
privatization would not work because of the low affordability
and problems of excludability specific to the rural context.
While the government’s role is potentially large, state failure
as exemplified by the IRDP and similar programmes would
mean that status quo would not deliver either. The best way
out of the mess is to bring back the agenda of land reforms
since that by creating productive endowments for the poor
can bring about their participation, and make them afford
infrastructure. Better institutional and administrative
mechanisms and governance improvements are possible for
an enhanced role of the state, which is inevitable if there
is willingness to seriously strive for rural infrastructure.
In Section 7.2 Das takes the case of a specific
infrastructural development effort—the programme of the
Gokul Grams taken up with much fanfare in Gujarat. He
brings out the dimensions of their failure which are more
or less the same as in typical rural development programmes,
despite claims to the contrary. Community participation
could have helped, so would empowerment of the village
and taluka panchayats which were actually responsible for
the implementation of the programme.
Brij Kothari, Avinash Pandey and Amita Chudgar (Section
7.3) report the strange case of electronic networking in rural
Dhar, one of the most backward districts in rural Madhya
Pradesh. The personal initiative, dynamism and leadership
of the local collector resulted in the development of an
electronic network with branches and nodes in taluka
headquarters and the main servers in the district headquarters
and dial up access in many villages with plans to cover most
clusters of villages, so that no villager is far from these
soochnalayas. This Gyandoot project is remarkable in having
involved the people not merely as users but as contributors
and initiators so that the sense of ownership and participation
is very strong. It has a high probability of being commercially
viable and self-sustaining. The content of the information
made available at the soochnalayas and the interactivity that
is possible for such tasks as getting copies of records,
certificates, complaints, and the commitment of the local
government offices to respond to queries are the beginnings
of true e-governance. The ultimate potential of the computer
and the internet for e-governance is immense since at current
rates of penetration it is likely to cover a very large part of
the population if special public arrangements like these
soochnalayas can do what the subscriber trunk dialling/
public call office (STD/PCO) booths did to the use of
telecom. Of course the project would hardly have been
possible without the initiative of the collector. Now that one
Gyandoot has come up, many more might be round the
corner.
THE URBAN SITUATION
The urban situation with regard to infrastructure, especially
in the big cities, depends crucially on policies and practices
with regard to urban space, both built up and land. It also
depends upon the capacity and resources of the urban local
bodies and the constraints they have in investments and in
bringing the private sector in. In the last IIR we covered
the finances of urban local bodies bringing out their
vulnerability. We thought we would be able to cover the
major issue of the distortions in the market for urban land
and space, but that for various reasons we could not do in
this report. Bhavin Kothari (Section 8.2) as mentioned
before brings out the potential of TDRs to overcome in part
the worst effects of the distortions in the market for land
and space, to allow at least some land to be made available
for adding vitally necessary urban infrastructure.
Bithin Datta (Section 8.1) brings out in crisp detail the
present situation with regard to urban infrastructure and
the organization responsible for the same—the Kanpur
Development Authority (KDA). The beginnings of a slow
change are there—projects have begun on build, finance,
operate and transfer (BFOT) and BOT basis but much
improvement is needed. Many problems arise with the
management and maintenance of infrastructure due to
problems at the planning stage itself—incorrect data and
surveys that lead to wrong layout, improper master plans
that do not recognize the ground reality, improper feasibility
studies, over-ambitious standards of layout and space
allocation. Thus plans that attempt to anticipate the needs
of the future would be futile and almost impossible to
realize. Poor coordination between the KDA and other
bodies concerned—the Railways, the Nagar Nigam and the
electricity board principally—have imposed huge delays and
costs. These hopefully will soon be overcome since there is
the beginning of the consciousness that these need to be
overcome if progress has to be made. Projects which are
abandoned after partial construction for various reasons,
but continue to exist on paper (for accounting and procedural
reasons), impose additional drain on the resources of the
KDA. Illegal encroachments even during the construction
of the project are rampant and have resulted in high costs
and delays. Without the political will to remove these and
prevent such encroachments a major constraint would
continue to exist whatever the improvements in other aspects.
The financial situation of the KDA though better than of
many other similar organizations is under stress. Salaries
Overview
take up a large part of the expenses and today there is little
contribution from user charges and taxes. The potential for
improvement though is high if the willingness-to-pay surveys
can be relied upon. Bringing about user charges would
require legislative changes and the development of a
framework to allow for tariffs and subsidies linked to tariffs
and tolls for many of the urban services. Land development
fees and user charges for water, certain roads and bridges
like bypasses are eminently feasible.
Mukesh Sharma (Section 8.3) continues the story of
Kanpur bringing out the situation with regard to water
supply and its pricing. Losses both technical and unaccounted
are very large, the rates which are low are highly distortionary
and do not promote judicious use of water. Going by the
water charges as a proportion of income the poor cannot
afford to pay more5. Binayak Rath (Section 8.6) brings out
the problems with regard to solid waste management in
Kanpur that are likely to be typical of most large cities in
India. Despite many regulations and injunctions of the
courts there is little adherence to norms as laid out in several
policies and documents of the central government. Collection
efficiencies both primary and secondary are poor, storage
facilities are entirely inadequate, existing equipments
including trucks are poorly utilized, the siting of landfills
is quite improper and equipments are in poor shape. The
Kanpur Nagar Nigam is poorly organized for the task, the
elected members are indifferent to the problems, and the
phenomenon of ‘badla workers’ is also noticeable. Some half
hearted attempts at involving NGOs and privatization have
naturally failed. The problem can be overcome if the space
for the informal sector can be created and suitable NGOs
can be actively brought in.
URBAN WATER
Nirmal Mohanty and Shreekant Gupta (Section 8.4), bring
out the issues in the use of water markets for reforms in
the sector. They argue that though ‘…informal water markets
have been in existence for decades, formal markets with
clearly assigned, private and transferable water rights are of
relatively recent origin. …In many instances water trading
has alleviated water shortages. International experience also
shows that formal and developed water markets strengthen
5
Essentially the method is to show that water rates already take
2.2 per cent of family income, higher than in many countries where
it takes between 0.9 and 1.8 per cent. This method of comparison
is debatable and the opposite conclusion can actually be drawn which
ties up with the willingness to pay surveys since the comparison is
with the advanced countries. At high levels of income the share of
necessities including water would be low given the nature of
consumption baskets. To presume similar shares is to assume that
consumption functions are homothetic over the items in the basket
which is certainly not true [Editor].
11
the incentives for conservation and more efficient use of
water. For example, farmers have responded by switching
to water-saving technologies and high-value, less water
intensive crops. The Indian experience with water markets
has been positive, although there have been only limited
gains as markets have remained informal, localized and
primitive. …The current challenge in India is therefore to
establish formal water markets which will expand the scope
of trading and make inter-sectoral water transfers possible.
Further, since formal water markets have a legal basis, effective
regulation can be designed to address the issue of ecological
sustainability. These markets will be of significant relevance
to the urban sector which has been suffering from acute
shortages of water but has not been able to access informal
markets. While it is true that in urban areas tariff
rationalization and reforms at the distribution end can
improve efficiency in water supply and use, nevertheless
additional measures will be required in view of fast growing
urban population. …In this context it is estimated that if
five per cent of the water being used for irrigation is
transferred to the urban sector, the latter’s water requirements
can be met for the next fifty years.
In Alandur on the outskirts of Chennai Muncipal
Corporation, but part of Chennai’s urban agglomeration,
citizens actually paid rather stiff connection charges and
monthly fees for a new sewerage system. The rates that they
paid were far higher than even the figures revealed by an
earlier willingness-to-pay survey. Residents of nearby Chennai
did not pay anything for sewerage facilities. This happened
because of the persuasive and educational efforts of the
Alandur Municipality. Mukesh P. Mathur (Section 8.5) brings
out this interesting story. The case is of importance in the
discussions of user charges and commercialization of urban
infrastructure. The costs that people bear in being subject
to denial are much higher than the cost of providing the
service. This is especially true in the urban agglomerations
of large cities not covered by muncipal facilities. The point
had been discussed in IIR 2001. If the state cannot gear up
to provide services, or even to create the framework (of
regulation) for bringing in the private sector, then it should
consider opening up such activities (without any regulation)
to private parties to organize and build facilities. That would
be better than continuing with the denial.
DEVELOPMENTS
IN THE
ELECTRICITY SECTOR
The high point in the electricity sector was the arrival of
the official draft bill to usher in open access. The National
Council of Applied Economic Research (NCAER) had been
working on the Draft Bill 2000 which had gone through
eight versions in the process of consultations among
government and potential stakeholders. The current official
bill 2001 is in many ways different. Ajay Pandey (Section
9.4) critically reviews the draft bill to point out its pluses,
and bring out its inadequacies. A golden opportunity for
reform of the electricity sector would again be missed. The
bill does not start with consumer interest but with open
access, yet it does not rule out all restrictions on interstate
and interregional trade and transport of power, puts severe
restrictions on the traders, and does not neatly solve the
problem of cross subsidization through for instance bringing
about direct subsidization. (See my discussion in Chapter
2.) While putting much responsibility on the regulatory
commissions, there is lack of clarity of roles between
government, the Central Electricity Authority (CEA) and
the commissions. Similarly the bill loses an opportunity to
have explicitly brought in incentive regulation. ‘There are
provisions which preclude the possibilities for the sector
such as competition in supply, development of pool or spot
markets as any such move will require further legislative
change, a time-consuming and costly process. The emergence
of new sets of problems and issues …in the areas of regulatory
coordination, conflicts between state and the regulators,
transmission and distribution (T&D) losses, conflicts
between state and central transmission utilities, besides the
political fallout of attempted tariff rationalizations cannot
be ruled out.’
The first day of 2001 started with the collapse of the
Northern grid leaving the region with no electricity, from
which it recovered only after several days. The CEA that
enquired into the episode brought out the events and failures
leading to the collapse. Taking off from that epsiode Puneet
Chitkara, Rajiv Shekhar and Prem Kalra (Section 9.2) lay
threadbare the nature of the failure and suggest ways to
improve the physical management of the grid, the regulation
and pricing of transmission for interstate movement of
power. The current system of responsibility assignment and
authority and of regulation is such as to create little incentives
for effective management of the grid both in the normal
course and in emergencies. The cost plus pricing that is
current, neither provides for efficient management of costs
nor does it provide for the correct siting of investments.
They propose, comprehensively and in much detail, a fresh
transmission pricing and regulatory mechanism, and
ownership and management structure for transmission assets
and operations that would overcome the problems with the
current system and would also be much in line with the
proposals for large scale unbundling of the electricity sector.
Dynamic line rating systems, online data gathering devices
and soft investments for condition monitoring with a view
to anticipate likely weak points in the grid are possible. Very
little investment may be required but they would become
vitally necessary if the events leading to the grid failure are
not to repeat.
After the Central Electricity Regulatory Commission
(CERC) rule on the availability-based tariff (ABT), giving
its ABT order for bulk tariffs, the same was opposed on
jurisdictional grounds by those central power corporations
(CPCs) who were badly affected by the order. Ajay Pandey
(Section 9.4) comprehensively reviews this order going into
both the processes followed by the CERC and the rationale
of the outcome. His findings are not particularly encouraging.
The process followed by CERC was very open. ‘It also took
expert opinion wherever required as is evident from the
appointment of consultants and committees.’ But those
affected by the order of CPCs took a ‘confrontational
posture…More surprising however, in the process of review
was the low level of involvement... of the beneficiaries’. The
CERC despite apparently noting the merit of certain
recommendations of the consultants with regard to
consistency with the IPP policy chose to ignore the same!
Similarly despite its attention being brought to significant
anomalies in the definition of the rate base, the treatment
of depreciation, the allowed return, the treatment of liabilities
denominated in foreign currency, the CERC chose to ignore
these. And the anomalies have continued to harm the sector.
‘In the end, the order despite openness in the process, looks
more like a balancing act, and we will have to wait at least
untils the next tariff review for a sound framework for bulk
power tariff regulations to emerge’. Professionalization of
the CERC is thus still awaited.
Sidharth Sinha (Section 9.3) brings out the reasons for
the failure of the much-touted Orissa model. He shows how
the inability to measure T&D losses and the inability to
achieve the desired reduction in the same resulted in the
failure of the Orissa Model. Ramamohan Rao, Puneet
Chitkara, and Kaushal Saxena (Section 9.5) ask, from the
vantage point of the Mukta Panna Oilfield Contract with
a private group, if there has not been a policy/governance
failure. It does not make sense to bring in a multinational
corporation (MNC) to work a proven gas/oil field where
there are few risks commensurate with the large returns it
would make. Liberalization of the oil sector has to be carefully
worked out.
TRANSPORT
G. Raghuram (Section 10.1) brings out several cases of
commercialization activities in the railways that have had
moderate success. The incentive incompatibilities, ignorance
of network effects as in the case of the Konkan Railway, the
tendency to tie its partner or client into one sided contracts
that the railways seem to have a propensity for come out
in these cases. The success factors and the problem areas are
identified and as the railways prepare themselves for large
scale commercial orientation the lessons from their earlier
Overview
experiences would prove invaluable. Raghuram identifies
eight dimensions that are crucial to the success of
commercialization and rate the cases on these. The case of
commercialization of catering services presents the disturbing
picture of large underreporting of the sales of the railways
official contract caterers. While the percentage share that
the railways take from the revenues of the contractors has
been significantly increased, at the same time it is difficult
to monitor and measure the base. Is there an impending
governance failure?
Subir Gokarn (Section 10.2) reviews the liberalization in
the air-transport sector and the developments therein.
Significant has been the entry of the private sector in a
major way into scheduled airlines that has made the domestic
airline sector show the beginnings of competition. The
regulatory supervisory mechanisms need to develop in the
direction of independence from the government. The policy
on airport infrastructure is not adequate to lead to quick
development of the sector. S. Sriraman (Section 10.3) brings
out the recent experiences of the state road transport
undertakings. Load factors have been falling because of
recently allowed private operators who have been operating
on high density routes, leaving the low density and expensive
routes to the State Road Transport Undertakings (SRTUs).
This partial liberalization has therefore not been conducive
to SRTUs restructuring for better effectiveness. Fare
structures do not take into account demand factors and are
not flexible enough. SRTUs need greater autonomy in this
directon and routes and route bundling would have to be
fairly allocated if the playing field has to be level between
the SRTUs and private operators. Performance of SRTUs
vary a great deal, and there are many SRTUs especially in
the south whose physical parameters show the same or
better efficiency than private operators. But their higher
cost, especially of manpower, would nevertheless make their
costs of service higher.
Biju Varkkey and G. Raghuram (Section 10.4) do a
detailed case study of the new Cochin International Airport
that was the first airport to be built on a BOT basis. In
many ways a private effort, it has nevertheless a dominant
stakeholding by the Kerala government. The large traffic
from the state to the Gulf, the limitations in expanding the
existing airport, the enthusiastic response of people from
the Gulf and the active interest of the district collector were
factors that led to the start of the project. Land acquisition
was difficult but was carried out despite all the hurdles.
Issues of adequate and fair compensation remain. The project
did not do as well as was anticipated because inter alia the
assumed transfer of bilateral landings from Mumbai did not
take place. The case brings out the issues in viability of
airports, rehabilitation and resettlement, and in structuring
13
of projects, and draws lessons for the practice of private–
public partnership.
TECHNOLOGY MOVES AS CONSUMERS WAIT
WLL (TELECOM SECTOR)
FOR
After the draft convergence bill at the end of the previous
year much was expected this year in the telecom sector.
Especially that it would lead to uniform licences across
various segments of the telecom industry. As mentioned
before instead there came WLL with limited mobility (LM)
in which the consumer interest has perhaps been all but
forgotten. Rekha Jain and Dheeraj Sanghi (Section 11.1)
review the WLL(LM) episode bringing out the content and
processes in the decision making. We realize that the only
way the issues could have been resolved would have been
through equivalent licences and making the terms of the
cellular and fixed line operators similar, since the strong
force of technological change does not allow much else. The
need for ‘the clear separation of roles of the Group on
Telecom and Information Technology (GOT-IT),
Department of Telecom (DoT), and TRAI is underlined’.
The TRAI should have a bigger role in detailing an expected
development. Thus once the idea of WLL is accepted the
TRAI rather than the government is best placed to work
out the details. The regulatory and governance environment
should have been strong enough to have left the technology
use to the industry without at the same time bringing about
the costs of multiple and competitng standards or technology
on the consumer. The use of the ‘short distance charging
area as a unit for mobility, and also for defining the rollout plans is arbitrary, and needs to go to be replaced by more
naturally defined units such as districts, or defined distance’.
Perhaps the biggest let down was the opportunity to separate
the spectrum licences from the service licences that WLL
would have offerred to the regulator. As a late comer in
network expansion, increased telecom density is likely to
result from a much larger and quicker penetration of cellular
rather than land lines. This can be inferred from the
experience of China and others in East Asia who are ahead
of us in telecom development. Thus to see cellular as a value
added service and only fixed line as basic is wrong. Cellular,
WLL with land lines, and land lines should have been
allowed same conditions of entry. The opportunity to do
this was missed.
Integral to efficient roll-out is the correct pricing of
spectrum and making as much of it available as possible.
It is perhaps socially optimal, today, for the industry and
telecom users (existing and potential) to pay the costs of the
defence establishment to be able to convert their equipments,
so that they are able to release some more spectrum. Price
of the ultimate service is important because there is both
a significant and large income elasticity as well as large price
elasticity. This is obvious today as cellular networks in
lowering prices have witnessed jumps in their subscriber
base. More importantly the spectrum should have been
nearly uniformally priced across its various possible uses,
bringing in a greater determinancy to the market. This is
the theme of Sidharth Sinha’s (Section 11.2) discussions. He
brings out the institutional structure for spectrum
management, the need for more efficient use and greater
availability of the spectrum, and the issues involved in
auctioning of spectrum rather than licences, and the whole
question of the bandwidth sizes in which unit lots of the
spectrum is allocated.
Dheeraj Sanghi (Section 11.3) looks at internet telephony
and argues why the feature of packet-switching and hence
efficient use of line capacity is not what makes internet
telephony cheaper. It is the significantly higher regulated
prices on long distance telephony that makes conventional
telephony expensive. With the removal of these differences
circuit switched telephony should be able to compete with
internet telephony (which is difficult to regulate) to give rise
to a new equilibrium where the former would have a distinct
and large space. ‘It is high time the ban on Internet telephony
is removed. It is hardly a threat to long distance telephony
in the near future. And we need to reduce the cost of long
distance rather than shield it from competition. When
Internet telephony becomes a real competition to long
distance telephony, then the TRAI may worry about the
level-playing field’.
With the auction of the fourth cellular licences the
mergers and acquisitions (M&A) in the telecom sector are
expected to speed up as the logic of scale and scope unfolds
itself. In Chandlerian terms those who make the investments
and moves to park themselves in a commanding position
would be survivors. In the long run it is unlikely that more
than a handful of firms would remain, perhaps even fewer.
Today contiguity drives the deals as weaker players sell off,
and others with greater value for the circle lap up such
licences. M&A got a boost with the government allowing
equity changes from the original license. Lokesh Garg and
Venu Madhav (Section 11.5) study the M&A activities in
the sector providing a rationale for the same and making
an attempt to peer into the immediate future using the logic
of contiguity. As that logic becomes redundant once players
reach an all India presence, convergence could drive the
M&A. India started with many more licences than most
countries so that many more M&A would take place.
‘VOICE’ GOVERNANCE
AND
NETWORKING
The Gyandoot project’s success with very little use of resources
should alert us to the vast possibility of e-governance as a
meaningful free of change in the relationship of people with
the government and the provider of public services. Citizens’
feed back through the experiments and methods developed
by the Samuel Paul and his group at the Public Affairs
Centre Bangalore, highlights the potential value that is
there in bringing the public user in regular and formal
contact with the provider of the service at low cost in terms
of time and effort or both. The gains in combining
networking and an electronic base for such feed back on a
regular (and formal) basis can be enormous. This is especially
so because the usual market with either price changes or
quantity changes to signal performance to the producer is
not there in so many public services.
Can IT potentially, with sound methodological
innovations in surveying and sampling, make a difference
here? Remember that the developments in real time
measurement at low cost brought about unbundling and
hence competition in electricity and telecom sectors. Rekha
Jain and Raghuram (Section 11.4) look at the many state
wide area networks (SWANS) wherein several state
governments have or plan to spend to develop these networks
to enable rapid and enhanced intra government
communication. If indeed communication over the network
comes to be recognized as valid within govenment, the gains
from the resulting quicker decision making would be large.
The quality too could potentially improve as much more
information, and in formats far more convenient, could be
made available. This is particularly important in government
and public bodies where decision making has to be consistent
and according to rules. As governments put out a vast array
of documents and forms outlining their processes, policies
and rules, the electronic media, particularly the internet,
already plays a role in their dissemination. The potential to
carry this further by linking a Gyandoot with the SWANs
is enormous. As Jain and Raghuram bring out, the SWANs
would have to put much more effort into application
development conceptualizing client (both government and
citizen) needs. A need driven flurry of activity to develop
the software and the applications that can then go over the
physical network ought to start soon. Otherwise there is a
real danger that the SWANS may be limited to voice and
video communication within government. Even that in
itself would still be beneficial. Such is the potential of the
new technology.
The Challenge to Governance in India
2
15
THE CHALLENGE TO GOVERNANCE IN
INDIA
Sebastian Morris
The tendency to ascribe failure of development policy to
bad or inadequate governance has become nearly universal.
It seems development finance institutions (DFIs),
multilateral agencies (MLAs) like the World Bank and the
Asian Development Bank, and policy-makers have all come
to the conclusion that poor governance, like a multiplicative
factor, reduces even the best policy and prescription to
naught. One can dispute this contention in many ways.
Since all acts of omission and commission, poor design
of institutions and their improper working can be
considered as governance failure, the contention is neither
an explanation of development failure in a causal sense nor
particularly useful from the point of bringing about change
in economic performance (or even of governance). The
notion of governance failure has to be narrowed down and
carefully understood. As a truism it has the danger of
masking our inadequate understanding of societies and
economies or even our unwillingness to understand the
specific features of particular societies. Talking about poor
governance, without worrying deeply about the conditions
that engender the same, may also hide an unwillingness
to examine the policies and development approaches
critically. In this paper we finally come to the conclusion
that the leverage point for correcting governance failure
lies in policy and politics; in a more restricted sense of
being able to set up the correct institutional arrangements,
rules and incentives for economic behaviour. Actions
focussed on governance have a special autonomy and a
more limited role.
This paper attempts to delineate that role today in India.
In the introduction we raise the conceptual and historical
difficulties with the notion that sees governance failure as
the cause of poor economic performance. Next we discuss
why good governance needs to be distinguished from
functional governance which aids and abets industrialization.
That helps us to understand certain historical regularities
in governance. Next we go on to discuss the interlikages
between institutions, economic development and governance
in India, and why internal attempts at reform thus far have
failed. Finally we bring out the current failures in governance
that are actionable and suggest that they are largely corrected
by changes in economic policy and some intitutional
initiatives. Attention to governance as such is warranted
only to build organizations and initiatives for commercialization and privatization, and for appropriate changes in
the law and in the development of frameworks for regulation
and contracting out.
Governance—Cause or Effect
Governance through the entire system (of government and
its parastatals) is more often not the leverage point for
change, but has to be effected by simultaneous changes in
other dimensions of society—economic policy, politics,
and law. The contrary position is not very useful, since it
immediately, raises the question: how does one bring
about better governance other than by appeal to political
will, a much abused term?
It is important and of utmost relevance that the nineteenth
century, despite absence of MLAs and DFIs saw more
countries industrially transforming1, than the twentieth.
1 Industrial transformation, is the second major social revolution
after man emerged, and without it no society (other than through
rents and transfers) can aspire towards high and increasing incomes.
There is nothing like sidestepping industrialization for a society of
any decent size, despite the opportunity to leap frog and avoid
particular industries that the emergence of the services sector as one
in its own right brings about.
Indeed the only successful independent transformations
that can be said to have begun unambiguously in the
twentieth century are those of the East Asian tigers (South
Korea, Taiwan, China, Vietnam, Thailand and possibly
Malaysia) where the role of MLAs was marginal at best.
The Soviet industrialization which was successful had
collapsed, and is in the process of acquiring a more
sustainable capitalist character. These facts should open the
minds of policy-makers to the possibility that DFIs and
MLAs may have been quite wrong in their policy approach
to development. Certainly, the hope that with actions at
the international level development can be engineered
faster than otherwise has been dashed. Otherwise the
twentieth century should have seen nearly all countries
(except perhaps the African) to being well on their way to
industrial transformation. It is important to note that good
governance as conventionally understood—fair, transparent
and accountable—was not a necessary characteristic of
successful countries at every point in their history.
Corrupt Societies have also Transformed
The US in the 1920s or earlier was a very corrupt society.
So is China today. Despite that it grows very fast. So have
many other societies been during some part of their history.2
Corruption in societies does present a pattern of sorts.
With a critical level of development it seems to fall,
sometimes very dramatically. Corruption came down rather
suddenly in the US after the 1920s. The jailing of Al
Capone in 1932 may have been the turning point in the
US towards a relatively corruption-free society. Today China
is dealing with corruption with a firm hand.3 Taiwan and
Korea today value honesty in public life far more than they
did in their recent past. The early years of industrialization
do seem to be more corruption ridden and prone to
governance failures than the post-transformation phase.
So, is the importance of governance, and its dysfunctionality
an aspect of the phase of development? And so negating
a priori any universally valid relationship between good
governance and development? See Box 2.1.
Another Word for State Failure?
The Gerschenkron notion that the later a country
industrializes the greater has been the role of the state
2 We know that industrialization is a messy process and good
governance, as we understand it today was neither a necessary nor
a sufficient condition. Indeed the early period of industrial
transformation has typically been one of contests and class struggles
wherein ‘rent’ or plunder were barely distinguishable from capital.
3 Over a few thousand corrupt officials and people have been
jailed or sentenced to death during the last few years in China, on
charges of corruption. See Box 2.2 on Corruption in China. See also
Zhao Dengju (2000).
(Gerschenkron, 1966) is again a historical regularity that
has held true to date. So far there has not been a single
violation of this regularity. Therefore is the insistence on
good governance as a pre-condition to the efficacy of
development policy a round about (and confusing) way of
admitting the Gerschenkron theses by mainstream
economists? When the insistence on governance is so
intense as it is today, then the state4 ought to be at the
centre stage. The debate on state and market failure has
led to deep insights into the factors of success in East Asia
and failure elsewhere. State failure has been cogently
developed in the literature wherein the class base of the
society, particular orientation of the bureaucracy, and the
policies pursued, and the appropriateness of economic
instruments of control have been related to present cogent
stories. We draw much from this literature.
Prosperity Inequality, and Governance
Today, the causation is assumed to be from governance
to development. It may, and often does run the other way
too, as numerous examples from history will show. As
mentioned earlier, China after going through a phase of
high corruption and poor (but nevertheless functional)
governance is now cracking down on corruption. Is it that
with ‘middle incomes’ the value of good governance has
gone up? And hence its pursuit? Similarly, was the sudden
change away from corruption in the US during the 1920s
the result of economic compulsions arising out of the high
and widespread growth of the roaring twenties?
As incomes rise for all with the industrial transformation,
and when the majority of the people cross a certain level
of income (and are satiated in a basic sense), their ability
to be concerned about immediate non-economic aspects
of life—relationships, orderliness, access to public facilities
and fairness, improves. Whereas below this level, the
struggle is for survival. With a decent living people’s ability
to resist the unfairness and waste in public bodies improve.
In China and South Korea with very little inequality of
incomes such a phase has come very suddenly.
In South Asia and Latin America with pronounced
income inequalities even when the rich are well beyond
that threshold level of income most others are not, so a
sudden change is not discernable. Visible poverty coexists
with affluence. Ghettos, a vast service sector, urban sprawls
and slums along with isolated and protected private clean
spaces result. Good governance in such situations of extreme
deprivation may then merely imply that state and public
institutions are only responsible to the rich and the upper
classes and so may be highly oppressive on the poor who
4
Even corporate governance is determined through frameworks,
policies and actions of the state.
17
Box 2.1
States, Governance, and Industrialization: A Historical Review
STATE, CLASS
AND
GOVERNANCE
States have an existence apart from that of governments and their role is best conceptualized as the management of the economy
and society within the constraints imposed by the coalition of classes that constitute society.
The state and institutions in England during the industrial revolution, if one goes by the stories of the poor houses, the poor
laws, the treatment of children and petty criminals, were hardly fair or moral, even by the standards of the society then. But
they were functional (or at least not dysfunctional) in the sense of not having stood in the way of the first transformation- that
forever changed society.1 Hence states and institutions may be distinguished on the lines of whether or not they aided the process
of transformation of society into an industrial society. Thus we distinguish between a governance that is functional in the sense
of aiding and abetting the industrial transformation; and dysfunctional governance in that the state in their behaviour, rules and
institutions delayed or indefinitely postponed the industrialization. Rather than economic performance per se, it is useful to think
of industrial transformation as the goal of all non-industrial societies.
THE WESTERN INDUSTRIALIZATIONS
The late eighteenth century state in France and its institutions were rendered dysfunctional with the beginnings of capitalism
in France and gave way in the French Revolution to make possible the development of bourgeois society. While the unfairness
of that pre-revolutionary state and society is quite obvious, that was not its weakness. The basis of the state which lay in the
dysfunctional class (the aristocracy and the landed gentry), and its feudal form were barriers to change. These therefore were
violently displaced by a revolution for a new society to emerge. But unlike in England where an unchallenged bourgeoisie reigned,
the French had to create or at least strengthen a vastly weaker bourgeoisie. It was only with the modernization of Napoleon
Bonaparte that bourgeois development (industrialization via capitalist development) could be put on an irreversible if slow footing.
The travails of the second Napoleon show that the state had to play a new role—that of balancing the interests of not only
the various sections of the bourgeoisie but also between classes. This was so because in France, the rising bourgeoisie had to share
the space of the state with an upper section of the working class, rich farmers, remnants of the old ruling class and a vast
bureaucracy. The coalition state in France unlike in Germany a little later under Bismarck, was only able to bring about a much
slower transformation of the economy than in Germany.
In Germany industrialization began in earnest when its elite landed interests—the Junkers—turned themselves into capitalists.
With a state that had its power base in merchants and landlord-turned-capitalists, its tasks were not as deeply contested, as in
France. Germany therefore transformed very quickly. In America, without the baggage of a feudalism, the beginnings of
industrialization required, as a first condition, the overthrow of the British to form a large market for the benefit of American
industry. The simple mechanisms of common tariffs and public investments in areas of market failure—standards, technical
education, support for local production of arms and ammunition were used. But it is only with the victory of the North in the
Civil War that bourgeois development could be said to have reached a point of irreversibility. One of the important issues in
the Civil War was slavery which was declared illegal. But it was the right of the Union to have a common tariff to which the
Southern agrarian interests were opposed, that was the real underlying issue. For the North however it was important that the
American home market for their manufacturers remain one. The freedom of slaves as the visible issue allowed the North to seize
the moral high ground and strike at the South.
THE DYSFUNCTIONAL STATE
IN
BRAZIL
Governance in a narrow or moral sense may well have been no worse in countries like Brazil than in the US in the early days
of industrialization. But here without cleansing the state of the Latifundia (the landed interest), Brazil could not pursue clear
policies to abet the industrial transformation, and therefore the governance of the state may be said to have been dysfunctional.
The issue of fairness is in this context entirely secondary. Conceivably in a state that is a coalition of various classes, chaos, and
civil war (which may appear as governance failure), that leads to ridding the state of the older classes which stand in the way
of bourgeois transformation may well be functional even if the process is seamy and abhorrent.2
RUSSIAN MAFIAS
The Soviet system collapsed as an organization and ideology completely, and no organized (controlled) transformation to the
market economy was possible, because every moment of confusion and anarchy only reduced the prospects of any such orderly
transition. Having stayed long in that disorganized state, the mafia that is today organizing production, markets and firms, ca nnot
be seen as entirely dysfunctional even if their particular actions are abhorrent. The only system that can in itself emerge out of
the present chaos without great leadership and central organization is the capitalist, with all its negative aspects. And the m afia
plays a positive if violent role in that birth.
1 That these may have served to secure the right to private property of the bourgeoisie against the propertyless is quite clear. In a slightly
earlier period, the bourgeoisie had won the right to property against lords and rulers with political power.
2 Thus the brutal Syngman Rhee’s regime in South Korea got rid of the landed interests, including rich peasants form the power base, and
virtually eliminated the left wing to create a state that was just right for industrialisation in the hands of ‘strongman’ Park Chung Hee.
Box 2.2
Corruption in China
FROM PARTY
TO
BOURGEOISIE
The comparison and contrast of corruption in India with China is important. Corruption today (or rather yesterday) in China
is no less than it is in India. Indeed, we may succinctly describe China’s process of growth and evolution into a capitalist society
since 1979 as one uninterrupted orgy of corruption, in which party functionaries (both the executive and the bureaucracy) fully
exploited both their political power as well as, their power over economic decisions and state-owned enterprise. The latter
happened especially after the managers in SOEs were allowed profit shares. Thus, the near complete egalitarian (in an economic
sense) society of Mao has now evolved into a society with some inequality. The transformation of the party elite (even lower
rungs) into a bourgeoisie is, from the vantage point of its functionality to the industrial transformation, akin to the junkers turning
capitalists in Germany in the 1860s after several years of the Zollverein. So an entire bourgeoisie is being created out of the party
members, but especially its elite. Besides corruption per se another aspect in the accumulation has been the round haul of Chinese
capital via Hong Kong, Taiwan, Singapore and the US (via non resident Chinese many of whom are relatives of party officials),
that mistakenly gets reported as FDI into China.1
What goes on today cannot be described as primitive accumulation per se. The phase of primitive accumulation of Marx,
in China was (under socialism) during the period up to the mid-1970s, especially during the Great Leap Forward. And this
accumulation fits the idea of primitive socialist accumulation of Preobrazensky. In Russia that phase was in the 1920s and 1930s.
Unfortunately for Russia, it actually went ahead with creating a socialist society. The Second World War by its appeal to Russian
nationalism prevented the contradictions of the socialist 1930s from being fully exposed, and the Cold War that followed only
increased the resolve of the state and party to not question its basic assumption of a transformation without markets. The phase
in China from 1979 to date can be termed as one of re-emergence of capitalism and markets on the sound basis (of endowments
for all) provided by nearly thirty years of communism.2 The market had not been completely destroyed under communism (unlike
in Russia), and agriculture was the first to be liberalized. Therefore, consolidation of the market mechanism was not at the cost
of the poor. Indeed, the consolidation of private property in the first phase was that of peasants which was followed by that
of lower rungs of the party who set up petty businesses, and then that of the elite sections who then went on to accumulate
capital through not entirely fair means. In simple language power and money cannot be divorced for too long. Similar processes
came about very early, with independence, in many of the African countries variously described as bureaucratic, kleptocratic or
state capitalist (Mamdani, 1976; Shivji, 1976; Leys, 1975). In India too at the state level through mechanisms such as the joint
sector and surpluses from agriculture and rents from the state, a local bourgeoisie has emerged. Thus, capitalism shows corruption
as an integral aspect when the bourgeoisie emerges. To the extent that the Indian bourgeoisie (however stunted) has had an early
origin3 (perhaps even earlier than the Japanese), and shows an intermittent growth thereafter, there is no dramatically distinct
phase of their emergence. But the 1980s and the 1990s (until 1996) may be seen as consolidation through profit and rents.
CORRUPTION HAS SUDDENLY
BECOME
DYSFUNCTIONAL
The question that naturally arises is why is the Chinese system so actively and purposefully coming down on corruption today,
when over the last couple of decades it not only turned a blind eye, but also may have actively encouraged the same? The answer
lies in the returns to corruption, which have come down with growth and maturity of the economy, and the creation of a now
numerous class of capitalists. Corruption which was functional yesterday to the accumulation and capitalist development is no
longer so as the economy moves to a higher level of development wherein further corruption would mean eating into each other’s
profits. What was observed in the US in the 1920s when corruption was finally tackled, is happening today in China but a
lot more suddenly.
If freedom from corruption and a legal basis for commercial interaction are treated as goods, their consumption by the masses
(non-participating in corruption) is now possible, since the incomes of the masses are above that minimal level and they can resist
corruption. Given the extreme equality of Chinese income distribution, that transformation is sudden. In white goods and
telephones the growth in consumption has been stupendous for the same reason. The very high growth rate of the economy is
another aspect of the same phenomenon, since that high growth rate is itself inter alia a result of the equality of income distribution.
TRANSFORMATION SUCCESS
IS
DUE
TO
ENDOWMENTS
The big question is why despite this massive corruption has there been no governance failure in the functional sense, that is,
a failure leading to the slowing down of the industrial transformation? To answer that question is to explain the late industrialization
1
2
It is known that about 80 to 85 per cent of Chinese FDI (average US $ 40b in the late nineties) are Chinese investments from these countries.
The cultural revolution, may have been a set back in more ways than one since it took attention away from the task of accumulation. It
may have also have made China critically short of certail skills like managers and bankers that it required for modern economy.
3 Even if we keep aside the early modern industrialists like Dwarkanath Tagore and others c.1860–70, whose valiant efforts fizzled out due
to a hostile colonial state, there were others like Tata and Birla who came in a few decades later. (See Dutt 1911).
19
of East Asia, and this report is not the place for it.4 It suffices to say that all of East Asia grew very rapidly because of land reforms
that were carried out in South Korea, Taiwan and Thailand (less critical since land is more plentiful) and in China and Vietnam
(both under communist rule). Such reform released the home market constraint.
AND
TO
EXPORT-ORIENTED POLICIES
Additionally, pursuit of export-led growth (China from 1979) to overcome the foreign exchange constraint and to add to demand
was the key. Successful economic transformation has therefore nothing to do with good corruption free governance as is the general
belief, but is necessarily about getting the initial conditions (essentially economic) right, if need be through political action. It
is certainly not caused by culture and such other sociological factors including the tautological work ethic. The work ethic itself
would have been the result of success in the economic task of transformation.5 The essential initial condition is really that the
majority of people is endowed to be able to participate in the market as producers and workers, and hence as consumers. All
other aspects are really secondary or endogenous to the process of transformation itself—work ethic, life style, entrepreneurial firms,
technological development etc. This is not to deny some autonomy to large firms, the state and others via strategic investments
in areas of market failure to speed up the transformation process.
RENTS BECOME CAPITAL
IN
CHINA
The vast impetus to growth in China following the relaxation, or non-existence of the home market constraint, and the pursuit
of export-led growth means that rents have a high probability of being invested, and thus, that surplus (though rent in origin)
becomes capital and not directly unproductive activity (DUP), as is the case with economies like India, with severe demand
constraints. At investment rates of 40 per cent6 plus and growth rates of above 10 per cent (till the recent slow down to 7.5
per cent) all sources of surplus including those illegal have the functionality of speeding up the transformation process because
they are invested. When investments in India are as low as 26 to 28 per cent with a marginal savings rate close to 40 per cent
but average around 25 to 27 per cent, the economy is demand constrained. So the problem in India is not rents per se, but
that so little of it is invested back into the economy. Not only that, so little of even profits may be invested given the current
strangle hold of conservative macroeconomic policy. Capital flight and avoidable waste in DUPs and other activities emerge to
bring about the current equilibrium, and that creates its own ethos of a lazy rent seeking and rent wasting economy, with vast
inequalities.
4
See Morris, S. (1997) for the argument that export-led growth is not laissez faire, but is the purposeful, promotion of both import substitution
and export promotion at the same time, through a highly undervalued currency. Earlier, economists like Lall (1994), Datta Chaudhury (1981),
Alam Shahid (1989), Amsden (1989) had argued that the states’ direction, and active involvement were important.
5 Who would have talked about ‘Confucian work ethic’ in the twenties after a visit to Shanghai or Taipei of the day?
6 Doubts have been raised about the stability of the Chinese banking system. In comparison to that of most other countries they seem to
be so stretched that they could come collapsing like a house of cards. If growth slows down to less than 5 per cent then the problems of the
banking system would have to be sorted out. What is generally not known is that late industrialization, because it offers the scope to grow very
rapidly, also allows higher debt–equity ratios and higher proportions of borrowed capital to own capital, without increasing bankruptcy risk. This
is because few industries face fundamental uncertainty. And with a strong state even that residual risk can be minimized. China is merely following
on the footsteps of Japan, South Korea and Taiwan, of high financial repression of the economy. That strategy is today functional to the Chinese
economy. It is entirely incompatible with convertibility on the capital account. South Korea, Taiwan and Thailand had opened themselves on the
capital account in the 1990s. That was the real cause of the currency crisis, since Japan in an earlier period had pulled through this risky financial
strategy to great advantage by delaying its convertibility till well after its complete industrial transformation, that is, only in the 1980s.
are in the majority. Standard notions of dimensions of
good governance—participatory, transparent, and
accountable—may be limiting. Only propertied citizens
(but not people in general)5 may be able to take advantage
of such good governance. The aspect of class is of particular
concern in India because of the prevailing inequalities of
incomes. It brings in a whole new dimension to governance.
It makes any meaningful characterization of governance
inseparable from the nature of the state and its class basis.
Even in democracies where theoretically the poor have the
5
Our contention therefore is that, growth which takes all
people above that survival level of income has to have primacy over
all else in a capitalist society, as the goal of policy and practice in
all poor countries.
same political rights and privileges as the rich, the economy
rules to corrupt, distort, and ritualize many political
processes such as participation. Stability to such discordant
societies is provided by an escape route for sections of the
politically ambitious (climbers) even among the poor. Thus
powerful big-men in democratic Kenya, India or Bangladesh
quickly amass wealth by controlling the levers of power.
And this small window that allows a few (outside the elite)
to convert political power into wealth has been wellrecognized as a characteristic feature of such societies.6
That process, an important aspect of which is corruption
of public offices is very visible, attracts media attention
6
Mamdani (1976), Leys (1975), Shivji (1976)
and is much discussed. It is actually an important process
for the survival and the continuation of the hold of the
elites over a vastly in-egalitarian society. This kind of
politics cannot be corrected by urging politicians not to
be corrupt. As law makers it is easy for them to create
laws with loopholes that make the space for them to
indulge in corruption. The cure actually lies in growth and
development, which in taking people above a certain level
of income quickly would create the right atmosphere and
basis to stand up against corruption.7
Meaningful good governance is very difficult in such
discordant societies. In such a society which is also truly
democratic as in India (a rarity since discordance is usually
managed by authoritarian regimes), the fact of political
corruption and anomie, should not lead to the policymaker losing hope. The point really is to look beyond
corruption, to the leverage points for change in society.
These lie principally in getting the initial conditions for
industrialization right—a population in which everyone
has some (minimum) endowments, so that individuals can
participate as both producers as well as consumers. Today
that would translate to land reforms and security of tenure
to the cultivator. It would also mean appropriate
macroeconomic policy giving primacy to growth. In short,
policy and politics become the drivers. In a more limited
sense though, institutional change towards better
organizations and rules provide an opportunity today in
India, since there is a broad consensus that reforms should
continue. Only with a more egalitarian income distribution
can governance hope to be both functional and good.
INSTITUTIONS, ECONOMIC DEVELOPMENT,
GOVERNANCE IN INDIA
AND
Prior Institutional Development in India
India, which started out with nearly all the institutions
(largely inherited from the British) current in advanced
societies, but limited to serve only a miniscule proportion
of its population, failed in the apparently easy task of
simply extending the domain, and access to these
7
One may ask: How can growth take place when such politicians
stand in the way of good policy and its implementation? While
there is no doubt about the influence of this corrupt behaviour on
the policy and economic management, our contention is that at this
juncture, all that the corrupt politician demand is an ‘illegal’ share.
It is possible for wise policy to result in high growth , so that the
costs of accomodation can be borne. The ‘rents’ that they would
collect while no doubt unfair and possibly illegal would if invested
make this ‘outside’ politician a capitalist. The resulting governance
and state system would be functional but not fair. Thus we would
caution those who want to change governance to work through the
economic rules of the game.
institutions, to the whole of society. Today we know that
in India such extension has been more formal than real.
In contrast, East Asian societies starting out without the
institutional benefit of the colonial yoke, were able to
create institutions as they went along and as the need arose.
This raises the question: can the early existence and growth
of institutions, much before their need in an economic
sense, prove premature and reduce the prospects of the
transformation? Possibly yes, if the history of South Asia
in the second half of the twentieth century is any indication.
The Failure of India
India had all the ingredients by way of rules, institutions
and organizations in spheres such as law, politics,
participation, administration and governance, which few
other non-industrial countries had. It also opted for universal
franchise and a ‘fair and true’ democracy, which meant that
most of the inherited institutions and more had to be
extended to cover the entire population. Did the costs of
such extension prove backbreaking for the immature
economy? Could these have in any case been avoided? We
must recognize the massive bureaucratic overburden that
has resulted, with the economy having to support an
extensive state apparatus that in form is concerned with
institutional development.8
India because of its ‘failed’ economy cannot in reality
claim to be (although in form the claim can be made)
successful even in the political front. Political and social
institutions tend to show the form of success and correctness
but not the content and substance. Constitutionally provided
decentralization exists in theory but is negated by government
rules, orders processes and controls, and overstaffing; caste
equality is enshrined in the constitution but violated every
hour in some corner of the country. Equality of opportunity
is enshrined in the Constitution but poor children out of
school, and others not so poor are exploited in Bihar and
UP by a rapacious private sector because public schooling
has all but collapsed. Indeed, an entire enterprise has evolved
within and outside government whose task is to manage the
contradictions between the formal political and social
8 Yet, there is no denying that had economic growth been as
rapid and broad-based as was envisaged by the planners and the
founding fathers of the nation, this burden may perhaps have been
not as onerous as it is today. Could the prior institutional
development then have been an asset? Perhaps so, and in that case
India may well have been able to complete both its economic, and
social and political transformations simultaneously! Today East Asia
(including China with its economic transformation just round the
corner) await their political and social transformations with a very
good chance of completing both. Thus in a causal sense the
explanation shifts to the failure of planning in India, which is
principally due to the neglect of land reforms, and the export
pessimism of the plan models.
development on the one hand, and slow economic
development on the other, and the consequent non-realization
of political and social development in substance. Thus, for
the state it is important to tell the intelligensia and the
middle classes that it (the government) is doing something
about poverty and the environment; that it provides
scholarships; that it has hundreds of special and targeted
programmes, that there are many thousands of nongovernmental organizations or NGOs working in the villages
and elsewhere, and that there are free hospitals; free water
supply; and that all are equal before the law. In truth though,
despite all these efforts, India has very slow growth in per
capita income barely doubling over a thirty year period (and
not because of a high population growth as many believe
to be). It also has one of the worst records with respect to
the environment. Bright young boys and girls are systematically
excluded from good education given its highly elitist character
(despite the activities of charitable and religious organizations).
The leakages from government programmes are so large,
ranging from a minimum of 30 per cent to as high as 98
per cent, that such programmes are more usefully (and
correctly) seen as programmes that serve to buy up potential
dissent among the excluded and deprived. Despite free
hospitals, even the poor spend vast sums on medical care;
health status and morbidity of the Indian is amongst the
worst in the world. We have tragically (and shamefully) the
highest incidences of avoidable diseases such as blindness
and mental retardation due to vitamin deficiencies, leprosy,
tuberculosis, typhoid and malaria to name just a few. Criminal
suspects are often subject to inhuman treatment by the
police in the process of extracting a confession. At the same
time drunken driving by affluent individuals resulting in fatal
accidents may go unpunished. Often the police themselves
play a role in supressing evidence.
The institutional school would explain economic
performance in terms of institutional inadequacies or their
absence altogether. It is true that the two are intertwined.
And any snapshot picture of poor economic performance
would reveal inadequate or missing institutions. But this
does not mean that institutional failure was a cause of poor
economic performance. In fact poor economic performance,
leads competing groups and interests to focus more on how
the cake is to be divided that is, on redistribution rather
than growth and transformation. This results in the populist
politics, and the corruption that has now virtually destroyed
many institutions. We will examine how, given the mess,
attempts to correct the same through institutional efforts
have usually failed in the past. Nevertheless, in a limited
sense, reforms have created the space for institutional
change and successful governance inprovements. With
time if nothing is done, this window of opportunity could
close.
21
Failure of Endogenous Attempts in India
The Administrative Reforms Committee (1970) made very
valuable recommendations even though in the light of
present-day understanding of the bureaucracy they look
rather staid. They have the limitation of being a purely
administrative approach to improve administration, rather
than any major shifts towards an increased role for the
market. Nevertheless most of the recommendations were
not taken up and the few that were, were ritualized to a
point where no real difference was made. Similarly there
is a Department of Administrative Reforms and Public
Grievances. What they do is hardly known to citizens or
even to most government officials.
Similarly other administrative and organizational reforms
have been attempted many times in India without much
success, pointing to the entrenched nature of the dysfunctionalities, and their basis in the character of the state,
and the overriding dominance of the bureaucracy without
a concomitant accountability.9 The measures recommended
for change, whatever the intentions or assumptions of their
original designers, mutated and got ritualized to end up
reinforcing the mess that was sought to be cleared. MoUs
(Memoranda of Understanding signed between Public Sector
Undertakings (PSUs) and government, the mechanism of
the holding company as a buffer between PSUs and
government were all instituted to reduce dysfunctional
interference of the government in PSUs, and thereby to
give mangers the requsite autonomy and accountability for
performance improvement. They worked elsewhere, notably
in France, but in India they got ritualized and continue
to exist on paper with no real effect on distancing PSUs
from government (see Box 2.3).
Political Economy of Design Failure
Many well crafted ‘fine institutions’, have deteriorated.
Examples would be the state schools education machinery,
health delivery systems and government purchase (including
defense purchases10). Why? Deficiency in design is only a
small part of the explanation.11 It is more likely that the
underlying root causes are the overall environment of
corruption and rent seeking, minimal accountability given
9 The lack of accountability resulting from the structure of the
bureaucracy, the civil servants’ significant power, and their relationship
with the political executive is well understood. We cover some of
this when we discuss the failure of the Panchayats later.
10 This is based on the author’s own professional study of the
system of purchases for the armed forces of such things as uniforms,
tentage etc.
11 The solution though may still be in correction of these
deficiencies when there is a strong motivation and willingness to
change!
Box 2.3
Institutional Efforts for PSU Management Fail
MOUS FAIL
In the area of public sector management, (which is recognized as a major aspect requiring governance related assistance, by the World
Bank and others), measures such as the holding company or the MoU got entirely ritualized.1 They ended up becoming an added
expense and a distraction and did not in any way reduce government’s dysfunctional interference in companies (the original purpose
of the MoU). The reasons for such a pass are well known. Until the budgetary squeeze on the PSUs, there was little need for any
of those in positions of decision making to change. The dysfunctional interface allowed displacement of responsibility, provided for
hidden budgets for the politician to use, reduced the challenge for senior managers, allowed workers high wages and security with
very little work, and to even translate their vast bargaining power into idle time. The private industries that benefited from the
relatively low prices of PSU products could not complain. The MoU over the late 1980s and early 1990s had got reduced to a
‘complex document’ crafted by the ‘Adhoc Committee’ within the Department of Public Enterprise, in consultation with the
enterprise and low level functionaries of the administrative ministries. They were evaluated by a ‘High Powered Committee’, which
could never have had the time. The entire exercise was purely formal. The essential seriousness attached to an important contract
was not there. They were seen more as an academic exercise than as a binding contract. No rewards and punishments were attached
to either performance or adherence, or to their absence. It was not in any way negotiated. Soft targeting was rampant. It is doubtful
if any of the administrative ministries thought of themselves as being constrained by the MoUs. Yet MoUs spread like wild fire
and nearly all PSUs today go through a MoU annually. We have, what the French have most effectively used, viz the contract form
to distance the PSUs from government, but sadly only on paper.
SO
DO
HOLDING COMPANIES
Earlier we had started with another form, the ‘holding company’, to create behemoths like the Steel Authority of India Limited
(SAIL), Bharat Bari Udyog Limited (BBUL). SAIL was the creation of the late Mohan Kumaramangalam, the dynamic young steel
minister who, in being close to the Prime Minister Ms Gandhi could cut through red tape. He was particularly enamoured by Fabian
socialism and the Italian holding companies. During his leadership SAIL did manage some autonomy, but since his death, SAIL
has been a curious and tragic mix of a bureaucracy and a ‘managerial hierarchy’, that is parasitic on the steel plants at Bhilai, Bokaro
and elsewhere. The reform of SAIL would mean that not only government gets off the back of the steel plants, but even the top
heavy SAIL head office is wound up. SAIL had the ridiculous distinction of employing 220 thousand people to produce some 8
million tonnes of steel, when Pohang Steel of South Korea (POSCO) could produce the same with just 13000 people.
Similarly, in a still earlier period organizations like the Project Implementation Board (PIB) set up within the Planning
Commission to coordinate the investment decisions of the PSUs, ended up to become a millstone round their necks. In its own
direct actions the PIB may have been responsible for much of the delays and cost overruns in public sector projects. The Planning
Commission itself is an organization that ritually plans, when government itself hardly takes these plans seriously.2
1 This is now well accepted. For a Discussion on why MoUs as also holding companies were failing when they were being actively implemented
see Morris (1990).
2 For a discussion on how PIB and other institutional oversight delayed investment projects and brought about cost overruns, see Morris (1989).
the nature of defined government processes and rules, and
the politics of displacement between authority and
responsibility. Also the open invitation to corruption in the
form of ‘lowest cost tenders’, zero feedback and punishment
of errant bidders, absence of processes to blacklist such
vendors have together been responsible for the heinous
crimes committed in public hospitals. This has been brought
out by the Lentin Commission Report (1988). Correcting
such ‘bloomers’ in design involve change at the core of
government processes, hardly possible without a movement,
and strong economic and political pressures to correct them.
Dysfunctionalities of Worthy Institutions
Similarly, in the context of public management we do have
the institution of the Controller and Auditor General
(CAG) whose job is to selectively audit the use of public
money, that is, inter alia perform ‘CAG’ audit of PSUs.12
It has rarely exposed cases of the big misappropriations
and corruption. But most managers would generally agree
that it has restricted entrepreneurial initiatives in PSUs,
to the point of rendering managers impotent. Despite
audit, the corrupt can always get away by covering their
tracks. Today Vigilance has emerged as a major constraint
to entrepreneurial initiative in the PSUs. It is not so much
the case that the institutions of the CAG and the Chief
Vigilance Officer (CVO) and the roles they play are per
se dysfunctional in a democracy. But given the failure of
the other systems, these have resulted in pervasive
12
This is in addition to commercial audit under Company Law
(statutory audit).
governmental interference at the operational and managerial
levels in PSUs. Neither audit nor vigilance is able to work
without large costs within the system.
The general point is that even the best institutional forms,
without underlying change in the politics and in the
environment of the organizations whose improvement is
sought, is of no avail. To bring about effective change the
very existence of the organization and the status quo has to
be threatened.13 So in a policy sense addressing governance
directly without at the same time creating the political and
economic conditions is pointless and a mere ritual. We will
argue that unlike the past, in some sectors today, such
conditions either exist or are about to be realized, so worrying
about governance and design at this juncture is useful. Thus
liberalization and the budgetary squeeze on state owned
enterprise all create the right conditions for correcting design
errors.
MODE
OF
SUBSIDIZATION
AND
CORRUPTION
The reform process thus far has eliminated the vast rents
that were generated through licences, controls and shortages.
This does not not mean that rents are not generated today.
Poor administration of subsidies, contracts contrary to
public interest, and residual shortages especially in
infrastructural services continue to remain, feeding
corruption and governance failure. We conclude the section
by arguing that only with the policies that remove the scope
for rents and with the correct modes of delivery of subsidies
can governance improve.
Today subsidies are under attack, and there is much
consciousness among reformers that they need to go. I had
argued that more than a sharp reduction in subsidies a
‘stepping stone solution is called for.’ By shifting from
existing modes of subsidization to direct subsidization can,
not only plug the leakages and improve condition for
governance, but also lead to conditions whereby reform
can become decoupled from the bind of subsidies. Herein
we take the case of electricity and argue the point already
made, in greater detail.
The discussion on the oil sector (see Box 2.4) exposes
the mess that has resulted from the current mode of diesel
and kerosene subsidization. In moving from current modes
to direct subsidies, there would be much support for the
reform from politicians who truly represent the interests
of farmers. It is in the realm of political possibility. Nothing
13
This is a fairly universal phenomenon. Large organizations,
public and private (when not run by a small group or an individual),
or in other words, bureaucratic organizations have rarely responded
to opportunity. It is ‘threats’ that have had success in bringing about
organizational change. The detailed case study of the Imperial Chemical
Industries (ICI), U.K. brings out all the nuances (Pettigrew 1985).
23
could help major infrastructural areas like electricity, water
and irrigation more than direct subsidization.
‘Agency Failure’ Due to Different Prices
The current mode of subsidization (financing the deficit
of State Electricity Board or SEBs by transfers or simply
allowing them to mount) creates an invitation to corruption
that is, surprisingly, not universally recognized. Thus the
SEB managers report high T&D losses when a large part,
usually more than half, is theft or leakage, where the
manager himself is involved in underhand sales usually to
small industrial consumers and affluent households using
air conditioners. Similarly, SEBs over-report auxiliary
consumption. Perhaps more importantly, the manager overreports sales to the subsidized sectors when in reality he
would have sold to industrial consumers, and created rent
equal to the quantity so sold times the price difference.14
This is a situation of rents with losses (Pandey, Section
6.3). The leakages that so result are very large. Thus, in
Gujarat in 1995, had the leakages been plugged, the Gujarat
Electricity Board or the GEB whould have shown a profit
of over 20 per cent on equity rather than a loss of 20 per
cent! In other words unlike the belief of many consultants,
the problem with electricity prices is one of irrational
pricing rather than a lower average price. This kind of
pricing creates the ‘open invitation to corruption’ in the
delivery systems. Both irrationality in the price structure
and the leakages can be stopped with direct subsidization.
Direct Subsidy and Reform
With direct subsidization, the electricity company (SEB or
its inheritor) sees uniform prices (regulated or part-determined
in the market for wholesale power) since the subsidized
customers pay with coupons (encashable) and with cash
above their entitlements. All zones or circles except the very
remote and sparse ones become viable for private investment.
Reform can now take off overnight in various ways—reform
by mere corporatization of SEBs, by privatization of
distribution-cum-generating companies, or through markets
for wholesale power. The company, within the ceiling imposed
by the regulator, could offer differential prices based on the
need to maximize its profit. Possible outcomes are low
prices for agriculturists since many of them would not mind
consuming electricity at off-peak hours. Similarly industrial
customers with the ability to shift demands to off-peak
hours could get electricity at low prices.
Invitation to Governance Failure and Corruption
I had argued that reform in the electricity sector has to
start with direct subsidization for the farmer and other
14
These were brought out in detail in Morris (2001a).
Box 2.4
Creating Governance Failure in the Oil Sector
SUBSIDIZATION
AND
ADULTERATION
In 1979, after the second oil shock, retail prices of petroleum products were increased due to the imposition of heavy duties.
There was, consequently, a need to cushion the shock on diesel and kerosene. Farmers were important users of diesel and poor
households used kerosene. Soon enough, the tax demands on the sector and the cross subsidization within the sector grew. By
the late 1980s, the final price of petrol was way above other fuels. Till recently, the price ratio between petrol and diesel was
as high as 3:1, with naphtha higher, and with kerosene in the range of 4:1. Even a 10 per cent adulteration of petrol with naphtha
or certain solvents including benzenes generates stupendous profits in relation to the contract profits in the retailing business.
The government pushes contracts (on paper) on to retail oil dealers that are so finely calculated that returns for honest dealers
is about 16 per cent on assets.1 But ‘honest’ dealers are a rarity today.
DEALER SECTION BOARD
Companies do not have autonomy in the selection of dealers. A ‘Dealer Selection Board’ exists but the criteria for selection of
dealers seems to have no bearing with the potential to perform well in the retail business. The Board itself is highly politicized.
Why should a business yielding only modest profits be so much in demand? Most dealers are politically connected; some perhaps
only a front for small time politicians. Dealerships are seen as payoffs at the lower levels of the political system. There are also
the usual reservations for ex-soldiers, handicapped people, depressed castes, freedom fighters, and other worthy citizens. But many
allotees are fronts for the real operators who control several outlets. Corruption is rampant and the marketing departments of
oil companies cannot avoid being involved. The extent of corruption varies much across regions. It is generally believed that the
extent of adulteration/short selling is more along highways, and more generally in the north and in Gujarat.
‘INNOVATIONS’
IN
ADULTERATION
Benzenes, naphtha, other solvents, and certain additives to keep the anti-knocking properties of the fuel within the required range
for IC-engines with ignition, are used. There is actually much R&D that takes place in the small scale industry to develop such
additives.
There is major adulteration of oils, even in the lubricants trade especially 2T oils with improperly recycled oil. A licensed small
industry has come up to extract base oil from used lubricants. But instead of doing just that, they manufacture lubricants with
improper additives. Even the extraction processes are not good enough to completely remove the metal residues in used lubricants.
This finds a ready and lucrative market among unscrupulous retail outlets and road side garages that service two wheelers. Branded
pouches introduced by the oil companies have not restored confidence. The informal sector responded with similar-looking
pouches. Since the freeing of lubricants from the administered price mechanism, specialist lubricant ‘super markets’ located all
over and (significantly) away from fuel outlets have emerged. They do roaring business because nobody trusts retail outlets to
sell clean lubricants, and the advertisements of the oil companies have helped build the scare and the consciousness.
CREATED NEGATIVE ‘EXTERNALITY’
The consumers of petroleum products bear large private costs due to the adulteration and short measuring. Loss of engine power
and life, more frequent maintenance, and considerable drop in mileage are the obvious effects. The social costs are enormous. When
kerosene and solvents are used, it releases unburnt residues and monoxide in the exhaust. Many of the solvents and benzenes
are hetero-cyclical and highly carcinogenic. Mere reporting of SO2 levels, as is done by the media in their pollution watch, does
not capture this pollution. Despite multipoint full injection or MPFI, Euro-II and other standards adulteration goes unchecked
in the cities. Indeed it is so rampant that a special auto-fuel is available on the streets of Ahmedabad at a fraction of the price
of regular petrol. This is a mixture of petrol, benzene and possibly naphtha that makes each autorickshaw a pollution bomb.
In highly corrupt and poorly coordinated societies such as India the notions of rent and directly unproductive activities may
not be adequate to understand the economic effects of certain activities. Thus, when as a result of corruption in government
purchase, the official earns rents then it is only in a static, ceterius paribus sense that we may see it as unintended redistribution.
Other effects that follow are the second order effects in the rents having contributed to raising the effective price of the product.
Now if the official and his establishment work hard to obfuscate, to create processes that are responsibility displacing, (where
attribution of blame is difficult), then all that work instead of being directly unproductive (wasteful) is actually ‘negative’. The
feed back effects on the system can be enormous. So-called vigilance agencies then have to work harder. They could, over a period
of time, have developed processes to give the semblance of being active (putting out a few cases of anti-corruption) while letting
most others go. Their role then becomes one of keeping the system of rents getting out of hand. Thus it adds negative value
to the economy, rather than being merely unproductive.2
1
2
Many managers claim that margins are purposely kept low to keep out good people!
See Gupta and Morris in 3i Network 2001 who brought out the case of wanton deterioration that creates the scope for further maintenance
activity on public roads. When railway projects are delayed, resulting in earthworks being washed away with the monsoon and have to be done
all over again, the processes that delay may be seen as cause resulting in ‘negative value addition’.
WHY COMPANIES CANNOT
DO
25
MUCH
The government holds oil companies responsible and advises them to police the retail distribution business. The oil companies
however, have no control over the dealers. Dealers do not admit to adulteration. They have a strong association, and when individual
cases of adulteration are occasionally taken up, nothing happens. Additionally, the fine/punishment is too small for adulteration
or short measuring. Based on the numbers of dealers actually caught adulterating or short measuring, it is estimated that at least
30 per cent of retail outlets, in the best of the nationalized oil companies are involved. It is probably worse for others. So what
do the managers in the marketing departments really do? The rookies try to do something, fail, and ask for different postings.
There is an interesting story of one such rookie, who is today a senior manager, finally opted out of marketing because he
could not bear this systematic assault. In one South Indian city, where citizen awareness of the ill effects of adulterated fuel is
somewhat greater than elsewhere, he launched a campaign, following two cases of adulteration and short measuring that was
discovered by the company. The action against the two outlets was the severest possible under the rules—their licence was
suspended for a while, and citizens were told why the retail outlets were closed. The local company officials were able to withstand
political pressures, but the sales of the company went down because now consumers knew for certain that petrol had from the
company had been adulterated. Other companies who had equally bad, if not worse, retail outlets benefited out of the demand
shift. Petrol quality is not easily measured at the retail level.
‘MANAGING’ CORRUPTION
Many managers get wiser and though not necessarily corrupt, begin managing the corruption rather than stamping it out. They
help to keep the adulteration within limits, and open new (suboptimal from a national or company point of view) company
outlets to check adulteration. How have consumers responded? In the case where the rents have been in part passed on to the
consumers (as in the case of auto owners in Ahmedabad), they benefit, but there are huge social costs. Motorists, especially those
with high performance modern engines obtain information about dealers and locate one who does not adulterate (hopefully there
is one in every city!). Variation in sales between dealers can be high. Thus in Ahmedabad the one outlet in the city that does
not adulterate (besides company pumps that are not conveniently located) sells as much petrol as 25 per cent of the total sales
of petrol in the city by all outlets of the same oil company! Consumers with incomplete information are subject to great stress.
Others journey long distance to inconveniently located outlets to get good petrol.
Yet, all the outlets, some of them with sales as low as 80 klpm, apparently make money since so much bribe is paid or influence
used to get these outlets. Marketing jobs (‘dipstick mending’ in oil companies as it used to be called) in the mid-1980s, used
to be prized jobs. They are probably prized jobs even now since they oversee points of huge rent generation. So change cannot
come from within the system. Consumers as usual do not have the necessary leadership institutions to argue their case. Oil
companies pin their hopes on the abolition of the dealer selection board in the post administered price mechanism (APM) scenario.
This may help in the selection of new dealers. However, the retail business is overcrowded, and in case of any conceivable rational
reorganization, many retailers would have to be closed as competitive margins and pricing emerge unless adulteration and short
measuring continues, with the effect of upping the margins and creating over-entry.
So how can one control and manage a set of dealers who have been reared in corruption? Would the establishment of private
sector oil distributing companies (or privatization of the oil sector) help? In a limited way they could if the private companies
are allowed to use price to signal quality. Then the consumer would have to pay high prices, the difference between the price
of good petrol and bad petrol being a return to asymmetric information for the oil company. Socially, this is suboptimal. The
oil company too bears an unnecessary cost of managing two different types of outlets, and ensuring that adulteration does not
occur in the high priced segment of the business. Unlike the public company it would have a motivation to internalize the benefits
of adulteration, and sometimes to stop it if the company’s reputation is directly linked to its behaviour. But the temptation to
adulterate may come once a name has been established. The essential difference though may well be that the punitive measures
by the government or a regulator are likely to become credible against a private company, rather than a public one, since any
displacement of responsibility has necessarily to be contained within it.
DISTORTIONS BREED FURTHER DISTORTIONS
Privatization or not, no real solution is not possible unless the vast differences in prices are eliminated. In the current scenario,
only heavy punitive measures with a large probability of getting caught, would help (If one is small, the other has to high).
Thus, something close to ten years imprisonment may perhaps work. Any attempt to solve the problem without correcting the
price difference in the first place, (except for the stiff punitive type mentioned above) would only compound the problem and
create other unanticipated distortions. The solution of a company owned and operated outlet that is currently being pursued
could add to the costs of distribution, if the employees of the labour contractor were to successfully put pressure for regular
employment within the company, and get the courts to their side. It also adds to an already overextended retail outlet network.
Elaborate testing machines to ensure quality also add to cost.3 Besides testing equipment, tamper proofing comes at a high capital
3
Absolute assurance of non-adulteration is possible only with the installation of octane, and cetane testers for petrol and diesel respectively
and other instruments, which are very expensive.
cost usually not justified given the Indian factor price ratios. In any case if tests are not going to be used to punish, they become
mere rituals or irritants, as the current PUC (Pollution Under Control) certificates in most cities have become. Value creation
at retail outlets through groceries and medicines dispensation is no compensation and would not work if the core product remains
a problem.
CREATED VESTED INTERESTS
A little over a year back, there was what seemed like an effort to clean up the mess. The so called Solvent Scam surfaced 4, to
reveal that vast quantities of solvents including benzene and naphtha ostensibly supplied for industrial use were diverted to
adulterate petrol. The huge quantities involved and the wide extent of the operations that spanned over five states was remarkable.
The kingpin was a Gujarat-based entrepreneur who had organized the entire business, and had the backing of highly placed
politicians, excise officials and possibly managers in the petrochemical plants. The evidence against him was very strong, and well
built up by the oil company that was keen to make a serious effort to stop the adulteration. The usual methods of destroying
and falsifying evidence somehow did not work in this case. However, the business had its supporters among the political bigwigs.
A counter-case against the alleging company was filed. Police brought forth evidence that diesel meant for industrial application
(which had a lower price) was being diverted for use in the transport sector. The oil company officials were quickly arrested and
jailed. Bails were denied and personal harassment of the officials began. The best efforts of the company to get the officials released
were of no avail. The company’s argument, which had much logic, was that they had been selling diesel to firms who had been
granted licences for lower priced diesel by the Excise Department. Was the Excise Department working hand in glove with these
benami firms to take advantage of the price difference? Then there was little that company officials could have done. They (the
company) claimed that they were neither an investigating agency nor the police. The final outcome is not known. Was a deal
finally forced on the Company? We would never know.
BIGGER MESS
In Delhi, a large part of the pollution was due to adulterated fuel use. When confronted with pollution even after Euro-II norms
were introduced for car engines5, the Supreme picked CNG instead of going for low sulphur diesel for use in combination with
modern diesel6 engines, and 4-stroke engines for two wheelers and autos using petrol. One of the reasons cited by the
environmental pressure groups is that, being gaseous, it cannot be adulterated. This, in other words is an implicit admission that
nothing can be done about rampant adulteration! If CNG really goes ahead in a big way we will have imposed a huge and
avoidable cost on the economy. The correct solution would have been as stated above. The problem of adulteration could be
overcome through removal of the incentive in the price distortions for adulterating, with stiff punitive measures. (Allowing the
oil companies to do so). The matter of subsidization of those who use diesel and kerosene could have been easily covered through
direct subsidization, not too different from the direct subsidization in the case of electricity. To us it is amazing that none of
the actors, the government, the politician representing farmers, the oil companies, nor citizen’s groups have actively argued for
the case of direct subsidization.
4 Much of this paragraph is based on the author’s discussions with persons who would not like to be named. See reports of the Solvent Scam
e.g. Malekar (2000).
5 Which in itself was a success, See Pundir (2001).
6 See Section 5.6, by B.P. Pundir.
subsidized sections (Morris 2001a). Direct subsidization
was a system whereby farmers and others once identified
could be regularly issued coupons through banks and post
offices equal to their fixed entitlements, allowing them to
purchase electricity from distribution companies. As a
result, it is possible to separate the subsidization and
reform of the sector (otherwise in a Catch 22 situation),
and address both issues independently. Politically it makes
sense on the part of reformers to not ask for removal of
subsidies—always very difficult—but to attempt to target
subsidies correctly. Such a change in strategy would bring
the politically mighty farmers on the side of reform. And
the vast gains out of reform would allow the burden of
subsidies to actually go down. It was argued that such a
move is not only desirable but also necessary for reform
to make progress. The current proposals of the Government,
to directly make good the subsidy claims of SEBs or their
inheritor organizations obviously creates an incentive to
over-claim and over-report subsidies, which finance departments or regulators can hardly cross-check. This motive
would remain for private companies too, even if they have
a motive to reduce and plug leakages. The difference would
be that leakages would have been internalized.
Additionally, such subsidization removes or minimizes
the distortions in the use of electricity. We had also argued
that if all farm subsidies are bundled and made available
for various inputs, with the farmer exercising choice, then
the vast distortions in the cropping pattern, input use and
especially in misuse of scarce water and land would be
reduced or eliminated. The gain to the economy would be
stupendous. This, to my knowledge has not been adequately
addressed by agricultural economists.
Arbitrage Opportunity
With such a large ‘arbitrage’ opportunity available to SEB
managers, why should they not succumb to temptation?
Indeed if a few take advantage of the opportunity, with
little or declining risks of getting caught, such corruption
spreads like wild fire to become the dominant pattern, to
appear almost like a characteristic or a propensity such
as ‘Indians are corrupt’ or ‘all government officials are
corrupt’, when indeed the problem is one of the system
rather than at the individual level. Nor is the problem that
of culture. So-called cultural explanation to15 many things
economic, is in most cases vacuous, and cannot lead to
a solution.
Rents in Other Subsidies
Besides these cases of electricity and oil retailing (see Box
2.4), there are many others of policy failure that have now
resulted in powerful vested interests. Among them are foodsubsidies through the so-called ‘public distribution system’,
fertilizer subsidy, irrigation pricing. In all these the problem
is more one of policy design rather than one of policy
objective. To subsidize or provide the incentive per se was
not as much a problem, as the way it was being done. The
failure is therefore intellectual rather than one of implementation, and as such the policy-makers, or rather the
detailers who are to be blamed. Here the responsibility falls
squarely on the upper rungs of the bureaucracy. The politician
in India has been forced to carry a lot more of the blame
for the current mess, than is legitimately attributable to him.
The bureaucrat and policy-maker by their intellectual laziness
bear responsibility for converting what would have been
accommodation of various legitimate interest groups, into
opportunities for rent and graft. Talking to senior and now
retired civil servants who were intimately involved in the
electricity and fuel sectors reveals that, the mistakes were
genuine. Correction though has now come up against the
wall of vested interests.
Distortions Don’t Cancel
This tendency to overcome rather than correct a past
mistake, with another measure (which would itself, in due
course, become another mistake), is rampant to policymaking in India. In fact, the system values officers within
15
A ‘cultural explanation’ of corruption or governance failure
can only lead to the impotent position of ‘changing the culture’,
something practically impossible. As a process, cultures change
much after the economic characteristics such as rewards and
punishments incentives, information, and control have changed.
27
the bureaucracy who can provide such compensating
solutions, a point I had made in the last IIR (3iNetwork,
2001, p. 9). This trap of ‘overcoming’ one distortion with
another is so ingrained in our minds that we are not even
conscious of the real options. Even the media is unable to
step out of that paradigm. The intellectual architects of the
mess of electricity pricing or fuel pricing now, after their
retirement, continue to be ‘successful’ advisers of reform,
creating further mess and sweeping them under the carpet
as they go along. The trifurcation of SEBs on paper merely
to get an ADB loan, the Orissa model of reform, the current
Compressed natural gas (CNG) solution to vehicular
pollution in Delhi, the ‘coverage of subsidization’ and
‘subventions’ to the GEB (and other State electricity boards)
by the state governments are all examples of application of
this approach. We can expect to suffer their consequences
in due course. Thus it is obvious today that if direct
subsidization, or better subsidy administration were to
come about, there would be a quantum improvement in
governance. Similarly, in a market economy, interventions
that recognize the constraints (and opportunities) in the
market would also result in major positive changes in the
environment for the improvement of governance.
SHORTAGES
AND
CORRUPTION
Unlike oil products or electricity, administered prices in
other crucial products such as cement, paper, steel and
non-ferrous materials were accompanied by control orders.
Control orders served to manage shortages that would be
inevitable in non-market prices. Thus ‘approved’
construction could hope to get steel and cement allotted
at controlled prices, while the rest of the economy went
either without these or had to pay ransom prices for these
otherwise mundane products. The resulting impact on the
economy and society was dramatic. Governments had to
develop the allocative machinery that was to do the job
‘fairly’. And even when not, it had to appear to be fair.
The bureaucracies that came about to manage the shortages
were very large. In steel allocations alone, a few thousand
people may have been involved. More importantly in
vitiating the controls or the rationing system, rents were
created. The marginal value of housing is considerable in
situations of shortage, and the rents which cement and
steel traders could extract out of the middle class who could
afford to build houses were considerable.
Licensed Shortages and Licence to Corrupt
There was a time when nobody (other than institutions and
public organizations) could get cement without having a
contact in government, or bribing officials. What was true
of cement and steel was also true of many other basic
materials like paper, furnace oil, many chemicals, which
were administratively priced and allocated. In other goods
and services which were also controlled (either on price
or capacity or both), but where automatic rationing through
queuing was possible, the scope for petty corruption was
enormous. Numerous examples come to mind—scooters
till the mid-1980s, railway tickets, food until 1972, movie
tickets till the end of the 1970s. Telephone connections till
the liberalization of the 1990s, electricity connections even
today in rural areas and small towns, water supply and
sewerage services, bus services. Where the markets could
adjust with fancy prices, such as in imported goods the
damage to the society was perhaps limited to the rents that
were generated out of a licence awarded to a favoured few,
or the returns to smuggling. It is where rationing or
queuing was necessary that the greatest damage was done,
since all people waiting in the queue would have an incentive
to try and get some of the product by bribery if he could
afford to. The administrative machinery would be able to
extract rents since the cost of waiting or denial, to many,
would be considerable. Such conditions when they continue
long enough can corrupt practically all in society, except
the ‘stupidly’ honest person.
Most of us do what our neighbours do, which is why
accents, trends and fashions are possible in society. If a
person’s probability to commit a corrupt act is a positive
function of the number of friends and neighbours who are
corrupt, then in situations with vast rent opportunity, long
queues and shortages, it is only a matter of time before
public moral standards fall and a so called corrupt culture
emerges. Nearly all Indians would have given a bribe to
a train ticket examiner or a village talati. The connected
elite of Delhi would not even think that they are doing
something wrong when they fix up for a fee somebody’s
business with the government.
As the control and allocation raj gave way in most
manufacturing sectors, the problem of shortages and denial
was overcome. Cement decontrol in the mid-1980s brought
about massive expansion in output, lower prices and
competition almost overnight. Today, personal bank credit,
which was officially completely denied (or one had to find
an accommodating bank manager who would pass off the
personal loan as a lending to the small scale industry), is
now available for the asking. For a brief review of the
failure and success of India see Box 2.5.
Infrastructural Shortages and Denial Remain
However, in many infrastructural services, especially those
consumed by the poor, the denial and shortages remain.
It is easy to say that second class rail travel is underpriced
and hence there are shortages. But true costs of passenger
travel may not be substantially higher than that at present.
Even at double today’s prices shortages would remain,
since much peak season travelling is need-based. In railways,
bus services etc., downward price elasticities are low (upward
price elasticities may well be large in cases of travel for
pleasure). Same is true of drinking water. In such sectors
adjustments are made through inhuman overcrowding and
congestion that the ‘unreserved’ traveler on railways and
buses has to bear. Petty corruption naturally results since
advance planning by definition cannot work for all when
there is a shortage. Even more importantly in all municipal
services but especially school education, water and sewerage,
sanitation, street lighting, and roads, denial and shortages
continue leading to corruption and neighbourhood
competition. Many of these services being basic can be
easily exploited by unscrupulous elements such as goons
who organize slums, provide ‘protection’ and regulate water
and toilet access or touts in railway booking offices, to
extract rents out of the poor and those denied. Price
elasticities are very low over a certain range, so price
adjustments when possible are large enough to have
(negative) income effects on the poor. Thus water market
prices in areas denied adequate municipal supplies, slums
and city outskirts are often close to the willingness to pay
and typically many times the cost of production of these
services.
State Failure Compounds Market Failure
Education, especially quality school education extracts large
rents from even the poor and the lower middle classes. A
shortage of good ‘English-teaching’ schooling makes harried
parents victims of donation demands and high fees in the
‘new’ schools.
Creating the ‘Culturally’ Corrupt Society
Unlike the high corruption of the contracts variety—a la
Bofors or Tehelka—corruption that an economy of shortages
and administrative (non-transparent) allocation breeds is
widespread and becomes almost universal. In society this
petty corruption is often used to justify more dastardly acts
of corruption. Thus when a young Indian Police Service
(IPS) officer when after a few years of struggle to keep
himself above the morass, finally gives up, he would use
the argument that even his upright brother had to depend
upon him to get that railway ticket or that ration card.
Members of State Assemblies and the Parliament (MLAs
and MPs) have quotas for gas dealerships and petrol-pump
allocations, and earlier for telephone connection. There are
VIP quotas on trains, quotas for certain worthy categories
of citizens like doctors and shopkeepers. Also, higher level
employees of organizations providing services have their
own quotas to allocate. When these are priced and sold
29
Box 2.5
The Indian Experience
There have been significant improvements in social and economic well being since Independence, though nowhere near the
progress made by East Asia and China. When the British left us, our average life expectancy was just 37 years for the country
as a whole (Habib, Irfan, 1975). This means that vast numbers of the very poor (peasants) in Bengal, Bihar, Orissa, Eastern UP
and Telengana would have had life expectancies no more than 25 years! A figure lower than that of Neanderthal man. Today
life expectancy is nearly 60 years in some states.
WHAT
HAS BEEN THE
SOURCE
OF THIS
PROGRESS?
Much of the improvement in life expectancy has come from technological developments in vaccines (vaccine programmes can be
administered even in situations of state failure), in antibiotics (especially cheap), and in some improvements in diet especially on
account of the milk, vegetable and egg revolutions. Per head grain intake has gone up very little or has remained static if some of
our food statisticians have to be believed. Even accounting for increased calorific intake due to potatoes in eastern India, it is unlikely
that food intake has shown anywhere near the kind of improvement (from a better base) that East Asia has shown. This marginal
improvement in food intake (and without any imports) would not have been possible without the High Yield Variety or HYV
revolution, again largely technological and amenable to programme mode of extension without major demands on design of
organizations. Public services continued to remain of abysmal quality and poor coverage, and may even have shown an overall
deterioration in quality as these were over ambitiously sought to be spread.
Similarly, social movements have had durable effects on both the society and the economy. These include the ‘Non-Brahmin’
movements of Southern India, including the Ezahava Rebellion in Kerala, the movement for the upliftment for lower castes and
women by people like Jyotiba Phule and Ambedkar in Maharashtra, and ‘Sankritization’ processes in so far as they lead to lower
castes valuing education.
MICRO-INTERVENTION
OF
STATE
HAS
FAILED
Microeconomic efforts at redistribution, by the state, began with vehemence since the stagnation of the mid-1960s, and has
continued with increased emphasis ever since. This ‘massive’ redistributive effort has coloured and determined the very functioning
of the government and the bureaucracy. Income distribution though has remained as skewed as ever. The proportion of the people
below the poverty line is still explained best by the rate of growth in the preceding years, especially of agriculture. Action and
organization for redistribution on the, part of the state has become an end in itself with the result being inconsequential. Thus,
all these programmes spew out impressive ‘results’ which are defined in terms of expenditures (input measures) rather than effects
(output measures1). Their real purpose we had mentioned earlier was to ‘buy up dissent’ and create the space for an expanding
bureaucracy. Vast rents were no doubt generated in the leakages. We have already seen that those economies that carried out
a one-shot (and economy-wide) redistribution of productive assets through land reforms (essentially a political and macro-process)
have avoided altogether any continual redistribution on the part of the state. Thereby, they have been able to keep their state
apparatus relatively lean and focussed on the task of industrial development.
MACRO-PROGRAMMES
In contrast to micro-intervention for redistribution, productively-oriented public investments, especially in irrigation, the HYV
programme, higher education and primary education (to the extent this could be sustained) have had important effects. Similarly
successful mega-programmes such as operation flood, and macro-efforts such as price support for food production (given the
demand constraint for food) and subsidies (despite the waste) have had measurable impacts. (Subsidies have also dysfunctionally
helped to create rents, which have over a period taken the form of ‘directly unproductive profit seeking activities’.2)
The criticality of the growth of agriculture to the rest of the economy is not adequately appreciated. Agriculture and exports
explain best the non-agricultural private sector GDP in causative studies (Morris, 1997). More importantly today (since the mid1970s) agricultural growth is constrained by inadequate demand requiring therefore a vast ‘buffer’ stocking. The only way the
demand can come is by the poor peasant being unshackled enough to increase his output so that in producing he automatically
creates demand. Only this can lead to a quick relaxation of the home market constraint for manufacturers.
Thus land reform, or major income redistribution through massive food for work programmes in the Indian context today
are the key issues that need resolution.3 To discard the present (conservative) regime of macroeconomic management for another
more ambitious and expansionary is a live issue. The potential benefits in aggressive pricing of the currency and in interest rate
targeting, if carefully managed are many. The high growth that it can bring, possibly in excess of 9 per cent, would be exhilarating.
It would be the only way, not only to grow out of the current recession and the fiscal mess, but also go give the economy and
society a fair chance to make its industrial transformation, and to therefore create the space and the pressure for governance
improvements.
1
2
3
For a brief review of such programmes see K. Das in Section 7.1 in this report.
A term due to Bhagwati, Jagdish (1982).
Those are not excluded given the class basis of society, and of the state today. Land reforms as a capitalist strategy that enhances the home
market, and embeds the institution of private property are feasible, if the Indian bourgeoisie can ‘think big’ to ensure its long term interests.
for a fee as in the case of gas connections, then the damage
to the moral and social fabric of the society is less, than
when administrative discretion is actually used. Imagine
a mother desperate to visit her ill son in a distant part of
the country having no option but to cringe before a
politician or a bureaucrat to get that ‘emergency quota’
released. Such processes deeply reinforce the notion that
only contacts and administrative and political power matter
in society, and therefore not ones work and rights. The
notion of rights gets therefore muted, in all meaningful
spaces of one’s ordinary existence. The pent up denial of
rights can sometimes spill over on to the symbolic and
political levels in a much destructive manner. This is not
healthy for any democracy. It allows demagogues and
charlatans to symbolically (rather than in substance) address
the problems of the people. Thus Indian politics in caught
in the rhetoric of symbolism, and in the complex web of
contacts (the actual reality that cuts across party lines). A
sustainable but expensive democracy results, were (harsh)
realities do not matter because they are actively kept
‘hidden’, or ritualized to create sympathy rather than anger,
reportage rather than analyses, and protest rather than
revolution.
CONTRACTS REGULATION
AND
GOVERNANCE
Inappropriate Contracts
The archetypal story here is that of Enron which had been
dealt with in IIR 2001 and is also covered in this report.
But our argument and that of several others including that
of Sant, Dixit and Wagle (1995) who perhaps were the first
to highlight the same, is that the IPP framework (despite
the aspect of competitive bidding after a few ‘fast track
projects were pushed through) has been flawed. In IIR
2001 and in the Infranet Conference December 2000 we
had called for an immediate ban on all further IPPs and
a withdrawal of all negotiations then on to bring potential
IPPs to closure. Instead, we had argued for true reform
based on open access to the transmission network and
reform of subsidization. The details of the governance
failure in the Enron saga have been brought out in its lurid
details by Abhay Mehta (2000) whose facts have not been
remotely contested even today despite the fact that his book
has been in circulation for several years now, Prayas Group
in this report (Section 6.7) brings out the implications for
governance that arise out of the same. Here we are interested
in drawing attention to a more general phenomenon within
the government of refusing to right-staff key organizations
and institutions of governance, causing failure as a result,
and then shrugging away the whole thing as the cost of
learning. Today lack of professionalism in key regulatory
functions obstruct reform (see Box 2.6).
Specialized Skills
Besides the SEBI, many of the departments of the RBI,
the Department of Banking, the Power Ministry, the
DFIs and investment banks all need highly specialized
knowledge and expertise that cannot be brought in by
bureaucrats on the move, however clever and committed
they are.16 The problem of policy-making and administration in a phase of transition to a liberal economy is
perhaps most demanding and crucial. Once a successful
liberal society has been ushered in, the challenge of
governance perhaps reduces. But till such a point is
reached governments have to work hard to create and
adequately equip the new institutions, create enabling
frameworks, such as BOT laws, and nudge consumer and
other watch dog organizations into existence and activity.
The failure of Indian governance in this front now threatens
the continuation of reforms. There have been notable
successes such as telecom reform, where the powerful
force of technology overrode regulatory mistakes. Ports
again have not done badly in this regard. Power sector
reform has perhaps been the worst victim of this kind
of failure.
Private infrastructure needs credit enhancements, and
hence may need to draw up elaborate agreements with the
state. In some cases such contracts can be used to generate
resources for the state without hurting the prospects for
market development, and the interest of the consumer. In
other cases such as that of the natural monopoly with little
contestability and average growth prospects, it would be
right for the state to grant subsidies and credit enhancements.
There is no getting away from the fact that specialized skills
such as knowledge of the sector and of laws relating to
contracts, and technology, are the basis for the correct
decision-making. What is desirable and suitable is not
easily decided a priori in every context.
Hiring consultants or bidding as a solution do not always
work. Consultants’ knowledge can be very limited, and their
best effort would not come forth unless the client is
knowledgeable and well prepared.17 Bidding can result in
optimal results only if the bid process is well structured, and
that is not easy. It is not a generalist skill either. There are
only limited gains in using consultants to correctly structure
bids when government departments and authorities lack
16
For governance failures arising inter alia out of lack of specific
knowledge and skills see Section 6.6 by S.K. Barua.
17 I have been witness to some entirely shoddy work done by
consultants of international repute, since they knew that their client
was ill-equipped to question them, and was not familiar with the
task and the questions given to the consultants. The consultants had
been covering up their poor work with jargon until the meeting in
which a few better-informed people (all outside the government)
could call off the bluff.
31
Box 2.6
The Tragedy of Indian Administration
There is no civil service training programme that I have yet conducted without encountering the civil servant blaming the
politician. My standard argument against the futility and error in such blame, which has never failed to enliven the debate, is
to show the ‘intellectual’ failure in many policies such as the export pessimism of Mahalanobis, inappropriateness of the mode
of subsidization in many areas, Indian reformers having read export-led growth as laissez faire under World Bank tutelage, etc.
I have tried to open the civil servants’ mind to other failures besides those attributed to vested interests of the politician. One
could further argue how several politicians and the dysfunctional interests they represent are very much the result of past policy
failure. Allied to these arguments I bring out the vacuousness of the often made statement ‘good policy but poorly implemented’,
to argue as in IIR 2001, why that is a contradiction in terms—a good policy implements itself.
MIXED-UP POWERS
I go on to then reason why the Indian system is most failure prone. It is well known to a student of government that when executive
decisions are the sole preserve of either a ‘bureaucracy’ (career bureaucrats in office), or that of elected politicians with clear
demarcation of responsibilities and roles, then the outcomes in terms of governance and economic administration, have been far
better than when both are involved together. The details of the Indian system are worth recounting from the bottom up. The
lowest and perhaps most crucial levels of government (from the point of view of economic service provision) are the urban local
bodies (nagarpallikas) and the village (gram) panchayats. They were always there but could never function effectively. It was hoped
in a manner similar to that between the centre and the states, if the state could legislate the powers of the local bodies then things
would begin to move in the direction of effective decentralization and hence effective local administration. Much hope was placed
on the 73rd and 74th Constitutional Amendments that legislated the powers and functions of the rural and urban local bodies
respectively. But that, it was soon realized, made no difference, since in any case local bodies had little fiscal resources of their own
and depended much on the state government for much of their funds (Mathur 2001). It was again hoped that with financial
devolution, as laid out by the state financial commissions, would result in autonomy and meaningful responsibility for local public
services to local bodies. In many states the devolution has yet to be notified. Even where they have been, the results are not
encouraging. The local bodies continue much as before, superceded for all practical purposes by state governments, officials and
departments that work locally (Nanavati, 2000). This has happened because the bureaucracy in India is a true hierarchically ordered
tree with no breaks to accommodate elected executives. Thus the talati, other clerks and junior officers view their senior officers
at the district and state levels and not the panchayat president as their masters. Had the link in the chain of command been broken
at levels where elected representatives were in executive positions, the embedding of responsibility would have been possible.
Organizationally, most functionaries are being asked to serve two ‘masters’, when only one (the higher ranked official) is far more
real, especially at the local level.
Strangely, in having the Indian Administrative Service or IAS and other central services as a national cadre, the bureaucratic
chain is not broken even at the level of the state, thereby denying the states (through the organizational aspect), much of the
powers (and independence) they ought to possess under the Constitution. But the problem is far more serious at the level of
local governments, where there is much displacement of responsibility: the elected representatives cannot be held accountable
since they have no power over the officers and staff of the local body, and the bind of processes and rules can reduce them
to impotence. The little financial autonomy they have compounds the problem further. The government employees on the other
hand can hardly be made answerable to people. Elected representatives are at best able to influence the selection of beneficiaries
of programmes pre-decided at the central or state levels, or be able to chose the site of a bore well, given that the state government
or its parastatals have a bore well programme. Design and planning which start with the local problems of nagarpallikas is hardly
possible. Local elections are highly politicized. This is entirely dysfunctional because local issues dominate the world of the citizen
especially in rural areas and small towns. The politicization then becomes the excuse to tie the hands of the elected representatives
in a maze of processes and rules. Similarly, the fear that panchayats may not adequately represent vulnerable castes, becomes an
excuse to effectively bypass them in all targetted economic programmes.1 In that situation it is natural that the elected
representatives turn to nepotism and graft. The scope for building political capital through good performance of the local bodies
they head or are elected to is therefore limited. So what else can they do? The bureaucracy arranges for the graft, partakes in
the same, and the system continues to exist and thrive at the cost of the people as a whole. So what systemic functionality do
local bodies have? The expenditure on local bodies is not inconsiderable, and salaries and related administrative expenses absorb
the bulk of their total expenditure. Therefore local governments of all but the larger towns may be nothing more than job creation
by an expanding bureaucracy. Election of representatives in politicizing local opinion, deflects them from economic failure, by
giving local leadership some participation in the ‘spoils’ of governance. Their potential to do good though is high if the local
1 In many parts of the country but especially in the south and the west, which have seen as neodicum of development, lower castes can no
longer be systematically excluded by panchayats. In most situations that require the village as a whole to have an opinion, as in issues relating
to displacement, natural disasters, road building, representative groups that include all castes have begun to emerge.
bureaucracy can be made entirely answerable to the local elected representatives. Costs could go down dramatically, employment
could then be more need and local requirement based rather than being derived from the rule book, and elected members would
be empowered to be responsible. They and others would then not be able to able to pass the buck.
COLONIAL ORIGINS
OF THE
‘SYSTEM’
The origins of such a debilitating design lie in colonial rule. The reality of (British) Indian administration and governance was
the governor general and the administrative bureaucracy that he commanded. The last authority in this hierarchy was the talati.
As the pressures for popular government emerged (the reason for the freedom struggle), the British, as early as 1935, created
legislatures at the provincial level with ministers and other elected officials, headed by Pt. Jawaharlal Nehru. This did not dilute
the powers of the governors and the governor general in any substantial way. In such crucial dimensions of administration as
the police, or district administration they retained complete control. With independence, while power over policy and law making
shifted to the elected representatives, at the state and central levels the executive power is still shared between career bureaucrats,
and elected officials. Only those politicians with great leadership skills and a natural flair for administration have typically been
able to exercise their power in a positive manner. At the local level, where there is no legislative role, and little or no policy-making,
executive power is the key, which is certainly not in the hands of the elected representatives. It may not even effectively be with
the local officials since they could in turn be constrained by their own deep hierarchy, rule orientation, and dysfunctional role
of the elected representatives. The collector remains the key authority at the district level and certain changes in the law such
as the 73rd Amendment and the Land Acquisition Bill have only increased his powers. Such structures which obfuscate, and
cannot allow for responsibility assignment can hardly be transparent or held accountable. Poor governance is therefore a problem
of design but has its base in history. Its continues because of the elitist character of administration and society.
THE BUREAUCRATS
The following provides some generalized sketches of the more interesting types of bureaucrats one encounters.
Of ‘Knights in Shining Armour’: Many capable bureaucrats (probably the best of the lot) revel in fixing problems. They are the
means by which a minimum functionality of the system is ensured. They need the problems, as much as the vested interests
who gain from the governance failures. They are shifted around when their activities become uncomfortable for the system. They
are also sent in when things go wrong and have to be fixed or set right. They are usually incorruptible, clever, highly motivated
individuals, with boundless energy. Unlike the ‘impotently honest’ bureaucrat they are able to take things forward. They have
a particular knack for identifying problems, however uninteresting their posting. They also have a tolerance for extreme failures—
either very large or very small. Thus, they are not reduced to impotence within the corrupt system. They are also able to get lower
down functionaries, even corrupt ones, to work to their own plans. They may even look away in the face of petty corruption
of their subordinates in the interest of overcoming the larger problem. They view every problem as something that must be actively
corrected. They do not admit to systemic limitations. To them, if all bureaucrats were like them the system would be functional
and good. That the system can have properties other than that of its individuals (holistic aspects, or in a more limited way, the
idea of the fallacy of composition), has no place in their minds. They believe implementation failure is the main problem. Notions
of incentive compatibility, functionality of the systems of rewards and punishments are anathema for them. Change arising out
of social movements is also an alien idea. Some of them may see the solution in education reforms and modification of values.
Change to them is what they and other energetic officers (and possibly some politicians) bring about. When they leave, their
good work inevitably collapses. The stories of their success when narrated can be very inspiring and may lead us to believe that
things could not go really wrong with such ‘knights’ around. A few may even be able to get into the limelight to become icons
for the mass media and the middle class.
And ‘Alchemists’: The more durable change comes from the ‘alchemist’ who understands the system and sees his role, not as
a doer, but as one who releases or allows pent up forces to act. Such a bureaucrat or a politician sees policy not as something
that needs to be implemented but that which implements itself. He would have no action stories to tell, and may appear academic .
Unfortunately, his tribe is rarer than that of the knights. They have less romantic notions of their own roles and class, see
themselves as ordinary individuals. Most bureaucrats who blame the system are not necessarily able to articulate the problem and
leverage change, be it a law or a price distortion. The time to ponder is denied to them. Over time, they think that it is committees
and expert groups (and today consultants) who should do the thinking.
And Yet Impotence: A few of the alchemists who find time to think may also end up incapacitated. Freeing them is an important
aspect of change. Armed with degrees in economics, management and public policy, they monopolize the entire thinking within
the government. Their importance is particularly enhanced when reforms are on since they are able to put out papers, framework
documents, drafts and white papers. Usually, their knowledge and understanding while very expansive, is not deep enough. There
is little dialogue among them, since they are only the last leaves of an intellectual enterprise whose roots and big branches are
in the west. In areas which require specialized knowledge or contextualization—electricity reform, revamping financial markets,
monitoring banks, macro management of the economy, privatizing PSUs—despite their best effort the probability of design failure
is high.
33
INAPPROPRIATE CONSENSUS
The process of consensus building around discussions of earlier drafts, usually kills the functionality of the final version that goes
on to become the policy or law. The coherence of a particular approach is then lost. Such compromise papers are usually fatally
flawed, and yet get pushed with the vigour that arises out of the bureaucratic and political processes that they would have gone
through.2 To kill that bad idea becomes a tough task for those later responsible for the policy or law. 3 So even the alchemists
who could have been agents remain constrained.
Had the process of consensus building or compromise been in situations where compromise is possible (where for instance
continuously varying solutions on some relevant dimension exists), and had the process been truly reflective of the interests of
different segments of society, there would still have been some progress. To give an example: the mode of subsidization of electricity
is not something that is to be decided on the basis of ‘bargaining’ or consensus. That has to be a ‘technical’ decision. To assume
that it can be negotiated is to presume that thieves and rent seekers are sections of the interest groups. On the other hand the
criteria for identification of the amount of entitlement (i.e. whether it ought to be largely a production, or an income subsidy),
or the amount of entitlement itself, can be negotiated.
2 Practically, every major initiative, the BOT laws of state governments, the modifications to the Electricity Acts that created the regulators,
the TRAI, the now pending Draft 2001 Bill on Electricity have been victims of this tendency. It was only the great technological dynamism of
the telecom market, that was able to force changes to overcome the debilitating provisions of the earlier TRAI Act. See Jayanth Varma in Section
6.1 who brings out the fatal flaws in this ‘half way house’, in private financing.
3 Thus today reformers would have to ‘kill the IPP provisions’, the idea of subventions, extra charges on transmission usage as a cross
subsidization devices, which were all bad ideas that came out of similar processes.
basic knowledge of bids and the industry. Similarly, decontrol
of highly regulated sectors is a delicate operation demanding
skillful execution, if the creation of vast rents has to be
avoided.
Distancing from Government
Additionally, it is crucial to distance such regulation, contract
designing and policy formulation from the day to day
affairs of the government for good governance. To illustrate
the point, the formulation of a draft agreement, say for
building sections of highways needs to be carefully done,
widely circulated and commented upon, cross-checked and
fully refined before it becomes official. But a specific
agreement becomes a day-to-day aspect. There is much
potential at the design stage to bring about better risk
allocation, incentive compatibility, lower monitoring costs,
and transparency and hence reduce the scope for rents.
If the prototype of the agreement itself is shoddy then there
is the possibility of certain developers using the same to
their advantage to create rents. Most power purchase
agreements (PPAs) and the IPP framework have been
flawed in this sense.
Distancing Privatization from Government
Privatization is one activity though, where the scope for
rents is enormous. Rents could take many forms. Thus
delays, interdepartmental wrangling and uncertainties,
restrictive presale conditions including insistence upon
golden shares can reduce bid values considerably. Then,
after sale, if the new owner is able to get rid of government
interference, neutralize or do away with the golden share,
the rents can be large, though this is not evident. The
current low values of the stock of PSUs are in part a result
of confusion with regard to disinvestment. If these are
corrected after sale, then large value transfers could be said
to have taken place even though with reference to the
market, these may not translate to abnormal gains for the
purchasing party. In the Indian context disinvestment would
have to be distanced if not separated from the government.
I had argued in (Morris, 2001b) for a constitutional or
distanced authority for disinvestment. This is because the
credibility of the government (irrespective of which party
rules) in carrying out disinvestment in a fair and corruptionfree manner is low if not non-existent. This has happened
because of state-failure in India, in many of its efforts to
direct economic activity and competitive politics, with one
feeding the other. Neither can the route of transparency
be an answer, since every aspect of the disinvestment
process cannot be disclosed. The disinvestment process
does not carry much credibility when it is directed from
within the government even if a competent body headed
by persons of trusted credentials is undertaking the task.
Valuations can always be questioned, and no political
party would let an opportunity to question values, go
unexploited.
A Core within Government
The tasks of governance and institutional change as we have
outlined above require that at least some section within the
government, for some time, is motivated, corruption free,
and skillful. Economic reform has the great advatantage
that it does not require all of the government to be ‘good’
all the time. That is why reform can be put together from
within the system if adequate pressures to do so exist. Such
was the case in the immediate aftermath of the crisis of
1990–1. As such the general ‘impotence of the administrative
machinery’, or the ‘system failure’ while real, and a valid
explanation for the ineffectiveness of well-meaning officers
and politicians18, need not actually stand in the way of
reform. The more correct reforms such as direct subsidies,
legal changes for BOT type participation, freedom of
information laws, growth-oriented macroeconomic policies
come into play, the less is the bind of the administration.
The growth and development effects of reform would in
turn, through larger processes, bring about changes in
governance through the system as a whole.
For such small groups within the government, regulatory
institutions trying to work a new sector development
programme, putting together a framework for public–
private partnership, writing contracts for the same, or
worrying about new frameworks for land acquisition, the
key to success would be to accept compromise solutions
only when they make sense. Thus whether one chooses cost
plus or incentive regulation or ‘created’ markets for
electricity generation is not something that is negotiable.
The choice should emerge out of the strategy for change
for the country as a whole, that is being pursued. If for
instance, the strategy is largely one of deregulation, the
understanding that ownership changes alone are not adequate
ought to follow. Industry structure and the nature of
environment for profits is important and the probability
of regulatory capture is high. In such a situation then only
created markets wherever feasible and incentive regulation
elsewhere would be the choice. Cost plus regulation has
no place at all. What could possibly be negotiated, is the
pace of change towards that new industry structure, and
the treatment of ‘stranded assets’. It goes without saying
that such key groups and institutions have the right skills
and the freedom. One of the challenges today is really to
open up administration to lateral entry of experts so that
one does not have to wait for the cadres of the bureaucracy
to eventually come up with the learning. Lateral recruitment
merely in advisory capacity does not help much.
Another attribute of success would have to be the
originality to contextualize reform to the Indian situation.
I had argued for inventive and original solutions (Morris,
2001b). The need to deeply understand our own problems,
18
Some may contest this and claim that ‘system failure’ is an
excuse to hide one’s lack of initiative and poor performance. This is
no doubt true, but then the implict reference for comparison is that
only a very dynamic and politically savvy manager or officer can get
things done. Why should the system demand such enterprise out the
officer. That only confirms that the system has constraints. It is
important to recognize the fact that only great leaders like V.
Krishnamurthy could succeed in Indian PSUs is proof of the systemic
mess.
to contextualize our approach (like deregulation) even if
they are derived from elsewhere had been emphasized. No
models that worked elsewhere, can on that count alone,
be grafted on to the situation here. Experts, including
transnational consultants may not have all the answers.
(Their answers can in any case be only as good as the
background work done by the clients) Thus, there is need
to go beyond the beaten circuits. Thus, ‘right-structuring’
the ownership of difficult-to-regulate business like
transmission, the need to be particularly bothered about
the mode of subsidy administration and, incentive
compatibility in proposals for change, to be able to
distinguish between political considerations and others
that are ‘politicized’ masks for rents, wastage and theft, to
recognize the limits of government administration and to
be alert enough to take advantage of the few opportunities
for political entrepreneurship, are all integral to getting the
‘Second Stage’ of reforms correct. The special characteristics
imposed by late-industrialization, low incomes, income
inequality, the opportunities in access subsidization, rather
than use-subsidization, in postponing regulation when in
high growth and expansionary phase of the network, are
other sensitivities of successful reformers.
CONCLUSION
We discussed governance, but argued that the ‘leverage
point for change’ to improve governance would generally
lie not in attempting improvements in government as a
whole, but in policies that engender faster growth and
development, in the removal of restrictions, and in correctly
deregulating the economy. The basis for the arguments
were conceptual, historical and empirical.
Today the economy is constrained by conservative
monetary (and fiscal) policies and a tame pricing of the
Indian rupee. Given the large buffer stocks of food, and
the very high responsiveness of exports to the exchange
rate there is scope to raise the growth rates substantially.
That should be the first task. This point was not argued
in this paper but mentioned by reference to my paper on
the topic (Morris 1997) which had anticipated the current
industrial recession and its nature. Many economists have
misunderstood East Asia ‘s success to inter alia lie in laissez
faire. This is incorrect. It lies in export-promotion, the
simultaneous promotion of both exports and import
substitution, possible in a more realistic three commodity
model of world trade. The fear of inflation and the fiscal
deficit getting out of hand is greatly exaggerated. A longer
term strategy for which there may be political difficulties
is land reform which has the potential to unlock the
constraint of the homemarket for the industrialization of
the country.
The second task is really to right-structure subsidy
administration in critical areas: electricity, water, and
petroleum sectors where reform is caught in the bind of
subsidization. Removal of subsidies would not be the answer
since that would require prior reform and would be political
hara-kiri. In any case that is not necessary since the true
value of subsidies (in terms of actually delivered benefits to
the targetted sector) is quite manageable. The replacement
of current modes that generate vast rents and create vested
interests by direct subsidization is possible. In subsidized
groups being able to pay with coupons, developers and
providers of the service/product would see uniform prices.
Developments in IT, in database management and communication allow the easy identification of citizens for the basis
of correct administration of subsidies. The task of coupon
distribution given the entitlement and identification is trivial.
Even if there are mistakes in identification, they are containable, and can be reduced over a period. Most importantly,
mistakes in identification do not affect reform and the
management of infrastructural sectors. They can then be
reformed quickly. Political support for direct subsidization
is likely to be overwhelmingly large, to counter any possible
role of vested interests. The need today is to urgently drive
towards direct subsidization in electricity, kersosene,
irrigation water, fertilizers and chemicals.
35
The third task is more that of governance and
institutional development: the economic reforms thus far,
have created space for some governance-oriented reform
to have an important impact on the economy. If the second
task can be simultaneously addressed, then the scope of
the changes possible within the government are very large.
Once the source of nourishment for corruption can be
destroyed, the business of improvements in the performance
of government as a whole can be addressed. Even before
that, in a more limited way, governance can improve if
small groups within government and regulators can take
upon themselves the task of doing things the right way:
developing drafts for framework legislation like the BOT
law, setting up of key organizations like the IDecK or
GIDB in Karnataka and Gujarat respectively, developing
the right formats for contracting, creating the space for
people to directly interact with providers of public services,
bringing in markets and commercialization wherever
possible, and working towards privatization when state
owned enterprises are severely constrained by their
dysfunctional interface with government. The need to rightman and professionalize the new bodies including regulatory
commissions is obvious. Society has paid too high a price
in the poor performance of regulatory institutions set up
during the 1990s.
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Amsden, Alice (1989), Asia’s Next Giant: South Korea and Late
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Appu, P.S. (1991), Land Reforms in India: A Survey of Policy, Legislation, and Implementation, Vikas Publications, New Delhi.
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Gupta, Anita and Sebastian Morris (2001), ‘How Much More
of this Infliction? The Cast of Ahmedabad Vadodara
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Economy of Neo-Colonialism, Heineman, London.
Lee, Eddy (ed.) (1981), Export-led Industrialisation and Development, International Labour Organisation, Asian Employment Programme.
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Uganda, Heineman, London.
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of the Rs 1000 Crore Solvent Scam in Gujarat’, The Week,
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and Change in Imperial Chemical Industries, Blackwell,
Oxford.
Pundir, B.P. (2000), ‘Vehicular Air Pollution in India: Recent
Control Measures and Related Issues’, in 3iNetwork
(2001).
Sant Girish, Shantanu Dixit, and Subodh Wagle (1995), ‘Dhabol
Project PPA: Structure and Eechno-Economic Implications’,
Economic and Political Weekly, 17–24 June.
Shivji, Issa (1976), Class Strangles in Tanzania, Monthly Review
Press, New York.
Zhao Dengju (2000), ‘Practices in China for Combating
Corruption’, paper presented at the ADB/ OECD
Conference on Combating Corruption in the Asia-Pacific
Region, Seoul, 11–13 December.
The Infrastructure Sector in India, 2000–1
3
37
THE INFRASTRUCTURE SECTOR IN
INDIA, 2000–1
3.1 A REVIEW OF SECTORS
Anupam B. Rastogi
In the year 2001, infrastructure sector grew less than
expected. There was much discussion about the failures and
‘half achievements’, but there were some successes, too.
HIGHLIGHTS
The Deepak Parekh Committee Report on Escrow Cover
(Government of Karnataka, 2000) unequivocally raised the
question of unsustainability of escrow accounts and brought
out the importance of privatization of distribution in power
sector. One could hardly disagree with the prognosis of Jack
Welch that India cannot be a ‘software superpower’ if she
does not produce enough power. ‘Everyone thinks the internet
shows up here, on the computer, and it doesn’t use power.
It’s a wonderful new industry. But the fact is every basis bit
of information uses electronics. And if you don’t have power,
nothing happen.’ (Singhal et al. 2000). The Enron saga
came to full boil and has spurred many tumultuous changes
in the sector which will bear fruit in the years to come.
Villages continue to suffer incessant power cuts. The failure
of the northern grid which plunged a large part of northern
India into darkness for a couple of days, brought home the
importance of the transmission business.
Draft Bill
Undoubtedly, the precarious financial health of the state
electricity boards (SEBs) can hardly be conducive for any
investment. Promoters and investors have shied away from
the sector. Policy risks continue to be high. The Electricity
Bill drafted by the NCAER (National Council of Applied
Economic Research) had gone through eight drafts. The
Bill seeks to replace the Indian Electricity Act 1910, the
Electricity (Supply) Act 1948 and the Electricity Regulatory
Commission Act 1998. The government’s own Draft Bill
2001 is slated to be introduced soon in Parliament. The
objective is to bring about comprehensive reforms in the
power sector.
Whither Convergence
The only sector that seems to be attracting private capital
is telecommunications, where large projects are being
implemented. However, there are problems here, as well.
The government continues to drag its feet on the issue of
convergence. It has taken too long to draft the convergence
bill and its passage.
The continuous changes in technology further challenge
the boundaries of many departments. This hindered the
provision of a legal framework for the development of the
telecom sector in India. Industry, however, is going ahead
with consolidation through mergers and acquisitions. It is
entirely possible that basic operators will formally join hands
with cellular operators to fight the government!
NHDP Goes Ahead
The transportation sector has a few successes in its bag and
a few failures too. Ports witnessed the beginnings of
corporatization and serious efforts at privatization of portrelated services.
In Roads, the National Highways Development Plan
(NHDP) is progressing on schedule and many states are
spending fair sums of money to improve their state highways
and district roads. But the battle against ‘short-termism’
needs to continue. The focus is on construction rather than
providing good road service to people on a sustainable basis.
Cratered surfaces of newly refurbished roads and highways
are expensive witnesses of this folly. The government has
further emphatically reiterated that road building in rural
India would be a fully sponsored by the Central government.
However, there are no visible developments on the ground.
Cross nodal connectivity is the new mantra, but other than
the Planning Commission’s Draft Integrated Transport Policy
(GOI, 2000b), there is no big blue print to make it happen.
Railways and NHAI
The much awaited Rakesh Mohan Committee Report on
Railways (GOI, 2001d) was submitted to the Railway
Minister. The major reorganization of the Railways suggested
in the report is being studied by an internal committee of
the Railways! Severely strapped for resources, the Railways
have started courting state governments and private sector
organizations to get resources for developing interconnectivity with ports and other bulk cargo facilities. The
NHAI (National Highways Authority of India) too has a
ground plan ready to connect major ports with the Golden
Quadrilateral.
Some Southern Cities Move Ahead
Urban infrastructure remained in doldrums. But there is
much talk about providing better services—drinking water,
sewerage system, district roads—in cities. Finances of urban
local bodies have been stretched to their limits and user
charges are so low that they cannot even support operation
and maintenance costs of these services. However, some
metropolitan cities such as Bangalore, Chennai and
Hyderabad, have taken certain steps in the right direction.
Some states such as Haryana and Uttar Pradesh have been
encouraging the private sector in providing civic services in
‘new’ cities such as Gurgaon and the NOIDA area. Rajasthan
has introduced a comprehensive bill which aims to promote
private-public partnership in providing many civic amenities
in all its cities.
Much has occurred in the approach of most state
governments. The competition to attract private capital to
provide all types of economic infrastructure is discernible.
However, the bureaucracy in many ways continues to be
suspicious of the ‘profit motive’ and finds it difficult to
accept that there are risks involved in private provision of
services, which need to priced.
Investments in Infrastructure
Reflecting the general slowdown in the economy, the
infrastructure index of the Ministry of Industry and
Commerce registered a dismal one per cent growth during
April-June 2001, compared to 9.3 per cent during the
corresponding period of the previous year. The growth rate
of infrastructure-related industries—electricity, coal, steel,
crude petroleum, petroleum refinery products, and cement—
accounting for a weight of 26.68 per cent in the index of
industrial production (IIP), was much lower at 5.3 per cent
during 2001–1 compared to 9.1 per cent in the previous
year. The slowdown was particularly pronounced for
electricity, steel and cement, reflecting basically the paucity
of investment demand. Obviously the severe recession in the
industrial sector has had its effect on the infrastructure
sector. The cumulative industrial growth for July 2000 to
June 2001 was also much lower at 1.5 per cent against 5.9
per cent in the previous period.
Sanctions and Disbursement
The sluggishness in investment demand from the private
sector is reflected in the performance of domestic financial
institutions (DFIs) in a major way. The total sanctions of
the three top ranking DFIs—IDBI, ICICI and IDFC—
grew only at a rate of 21 per cent during 2000–1 as against
a robust 44 per cent last year.
More disturbingly, the total disbursements of the three
DFIs had slided to 15 per cent growth compared to 42 per
cent growth during the previous year.
Power and Telecom continued to rely on traditional project
financing methods. The Transport sector witnessed new
Table 3.1.1
Sanctions and Disbursement of Major DFIs
(in Rs. crore)
Disbursements
1998–9
IDFC
ICICI
IDBI
Total
Percentage growth over previous year
374
15807
14470
30651
1999–2000
642
25092
17059
43537
42
Sanctions
2000–1
1998–9
1999–2000
2000–1
762
31965
17500
50225
15
1682
24717
23745
50144
1866
43523
26966
72349
44
2467
56092
28711
87270
21
initiatives. Work on the Golden Quadrilateral is almost on
schedule. Success achieved in execution of the Moradabadby-pass using an SPV (special purpose vehicle) has
emboldened NHAI to try some more projects using the
same method. It was rail-port interconnectivity that saw
long-term concession awarded to the private sector by the
Railways. The Railways would construct the fixed
infrastructure and maintain and operate it, the private sector
would assure a certain fixed amount of traffic and raise
funds to build the facilities.
The urban infrastructure witnessed the use of many
forms of financial initiatives. Despite all the jugglery, if the
urban bodies cannot pay, these initiatives are likely to remain
non-starters.
Fiscal Incentives for Infrastructure: The Union Budget of
2001–2 proposed certain measures to provide a boost to
infrastructure investments and industrial growth. But the
decision-making process and governance of the country
came to a standstill because of the series of unexpected
political developments.
PM’s Task Force on Infrastructure: This Committee after
designing detailed framework and implementation of the NHDP
and the North-South and East-West corridors considered issues
related to ports, aviation and integrated transport policy.
PM’s Economic Advisory Council: It was probably the first
time that the report of the Council was forthright in detailing
all that ails in the sector. It pointed out that inadequate user
charges (and the states’ inability to compensate the private
sector), and regulatory uncertainty, are the two main causes
for the poor response of the private sector’s participation in
the sector. There are enormous risks in the current scenario
which have held back the private sector from enthusiastic
participation. The main recommendations of the Council
are delineated in Box 3.1.1.
INITIATIVES
AT THE
STATE LEVEL
39
operation and maintenance of infrastructure projects. The
basic reason for this is that contracts can be specified, and
the profit motive used to create incentives for its delivery.
The government is preparing a comprehensive legislation
for reducing administrative and procedural delays, identifying
generic project risks, detailing various incentives, detailing
the project delivery process and procedures for reconciliation
of disputes.
Andhra Pradesh
The state enacted the Infrastructure Development Enabling
Act 2001 (Draft Bill) to provide for the rapid development
of physical and social infrastructure in the state and to
attract private sector participation. The bill provides
comprehensive legislation. It also lays down procedures for
reconciliation of disputes and provides for other ancillary
and incidental matters with a view to present bankable
projects to the private sector and improve the level of
infrastructure in the state.
Rajasthan
To attract private investment in urban infrastructure,
Rajasthan is introducing freer, market-friendly policies and
legislations. Policy changes and legislative amendments
include the New Rajasthan Town and Country Planning
Act, nearly three hundred amendments to the Rajasthan
Municipal Act 1959, abolition of the Urban Land Ceiling
and Regulation Act, and amendments to the Rajasthan
Urban Improvement Act 1959, Jaipur Development Act
1982 and Urban Land Allotment Rules 1974.
Rajasthan is the third state, after Haryana and Uttar
Pradesh to invite private sector to liberally invest in joint
sector townships on BOT basis. While the latter offered
townships (such as Gurgaon, Greater NOIDA) on standalone basis, Rajasthan is offering majority of its urban centres
to prospective developers.
West Bengal
POWER
The West Bengal government is in the process of framing
a policy for allowing private participation in infrastructure
like roads, flyovers and water distribution. The policy is
going to be introduced through a government resolution
rather than through legislation—a weak initiative since the
government of the day can change the rule of the game later.
Private parties will be allowed to exploit adjoining lands for
commercial exploitation. Open bidding is to be the basis
of private participation.
True reform is awaited in the power sector. The single buyer
model of private generation of electricity could never have
taken off with the SEBs in near bankrupt conditions. The
process was started with the Deepak Parekh Committee Report
which questioned the suitability of escrow account of SEB
receivable and escrow capacity of KSEB (Karnataka State
Electricity Board). The Committee also suggested that funding
should be done on the strength and viability of the project
itself. Important suggestions were made in the expert group
reports (GOI, 2001a and 2001b), the energy review committee
reports (GOM, 2001a and 2001b) popularly known as the
Godbole Committee Report. Finally, the Electricity Act 2001
is ready. If passed by Parliament and implemented, it will be
Karnataka
The government has recognized the importance of private
sector participation in the designing, financing, construction,
AND
ENERGY
Box 3.1.1
Infrastructure Sector in the Report of the PM’s Economic Advisory Council
The council’s report on economy laid emphasis on investments in economic infrastructure if India is to achieve a growth target
of 8 per cent during the Tenth Five Year Plan. Private sector investments were muted because the pre-conditions for successful
large scale entry of the private sector were not yet met. Two main reasons provided in the report were inadequate user charges
and regulatory uncertainty.
While infrastructure remains an exclusive public sector monopoly, the rationalization of user charges in infrastructure is abso lutely
vital. A regulatory regime that is seen to be fair to consumers and also sensitive to the legitimate needs of investors, is abs olutely
essential.
POWER
‘The flaw in the policy with regard to electricity was the failure to recognize that the root of the problem lies in the financial
unviability of the state electricity boards. This has made independent power projects (IPPs) look for temporary solutions such as
escrow arrangements and central government guarantees which simply do not address the core problem.’
It suggested that the huge transmission and distribution losses could be brought down through privatization of distribution as
the privatized areas would help achieve better efficiency from the distribution system.
The central government should play a pivotal role in the reform of SEBs (State Electricity Boards) as large parts of these dues
are to the central government organizations, such as NTPC, Coal India, Railways, and NHPC.
In view of the rapid convergence of telecom, IT and media, a new comprehensive statute, which creates the framework of single
license for multiple services, needs to replace the Indian Telegraph Act of 1885.
The government must levy fees to meet administration and regulatory costs, along with universal service obligation charges,
through revenue sharing, and not as an avenue to raise resources for the government. Increasing competition within the sector will
ensure benefits of reduction in license fees is passed on to consumers. The only area where government should collect rent is in
the allocation of spectrum, which is a scarce resource.
ROADS
The council suggested that the private sector be encouraged to participate in road projects through the BOT (build, operate, transfer)/
Annuity system as ‘EPC (engineering, procurement and construction), and O&M (operations and maintenance) contracts be merged
and given to the same contractor who would be responsible for construction and maintenance of the road during the concession
period.
According to the committee, private sector made little progress for so long because the government found it more attractive
to raise money cheaply through riskless gilt-edged debt, rather than paying the private sector’s capital costs with their risk-premium.
PORTS
The existing port trusts should be corporatized and turned into landlord ports that would then invite different operators, both public
and private, to invest in cargo handling and port infrastructure services. The ports as such should concentrate on the development
of common user general cargo facilities. Rather than fresh ports it suggested existing ports be optimally utilized through efficiency
enhancing investments. Tariff fixing is no longer necessary as intra-port and inter-port competition will ensure competitive pricing
of services.
RAILWAYS
The council strongly recommended depoliticization of Railways, rationalization of user charges and corporatization of production
units. Railways have a key role in initiating development of the key inter- and trans-modal facilities.
CIVIL AVIATION
The council recommended leasing the major airports (Delhi, Mumbai, Chennai and Calcutta), and inviting private sector management
of airports. An independent regulatory framework for ensuring economic regulation in the sector was suggested as there are many
operators.
The inland air travel tax and foreign travel tax should be converted into a common ‘civil aviation cess’ to ensure sufficient flow
of funds to develop civil aviation facilities in other parts of the country.
the harbinger of a new market structure for the power sector
in the country (see a review of the Draft Bill 2001 in Section
10.3).
Little progress has been made in bringing new investment
to the power sector. During the past year no major IPP has
achieved financial closure. The main reason for this is the
non-resolution of a bankable security package for lenders;
finalization of the escrow agreement and its operationalization1.
The power ministry has firmed up an action plan to
double the electricity generation capacity in the country to
over 2 lakh MW by the end of the Eleventh Five Year Plan
(2008–12). Projects aggregating 1,07,000 MW generation
capacity had been identified by the ministry for completion
during the Tenth and the Eleventh Five Year Plans. While
43,000 MW additional power generation capacity has been
planned for the Tenth Plan, 64,000 MW target has been
fixed for the Eleventh Plan. The institutional and policy
changes to realize even half of these are challenging. We are
doubtful, about the achievement of these targets, but need
not presume failure that would be inevitable.
Under the action plan, the power ministry has envisaged
large-sized thermal units such as 3 × 660 MW Sipat (NTPC)
and 6 × 660 Hirma (IPP) to reap economies of scale. The
Plan would target 35,000 MW additional generation capacity
in the hydel sector as against the existing capacity of 25,000
MW! The likely problems in land acquisition and in
management of environmental problems, and rehabilitation
and resettlement, do not find adequate mention.
Under the Tenth Five Year Plan, the Power Ministry
hopes to operationalize the mega power policy with a set
of fiscal and other incentives (such as customs duty exemption
and ten year tax holiday) extended to large-sized inter-state
projects of over 1,000 MW for thermal, and 750 MW for
hydro. The ministry hopes that these steps would ensure
offtake of power from identified mega projects to beneficiary
states and bulk consumers on the basis of long-term power
purchase agreements.
It has proposed a five-point strategy to convert lossmaking SEBs into viable profit-making concerns. The
strategy was chalked out after taking into account the
recommendations of the Ahluwalia Committee (GOI
2001b), established to suggest remedial measures on sick
power utilities. The strategy includes working out statespecific revival packages as part of the SEBs’ restructuring
exercise, preparation of district-wise distribution plan across
the country, converting all distribution feeders into proper
profit-centres, ensuring metering of all consumer
connections, and bringing the accounting procedures of all
SEBs in line with the international standards for greater
transparency2.
1 [To continue viewing the problems of the power sector as
arising out of escrow is itself a fallacy. The source of disease is thereby
not addressed (see Chapter 2).]
2 These are really operational decisions of any electricity company.
That at a policy level the government has to lay down 100 per cent
metering is indicative of the deepseated problems to SEBs, wherein,
even operational decisions have to be taken by the government.
41
Settlement of SEB Dues
The chief ministers’ conference, held on 3 March 2001
under the chairmanship of the Prime Minister deliberated
on the Power sector. They agreed to meet the challenge of
restructuring head-on. The Union Minister of Power
constituted an expert group under the chairmanship of
Montek Singh Ahluwalia to recommend measures for onetime settlement of outstanding dues of SEBs to the central
public sector undertaking (CPSUs) and the dues from CPSUs
to SEBs. The group was also entrusted to suggest a strategy
for capital restructuring of SEBs to make them operationally
viable.
The expert group’s recommendation includes a package
of incentives and disincentives linked to commercial discipline
and initiation of a process of reforms. The group emphasized
that the recommendations have to be accepted in toto. For
the states participating in the scheme, the group
recommended 50 percent waiver of the surcharge/interest
on delayed payments. The rest of the dues, including the
full principal payment amounting to Rs 33,600 crore was
to be securitized through tax-free bonds bearing an interest
rate of 8.5 per cent and issued by the respective state
governments. The group recommended that if a state defaults
in current payments for power/fuel, there should be a graded
reduction in the supply of power from central power stations
and coal supplies to the state. Further, SEBs should accept
reform-based performance milestones such as setting up of
SERCs (State Electricity Regulatory Commissions), metering
of distribution feeders and improvement in revenue
realization. Several states including MP, Orissa and West
Bengal have objected to the severe penalties proposed by the
panel against defaults. The government has accepted the
first part of the report.
SEB Restructuring
In the second part of the report (GOI, 2001b), the group
has proposed a comprehensive restructuring of the sector
to make it viable. The causes of failures are in line with other
reports. The committee has suggested that market borrowings
and private investments should be tapped to finance
expansion and modernization plans in the sector. It has also
recommended waiver of loans provided by the states to the
SEBs and central assistance for bridging the revenue gap,
meeting the costs of the work force rationalization and
adjustment costs for shifting to open access. The group has
recommended that the adjustment costs of the transition
would have to be funded out of the budgetary support.
Further, it has recommended central assistance equal to 5
per cent of the total sale revenue of an SEB in 2000–1,
subject to a ceiling of Rs 100 crore per year for allowing
‘open access’ of electricity. It has also suggested that the
assistance should be provided to the SEB or its successor
entities for a period of three years after ‘open access’ is
guaranteed.
The group has recommended that during the first year
of direct sale by any private generator to bulk consumers,
the SEB or the transmission company should receive central
assistance of 50 paise per unit of power wheeled, subject to
a ceiling of Rs 250 crore. The panel has recommended that
‘this assistance should be reduced to 25 paise per unit during
the second and third years, the ceiling remaining unchanged’.
It has estimated that the central assistance on this count
would not exceed Rs 10,000 crore during the Tenth Plan.
The second part of the report has not yet been accepted by
the government.
The Electricity Bill 20013
The salient features of the bill are:
• No techno-economic clearance for generating stations
and no state licencing
• Non-discriminatory and open access to the
transmission system
• Major role for the regulators, SERCs and CERC
(Central Electricity Regulatory Commission) in licencing,
tariff, grid rules, and access rules
• Provides for power trading, and the eventual creation
of a spot market
• Graduated reduction of subsidies; and
• Mandate for the regulator to cover tariff in all segments.
DPC Report4
The Energy Review Committee headed by Madhav Godbole
found a complete failure of governance of various governments
at the state as well as the central government level in their
dealings with DPC (GOM, 2001a). In the report (part I)
the committee found that the Enron power purchase
agreement (PPA) had built in excessive payments to Enron
from the Maharashtra State Electricity Board (MSEB) as a
result of undue burden of the regasification facility, high
recovery charges of shipping and harbour and O&M, and
inflated claims of fuel consumption. Based on these findings
the committee recommended a reduction in tariff.
The committee drew up a blueprint for restructuring the
Maharashtra State Electricity Board (MSEB). The committee
emphasized two elements essential to the success of the
reforms: a reliable estimate of how much power is consumed
by each user group; and an organizational structure, which
devolves the responsibility to measure consumption and
3
See a critical review of the Bill in Section 9.4.
4 Section 6.6 draws the governance implications from the findings
of the Godbole Committee Report.
collect charges to entities as close as possible to each user
group possible.
It has suggested trifurcation of the MSEB. There is to
be a set of independent generation companies formed by
clubbing the existing facilities into sets of six. Some are to
be open to privatization, others not. Likewise, there will be
a set of independent distribution companies which may be
offered for private ownership. In keeping with the natural
monopoly characteristics of this activity, the transmission
company will continue to be under a single operator. The
company will be kept under public ownership, with wheeling
charges to be determined by the state’s power regulator.
Over time, it may be handed over to a private operator, but
private ownership of the transmission company is not
envisaged by the report.
The committee has rationalized that the overriding aim
of power sector reforms is getting people to pay for the
power they use at the rates which are set for that particular
category. If the provision of power at below cost to specific
categories of users, for example farmers, is deemed socially
desirable, then it is incumbent on the government to
reimburse the distribution company the difference between
the price charged and the cost incurred. So far, this
subsidization has been done by underwriting the losses of
the SEBs, but under the reform blueprint, it now needs to
be done by an overt transfer from the government to the
private distributor who will then buy power at the regulated
rate from the generators5. For the system as a whole to be
viable, the distributor needs to know precisely who is to be
thus favoured and how much this group collectively
consumes. Without an accurate estimate of consumption,
rates cannot be set with any degree of precision. Distribution
companies making plans based on erroneous estimates of
paid-for consumption run grave risks of financial nonviability. Interestingly, the committee has recommended
that the proceeds of privatization be deposited in the Power
Sector Reform Fund, a state level fund.
According to the report, ‘the essential feature of the
model (defined as the Maharashtra model) is to avoid the
problems of persisting with government ownership, mixed
zones, the single buyer approach and an annual regulatory
process, while at the same time phasing in the transition to
a full-fledged market system, as envisaged in the proposed
Electricity Bill, in an orderly manner’. (GOM 2001b, p. 88)
POWER SECTOR REFORMS
AND
STATES
Reforms at the state level have been moving slowly.
Administrative changes have not been easy to bring about.
5
Even this would not work, since the incentives to over report
consumption by the subsidized sector would remain. Only direct
subsidization would work. See Chapter 1.
43
Table 3.1.2
Power Sector ‘Reforms’: A ‘Score Card’ for Statesa
Parameter
SEB
Restructuring
Constitution
of SERC
Andhra Pradesh
ü
ü
Assam
Bihar
Chattisgarh
Delhi
Goa
Gujarat
Haryana
Himachal Pradesh
J&K
Jharkhand
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Orissa
Punjab
Rajasthan
Tamil Nadu
Uttar Pradesh
Uttaranchal
West Bengal
North East States
Commercialization
of Distribution
MoU with Central
Government
Strategy being
finalized
–
–
–
–
–
–
–
–
–
ü
ü
Committed—proposal to
be done during 2001
–
–
–
Reform law approved
ü
Strategy being
by GOI
finalized
ü
ü
Strategy being
finalized
–
ü
–
–
–
–
–
–
–
ü
*
To be completed
by Dec 2002
The state has proposed to reorganize SEB into three profit centres
Reform Law passed
ü
–
in the Assembly
–
ü
ü
ü
ü
ü
–
Notified; yet to
–
be constituted
ü
ü
Committed
–
ü
–
ü
ü
Strategy being
finalized
–
–
–
–
ü
ü
Willing to constitute joint Electricity Regulatory Commission
–
–
–
–
–
–
ü
ü
–
–
–
*
ü
–
–
–
–
–
ü
–
–
a
These constitute reforms in a formal sense. In content restructuring is not uniform across SEBs. Gujarat has trifurcated on paper,
the GEB, purely to meet certain targets set by the ADB (Asian Development Bank) while the sector continues as before. It is hoped
that the Reform Law would make a difference.
Source: CII (2001), Press Release.
Some state regulatory authorities have also passed tariff
orders but restructuring and corporatization of the SEBs is
proving difficult. Internal changes due to corporatization
has been even more difficult. Table 3.1.2 succinctly captures
the progress of reforms in various states.
Karnataka
The expansion of the generation capacity at the Raichur
Thermal Power Station (RTPS, Unit 7) by the Karnataka
Power Corporation Limited (KPCL) became the first project
where financial closure is subject to reforms. The government
of Karnataka, KPCL, Karnataka Power Transmission
Corporation Limited (KPTCL) and IDFC signed a
multipartite agreement which specifies milestones for reforms
to be met by the state government and KPTCL such as
privatization of distribution within a specified period,
commitment to financial discipline and creation of a
dedicated power fund. Encouraged by this development,
the Union Finance Minister has suggested a conditional
lending programme for IPPs by financial institutions, in line
with the multipartite agreement in Karnataka, as an
alternative to escrow based lending.
Orissa
Power sector reforms initiated in Orissa six years ago have
come to a halt (a detailed analysis is given in Section 9.3).
AES Corporation, the US power major has a 49 per cent
stake in the Orissa Power Generation Company (OPGC)
and a 51 per cent stake in Central Electricity Supply
Company (CESCO), distribution company for central
Orissa. The AES has initiated arbitration proceedings against
GRIDCO for non-payment of dues and has threatened to
pull out of CESCO if tariffs are not increased. CESCO is
losing several crores every month in high costs and low
tariffs. The power corporation is in red after six years of
operation. The public, too, is not appreciative of slow and
halting manner of the reforms process. From being a model
in power sector reforms, Orissa’s experience is now a lesson
on how not to go about privatizing the power sector.
Andhra Pradesh
Andhra Pradesh (AP) has provided major boost to the power
sector reforms. The Rural Electrification Corporation (REC)
has almost doubled the disbursement amount to the state
to undertake rural electrification programmes last year. Under
its lending programme for AP, the corporation has decided
to disburse Rs 800 crore to the Transmission Corporation
of Andhra Pradesh (APTransco) in 2001, which is substantially
higher than Rs 420 crore during the previous year.
Rajasthan
The Rajasthan government has decided to spend Rs 2,000
crore on power sector reforms in the next two years in an
attempt to make the energy sector self-reliant by 2005.
Jhunjhunu, Jodhpur, Alwar and Jalore districts of the state
have been identified under the Accelerated Power
Development Project of the central government.
Rajasthan, facing power shortage, has decided to work
more on non-conventional resources like solar and wind
energy. The first wind power project has been set up by an
IPP in the border district of Jaisalmer. The state has already
achieved a record by setting up 9,900 domestic light
connections based on solar energy. According to the Renewable
Energy Development Authority (REDA), three demonstration
wind power stations are already functioning in Jaisalmer,
Phalodi and Devgarh. All the three wind units have generated
more than 7 million units of electricity so far.
Jharkhand
Recognizing the need to open up the power sector to private
investment, Jharkhand has decided to privatize electricity
supply in the state. Power supply as well as revenue collection
will be first privatized in the state capital, Ranchi, on an
experimental basis. If successful, it will be implemented in
Jamshedpur, Bokaro, Dhanbad and other towns.
Delhi
The Delhi Vidyut Board (DVB) has invited financial bids
for privatization of three distribution companies. The Board
has received bids for divesting 51 per cent stake from private
companies and final financial bids are to be called soon.
Under the scheme, the balance 49 per cent would be held
by the government but the strategic partner would be given
complete freedom in running the distribution companies.
Tamil Nadu
US based power major CMS Energy has threatened to pull
out of the US $ 1.4 billion Ennore power project if the
Union government does not agree to provide a counter
guarantee on payments. The state government has strongly
advised the Centre not to agree to a counter guarantee. The
corporation has demanded that the government modify the
payment security mechanisms for the Ennore project. CMS
Energy holds 26 per cent of the equity in Dakshin Bharat
Energy Consortium (DBEC), which is executing the 1,850
MW project. The central government is working to provide
a type of counter guarantee under a new terminology called
‘termination guarantee’. Serious doubts are being raised as
to whether the multi-million dollar integrated liquefied
natural gas (LNG) import terminal-cum-power project
proposed in Tamil Nadu will take off.
The DBEC was willing to sell the entire power generated
from the Ennore project to the PTC. Tamil Nadu Electricity
Board (TNEB), however, decided that it will buy only 750
MW of power on long-term basis. The MoU stipulates this
and states that PTC will buy the power generated from
Ennore as per the PPA terms agreed to between PTC and
the developer, namely, DBEC and in consultation between
TNEB and other beneficiary states. The company has drawn
the Prime Minister’s attention to the signing of the Joint
Development Agreement on 14 September 2000 in
Washington, giving the Ennore project special status by
both the American and Indian governments. The agreement
sought completion of the Payment Security Mechanism
(PSM) concept by 15 December and full PSM
documentation by 31 March 2000.
The government is targeting to generate 10 per cent of
the power requirement from renewable energy sources and
plans to set up additional generation capacity of 10,000
MW and a target for electrifying 18,000 remote unelectrified
villages by 2012.
Andhra Pradesh leads in power generation from bio-mass
such as bagasse, rice husk and agricultural waste. Fifty
plants of 6 MW range each had been sanctioned, of which
five had been commissioned and 25 had been sanctioned
loans. All the plants are expected to be fully operational in
two years, accounting for a total of 300 MW of additional
power.
Private entrepreneurs now produce wind electricity in
nine states. Together, they have a total installed capacity of
over 1100 MW — Karnataka has 40 MW, Andhra Pradesh
over 90 MW and Tamil Nadu over 800 MW. During the
2000–1 fiscal year, the 40 MW installed capacity in the state
produced 71.1 MW electricity, 8 per cent of the 882.6
million units from renewables sources (solar, bi-product
steam from sugar companies, biomass and small hydel).
OTHER SECTORS
Upstream Hydrocarbon Regulatory Authority
The Union government has almost reached a consensus to
constitute a separate regulatory authority for the upstream
hydrocarbon sector. This has become all the more important
in view of the recent round of bidding under the new
exploration licencing policy. The upstream hydrocarbon
regulatory authority (UHRA) would be set up once the
operational framework is finalized. A bill to this effect is
expected to be introduced in Parliament.
It is mooted that UHRA should not be subservient to
the government in its daily functioning and that government
interference should be minimal, along the same lines as the
Telecom Regulatory Authority of India (TRAI). UHRA
should have full operational and functional autonomy within
a framework of set rules and regulations laid down by the
government. Public overseeing of the institution could be
ensured through annual review by the government and
auditing by CAG (Comptroller and Auditor General of
India).
Roads
Besides telecom, construction activity of arterial roads has
been the most visible sign of the ‘new’ infrastructure.
The road widening (four lane) projects on the Golden
Quadrilateral are being expeditiously implemented by NHAI
with funds being raised from a variety of sources—budgetary
resources, multi lateral borrowings (World Bank/ADB),
market borrowings by NHAI and private participation.
The first major BOT project on national highways using
the annuity approach, four laning of the Panagarh Palsit
stretch on NH 2 received better response. Six other four
laning projects have been offered to the private sector on
the annuity format. Several applicants have qualified to bid
for these projects. IDFC has been involved in this initiative
as an advisor to NHAI from the onset, defining the concept,
finalization of the evaluation parameters for qualification
and final selection, procuring documentation, managing
the procurement process, finalizing the BOT concession
structure and concession agreement, and negotiating with
bidders.
The first major BOT project on National Highways
using direct tolling approach—six laning of the Jaipur
Kisangarh stretch on NH 8 received poor response with
45
only one bid. Moradabad bypass, implemented by a whollyowned subsidiary of NHAI, started functioning in 2001.
The recently commissioned first phase of the Moradabad
bypass has received enthusiastic response from users, with
toll collections over Rs 1 lakh per day in less than a month
since the road was opened to the public. A few more BOT
projects which became operational during the year were the
Delhi-NOIDA toll bridge, Wainganga bridge project near
Nagpur, and Baroda-Halol four laning project.
Several state governments, such as Maharashtra,
Karnataka, Kerala and Punjab, are pursuing initiatives for
road development, some of them through dedicated road
development or infrastructure development corporations.
Motorists will now have to pay for driving on newlyupgraded Indian highways. The government plans to toll
the entire NHDP in perpetuity. This means that BOT roads
are likely to be tolled even after the end of the concession
period. The government has fixed a rate of 40 paise per
kilometer for cars and an upper limit of Rs 1.40 for heavy
vehicles. NHAI is to finalize the toll for different stretches,
including bridges. It is estimated that NHAI will mop up
annual revenues worth Rs 20 lakh per km through tolling
of every completed kilometre of highway along the Golden
Quadrilateral linking the four metros of Delhi, Mumbai,
Kolkata and Chennai. Taking into account a construction
cost of Rs 4 crore per km, this works out to an average
recovery of about 5 per cent of the total funds invested for
developing the Golden Quadrilateral.
The SPV route appears to be the new buzzword fuelling
India’s great highway dream. This new financing route is fast
catching the fancy of the NHAI. The authority is considering
the option of taking up projects through the SPV route on
the Ahmedabad-Vadodara Expressway and plans to connect
12 ports including Kandla, Cochin, Paradip, Tuticorin,
Haldia, JNPT, Vizag and Marmugao. In future SPV projects,
NHAI proposes to invest 30 per cent of the equity of the
project with the EPC contractor contributing a minor 5–
10 per cent so that there is a sense of ownership towards
the project. However, the success of the SPV route, would
depend upon identification of commercially viable projects.
NHAI hopes to take up projects worth Rs 2,500 crore via
the SPV route.
It is hoped that the Central Road Fund will ensure funds
raised through the cess will be used for road development.
The act, however, does not provide for complete ring fencing
of the cess fund. Establishment of a road board to manage
funds professionally is not mandatory in the act. The
government has lost the opportunity to ensure that ‘users’
get the quality of roads they pay for. A critical assessment
of the act is given in Box 3.1.2.
Box 3.1.2
The Central Road Fund Act 2000 gives statutory power to establish a Central Road Fund for development and maintenance of
national highways and state roads, development of rural roads, construction of under- or over-head railway bridges, erection of
safety works at unmanned rail-road crossings and other prescribed.
The cess on petrol and high-speed diesel (HSD) will be levied and collected at the rate of rupee one per litre. The proceeds
of the cess shall first be credited to the Consolidated Fund of India; the central government may credit proceeds to the fund e xtend
grants and loans. Any fund provided by the central government for the development and maintenance of state roads is also to
be credited to the fund. The balance to the credit of the fund is not to lapse at the end of the financial year.
The fund is to be administered by the central government and is to allocate and disburse money to concerned departments.
Projects of state roads, approved by the central government using set criteria to be financed out of the share for state roads shall
be monitored by the central government.
Fifty per cent of the cess on HSD is to be allocated for the development of rural roadsand the balance as follows: 7.5 per cent
shall go for the development and maintenance of national highways; 12.5 per cent for the construction of under- or over-head
railway bridges; 27 per cent on development and maintenance of state roads; and 3 per cent on central government approved speci fic
state road projects.
The salient features of the Act are:
•
•
from
•
•
•
Cess collected from users shall be spent on development and maintenance of roads.
All the central government funds earmarked for road sector shall be channelized through the fund. State road projects financed
the fund shall follow established criteria.
Regulation and control of motor vehicles throughout the country come within the jurisdiction of the central government.
There is no provision for a cess drawback for off-road usage of HSD which will keep the administration of the fund simple.
Money from the fund cannot be allocated for the maintenance of an expressway.
CRITICAL
ASSESSMENT OF THE
ACT
• The administration of the fund remains with the central government and there is no statutory provision for an oversight
board having user groups representation.
• The proceeds of the cess are not completely ring-fenced; the central government is required to credit the proceeds to the
fund from time to time after deducting the expenses of collection.
• The fund has no budget constraint as the government may credit money by way of grants or loans. The government has
powers to disburse funds to any prescribed project.
• The fund remains under political control except that proportion of money to be spent on development and maintenance
of national highways is fixed.
• The act provides a weak legal basis to the fund but it will have published financial rules and regulations. The fund shall
not be subject to independent, technical and financial audits.
Annuity vs EPC
In public-private partnership for infrastructure financing,
received wisdom is that the contract should be such that
risk ought to be borne by the party that is best able to
mitigate it. Annuity is one such instrument. Soon after
NHAI received the bid for the first annuity project, it
received extremely sharp criticism from financial circles
and analysts. Criticism of the popular press was based on
prices quoted by the Gaumuda–WCT combine of Malaysia
for Rs 69.8 crore (half yearly payments) for the PanagarhPalsit pilot project. This was for a stretch of only 65 kms.
They compared the annuity to the cost of four-laning a
two lane highway at approximately Rs 4 crore per kilometer.
However, one needs to consider the price to be paid for
implementing a pilot project. It was expected that the
prices would be lower once private entrepreneurs gain
confidence in the concept. The annuity method is
considered the most risk-free variant of BOT highway
projects with private sector participation. However, analysts
objected to annuity concept on the following grounds
(Haldia, 2000):
• Annuity payments essentially entail budgetary funding
on a deferred basis. Tight budget constraint, implies that
only a fraction of the development programme can be
sustained.
• Price at which a private company can raise funds
from the market will be higher than that of the government.
• Dichotomy arises when user pays toll only on some
roads. Political justification for a toll road at one place and
annuity payment at another place will be difficult to
sustain.
• To support annuity payments by the state government
for state roads, it is not easy to impose another cess to
support a state road fund.
• The developer demands a traffic guarantee or even
a revenue guarantee which goes against the philosophy of
private enterprise6.
The annuity programme is a logical way of getting better
management control into the public sector. The government
still manages virtually the entire road sector and has the
option to collect toll on these roads7.
Subsequent bids for annuity based projects have countered
criticism from the popular press.
The annuity prices quoted by the Hyderabad based G.
Mallikarjun Rao (GMR) group for three projects has again
suggested that this is a viable alternative. The GMR group
has quoted Rs 29.48 crore for the Tuni-Ankapalle project,
Rs 37.59 crore for the Dharwad-Belgaum project and Rs
41.85 crore for the Tindivanam-Tambaram project. The
internal rate of return (IRR) works out at about seven per
cent.
In conclusion, whereas the BOT route tilts the burden
of project risks and responsibilities towards the private
developer, the annuity route provides for a more balanced
approach to risk and responsibility allocation between the
project participants. The government has been able to strike
the right balance so far by adopting the annuity scheme on
seven stretches totaling nearly 450 kms.
Toll Roads
The first BOT project (Rs 673 crore six lane highway
project between Jaipur and Kishangarh on NH 8 in
Rajasthan) under the direct tolling method is likely to be
awarded to Larsen & Toubro and Joannou & Paraskevaides
(Overseas) Ltd of Cyprus. The bare construction cost of the
project is estimated at around Rs 493 crores. However, the
total project cost is expected to rise to Rs 673 crore after
factoring interest during construction (IDC).
The successful bidder will develop the highway and recover
costs by collecting tolls from the users directly during a
concession period spanning 15 years. The agreement provides
for a 100 per cent indexation to the wholesale price index
(WPI) while revising the toll fees annually. Accordingly,
increase in inflation will be passed on to the users fully at
the time of annual revision in toll.
Rural Roads
The Pradhanmantri Gram Sadak Yojna was launched in
August 2000. The Prime Minister has reiterated the
government’s commitment to this programme. The scheme,
6 For the argument that the larger gains from involving the
private sector are in allocative efficiency, see section 6.1.
7 Annuities though may not lead to better allocative efficiency,
because governments still decide the road location. They still do have
the benefit of private construction, maintenance and management.
47
expected to connect 1.4 lakh habitations with the highway
network, has a total outlay of Rs 58,200 crore over the seven
year period.
Approval from the Planning Commission has been waived
for this scheme. The programme would be fully funded by
the Centre on the basis of state government project reports.
Under the programme, unconnected habitations in rural
areas with a population of 1,000 or more is planned to be
connected with all-weather roads in three years. In the
second stage all habitations with a population of over 500
persons are to be covered by the end of Tenth Plan. The
third stage extends to northern-eastern states, Sikkim,
Himachal Pradesh, Jammu and Kashmir, Uttaranchal and
the desert areas. The objective is to connect habitations with
a population of 250 persons and above.
The roads constructed under this programme would be
maintained by panchayati raj institutions. The ministry of
rural development will be the nodal implementation agency
to raise additional financial resources from the World Bank
and the Asian Development Bank to complete the
programme by 2007. The ministry of rural development
has been asked to set up a Rural Road Development Agency
to provide advice on technical, quality control, and
management aspects of the projects. The present source of
funds comes from the 50 per cent share of cess on highspeed diesel totaling over Rs 17,500 crores during the sevenyear period.
Ports
Following the issue of guidelines in June 1988 for the
formation of joint ventures by major ports with foreign
ports, minor ports and private operators, necessary
amendments to the Major Port Trusts Act 1963 have been
effected and enforced. The government has also decided to
initiate the process of phased corporatization of major ports
to enable them to operate in a market-oriented economy
with adequate flexibility. Steps have been initiated for the
corporatization of the Jawaharlal Nehru Port at Navi Mumbai,
New Mangalore Port, Mormugao Port and Tuticorin Port.
The government has also planned to develop hub ports,
one in the east at Chennai Port and one on the west coast
at Navi Mumbai. With the globalization of the Indian
economy, creation and upgradation of port and shipping
services to international standards is essential. By allowing
joint ventures, the government intends to attract new
technology, introduce better managerial practices, expedite
implementation of schemes and foster strategic alliances
with minor ports.
The Peninsular and Oriental (P&O) Steam Navigation
Ltd of Australia has taken over the Rs 400 crore container
terminal project at Chennai port. P&O was selected as the
preferred bidder in 2000, but took control of the facility
only in 2001. The terminal will be constructed on BOT
basis. The mandate includes developing and managing the
terminal for a 30-year period, with construction scheduled
to be completed in two years. P&O Ports anticipates
investments to the tune of $130 million in the first five years
of the concession period for promoting Chennai as India’s
leading east coast box port.
First major corporatized port at Ennore (Phase 1, Coal
handling berth) was completed this year. Tamil Nadu
Electricity Board (TNEB) is installing coal handling
equipment. The Jawaharlal Nehru Port Trust (JNPT), which
has attained super-port status because of its efficiency and
productivity, is now focussing on marketing internationally.
It was handling around 1.2 million containers annually and
is expected to touch 1.4 million containers by December
2001. The efficiency and productivity of the port has visibly
improved over the past three years. International shippers
earlier preferred Colombo or other parts in west Asia.
However, JNPT is now receiving cargo from Karachi to be
further dispatched. The port has also attracted cargo from
the gulf countries, which were earlier going to Dubai. JNPT
is further augmenting its facilities to cater to international
shippers. The port has a linear quay length of 680 metre,
six rail-mounted quay cranes, two super post panamax,
rubber-tyred and rail-mounted gantry cranes, and will be
adding additional container berths. The port handles around
70 per cent of the inland container depot products of the
Concor at Nagpur. A study is underway to convert JNPT’s
four bulk berths into container berths.
The Mumbai Port Trust (MbPT) failed to receive bids
for licencing of the five terminals at Victoria Dock as
multipurpose berths for cargo operations. Bids were invited
for licencing of the five terminals with 13 berths for five
years, extendable as may be mutually agreed.
Transport Policy
The 52nd Report of Parliamentary Standing Committee on
Transport has recommended that there is no need for a
regulatory authority for ports such as the Tariff Authority
for Major Ports (TAMP). In the present scenario of
modernization and corporatization, major ports should have
the liberty to fix port tariff. Major ports also face competition
from minor and state ports.
The proposal to convert TAMP into an appellate tribunal,
as suggested by the C. Babu Rajeev Committee, has evoked
stiff resistance from none other that the TAMP Chairman
himself. TAMP has also sought legislative powers from the
union government to levy fees for services provided. It has
urged the government to formalize the arrangement of
audit of its accounts by the Comptroller and Auditor General
of India (CAG). At present, TAMP is totally dependent on
the government for budgetary support. As long as this
arrangement continues, the prescription of an accounts
format and CAG audit are necessary.
TAMP has also urged the government to hold prior
consultations with the tariff regulator before making
investments and awarding BOT concessions to the private
sector, as the royalties paid to major ports and the revenues
shared with them will affect the tariffs of BOT operators.
Besides, the creation of assets will have significant tariff
implications.
Inland Waterways
India has 14,500 km of navigable waterways of which 5,700
km are navigable by mechanized vessels. There are three
national waterways. These include Allahabad-Haldia,
Dhubri-Sadiya over Brahmaputra and Kottapurram-Kollam
on the west coast canal.
The cabinet has approved the Inland Waterways Authority
of India (IWAI) Amendment Bill 2001 to enable it to
constitute the IWAI. The policy package for the sector will
allow the authority to form joint ventures with private sector
companies. The new policy also allows equity participation
for joint ventures upto 40 per cent for BOT projects and
grants tax exemption as offered in the infrastructure sector.
Major private and public sector companies, including
Hindustan Lever Ltd, Indo Gulf Corporation, NTPC,
Numaligarh Refineries and Concor, have evinced interest in
developing inland water transport facilities in the country.
Railways
The Railway ministry has opposed the idea of corporatization
of the organization as proposed by the Planning Commission’s
approach paper to the Tenth Plan. However, a beginning
at restructuring seems to be in sight with the Railways
agreeing to corporatize some of its non-core activities. The
ministry feels that corporatization of the entire organization
would not bring significant benefits.
The Khanna Committee Report released in February 2001
sharply criticized the role of the Railway ministry, especially
in not maintaining correct data on accidents and the action
taken on the reports of the enquiry committees. Its
recommendations included merger of departments, closer
interaction with overseas research agencies to improve crashworthiness of coaches, closure of railway lines where state
governments are unwilling to bear losses, dropping projects
for which only token allocation of funds has been made,
total freeze on gauge conversion projects and reduction of
staff strength by 25 per cent over the next ten years.
The Rakesh Mohan Committee comprising 17 members,
was constituted on 31 December 1998. It submitted its
final report, outlining among other things, a financing plan
to make the Railways a commercially viable organization.
The committee has recommended major restructuring
followed by eventual corporatization of the Railways. This
includes disbanding of the present Railway Board, forming
an Indian Railways Corporation to be governed by the
Indian Railways Executive Board, and constituting an Indian
Rail Regulatory Authority. The group has challenged the
monopoly of railway officials over the transportation
monolith by recommending lateral induction of experts
other than railway officials into the executive board. It does
not appear that this measure will be implemented. Broad
suggestions made in the report are given in Box 3.1.3.
Pipelines
The pipeline sector has been creating new capacity away
from the public gaze. The private sector is willing to invest
49
here even though it is inherently a monopolistic sector.
However, no big player wants to be left out even though
a regulatory framework is not in place.
An interesting tussle has brewed between Gujarat, which
has passed an act and Gas Authority of India Limited—a
central government PSU—is disinclined to be regulated by
a state regulator. Gujarat enacted the Gujarat Gas (Regulation
of Transmission, Supply, and Distribution) Act in March,
20008. This has enabled the state to start a Rs 3,000 crore
gas grid project of the Gujarat State Petroleum Corporation
(GSPC). The project involves setting up a 2,500 km grid
for the transportation of indigenous gas and imported
liquefied natural gas (LNG) throughout the state. For this
purpose GSPC, in which the state government has an 80
per cent stake, acts as the nodal agency. A special purpose
vehicle, the Gujarat State Petronet Limited (GSPL), has
been floated to own the assets. The grid will connect the
Box 3.1.3
Within the Indian Railways (IR), there is no controversy on rationalization of passenger fare and making it immune from political
interference. However, the high growth targets set by the committee do not seem to be palatable. The committee has emphasized
that competition has been increasing in the transportation business. In the 1980s, road transportation grew rapidly, eroding the
share of the Railways, including the area of commodities where the Railways had traditional stronghold. The annual growth rate,
measured in ‘net tonne kilometres’, averaged 5.33 per cent between 1984 to 1991 and dropped to 1.86 per cent during the next
eight years (1992–9). Road dominance is likely to increase even further after the four-laning of the ‘Golden Quadrilateral’ and
the development of new expressways in the country. The increasing use of pipelines for the transportation of POL products is likely
to further reduce demand for their transportation. These developments call for a basic change in IR’s approach to freight transportation.
Total passenger kilometers (pkm) had been growing at a trend rate of about 4.5 per cent over the last 15 year period, and the
last five years have seen an acceleration to about 5.8 per cent. The patterns for physical volumes show a significant increase in
the share of the upper classes, particularly after the 1980s, but the overwhelming share remains in the lower classes. The ratio of
average passenger fare to the average freight tariff is amongst the lowest in the world.
The railways, therefore, has to invest and reorganize in a significant fashion over the next few years in order to meet the rising
demand of passenger business and, growing, but intensely, competitive freight business. Wrong pricing policies, inefficient public
enterprise operations and other difficulties have all contributed to this situation. But the solution does not lie in borrowing funds,
without improvements in returns.
Expansion of traffic on high density routes to raise the speed of freight trains significantly requires both managerial action and
investments in new technology. The existing managerial, financial and accounting systems are inadequate to meet the challenges
ahead. IR also has to undergo major structural change in its organization if it is to serve the emerging needs of the country; this
is the considered view of the expert group. The group has estimated that if there are no significant changes in performance, it
would have an operating deficit of Rs 3700 crore by 2003.
The challenges and concerns that lie ahead are:
•
•
•
•
•
Growing customer needs and rising expectations
Lack of goal and task clarity
Outdated organizational structure
Lack of autonomy
Undue political influence at all levels of decision making
The expert committee particularly stressed the need for organizational change. The overwhelming sentiment is that action is
overdue and ‘business as usual’ would be disastrous.
The view of the expert group is that the potential exists to double the underlying rate of growth of IR. The stage of development
favours the growth of rail especially freight. Accepting anything less would be a loss to the nation. The rail system is too important
to permit its withering away.
8
On salient features of the Act and on its hopefully not ‘still’ birth pangs see Section 6.2.
state’s gas-supplying centres with users, chiefly power plants.
The act also envisages setting up of a regulatory authority.
The Ministry of Petroleum and Natural Gas has taken up
cudgels on GAIL’s behalf and has asked the state to reexamine the act on the grounds that would not only make
the hitherto unanswerable GAIL comply with more than one
regulatory authority but would also conflict with its interests.
The central government is taking a myopic view of the
real import of the Gujarat Gas Act. The main purpose of
the act is to ensure the growth of the gas industry in the
state. But since most of the LNG terminals are being
conceived and built in Gujarat, the act would ensure the
growth of the gas industry of the country as well. It also
lays down a well-defined structure for the evolution of the
gas industry, as well as the principles of regulation. And
contrary to GAIL’s misplaced fears, the regulatory framework
being introduced in the state is a light-handed one and does
not regulate the price of gas. This has been rightly left to
the market to decide as there is already a competition
among gas sellers, and between gas and other fuels. The
regulator would only regulate gas transmission charges.
With regard to GAIL’s apprehensions that its existing
infrastructure would become available to third parties, GAIL
ought to realize that gas pipelines are a natural monopoly
and hence should be regulated on the basis of the common
carrier principle where all the companies should have open
access at a fair price. Accordingly, the Gujarat Gas Act has
been formulated to provide for regulation of gas transmission
and distribution on an equitable basis.
Airports
The government is planning to introduce an integrated civil
aviation policy which will incorporate guidelines on transport
and tourism. It has been decided to club transport and
tourism with aviation policy as good road and rail
connectivity with airports would help both tourism and
trade. The centre is also considering the appointment of an
independent economic regulator for airports to fix airport
tariff and safeguard public interest. An autonomous statutory
Airports Economic Regulatory Authority (AERA) has been
proposed as a long-term measure for the limited economic
regulation of airports in view of the inherent monopoly
characteristics of airport services. The regulator will be
delinked from government control.
The issue of setting up a regulatory authority has come
in the wake of the government initiative of permitting
complete foreign investment in airports. The government
has approved the construction of new airports at Devenhally
in Bangalore, Shamshabad in Hyderabad and Mopa in Goa,
with majority private sector participation.
The government decided to give major airports on longterm lease to private operators. The bidding process is well
underway. There still needs to be the requisite amendment
to the Airports Authority Act 1994. The aviation
establishment has broadly come to an understanding that
it would adopt a dual-component scheme of leasing. The
first would be a one-time, fixed payment for the entire
duration; and the second, a variable annual payment. It is
estimated that the revenue from the leases of the four major
airports would be sufficient to sustain the development and
maintenance of the remaining 119 airports across the country.
The Airport Authority of India (AAI) presently earns an
annual revenue of approximately Rs 1,800 crore; of which
nearly Rs 1,000 crore is generated by the airports at Delhi,
Mumbai, Chennai and Kolkata.
The AAI has been privatizing other airport services as
well. The operation, maintenance and management of the
centre for perishable cargo for exports at the Indira Gandhi
International Airport has been given to a private operator
last year.
Integrated Transport
NHAI is now looking at linking the high-density Golden
Quadrilateral to points of high economic potential. To start
with, the authority is interested in connecting 12 major ports
to the highway network in a bid to attract more traffic. NHAI
is in the process of establishing SPVs for the Haldia, JNPT
and Vizag ports. The other ports that have been identified
for connectivity are Kandla, Cochin, Paradip, Tuticorin and
Marmugoa. NHAI is keen on the SPV route after it successfully
implemented its first SPV project in the Moradabad bypass
last year. It plans to invest 30 per cent in each project and
raise the balance from the market. In the future, NHAI
proposes to offload its stake in the SPV Company and generate
earnings. The idea is to create a ‘rolling stock’ of earnings via
disinvestment. The proceeds would be reinvested in future
projects where NHAI proposes to take equity.
The Container Corporation of India (Concor) is planning
to launch dedicated freight trains with fixed time schedules
for arrivals and departures between Shalimar (Howrah) and
Mumbai, and Shalimar and Nagpur. The launching dates
are yet to be finalized as demand estimates are being worked
out. Concor has already launched similar dedicated freight
trains with fixed time schedules between Shalimar and
Chennai (July 2000), Shalimar and Hyderabad (November
2000) and Cossipore (Kolkata) and New Delhi (March
2000), for domestic traffic; and Cossipore and Haldia dock
(May 2001) for international traffic. All services, but for the
last, are doing well.
Urban Infrastructure
Urban infrastructure is particularly neglected. The deteriorating infrastructure for drinking water compelled the
Eleventh Finance Commission to sound a cautionary note
on the inadequate maintenance of civic services and the
need for rationalization in pricing of urban services. It has
called for increase of tax revenue and user charges to cover
operation and maintenance expenses. The commission also
mentioned the need for speeding up devolution of funds
and a concomitant transfer of staff from state governments
to local bodies in line with the 74th Amendment.
Progress along better quality private participation and
investments has been slow due to inadequate revenue streams.
However, a few states have been attempting innovative ways
of construction and financing.
The progress in municipal bond markets has been very
little. The credibility of urban local bodies (ULBs) which
51
had raised money earlier has come under cloud as ULBs lack
financial management skills. Their accounting is not in line
with generally accepted practices. For example, the Nashik
Municipal Corporation failed to open an escrow account (a
key bond issue condition) even two years after the bond
issue, setting back the nascent market.
The deliberations on National Water Policy and Report
of the Sukthankar Committee were two important policy
initiatives last year. Whereas the first raised the important
issue of sharing of water resources—mainly surface water—
among different states for different usage, the second one
detailed the complexity of drinking water in urban and rural
areas. The latter also highlighted complex institutional
Box 3.1.4
The Sukthankar Committee Report
The Government of Maharashtra (GOM) established a committee to prepare a roadmap for improved provision of water and sewerage
in rural and urban areas under the chairmanship of Mr. D.M. Sukthankar, former chief secretary of Maharashtra (GOM 2001c).
The committee was to suggest future strategy for O&M for existing and new schemes, the framework of an institution for tariff
setting, feasibility and means of private sector participation in the water sector and to suggest effective implementation of the Ground
Water Act 1993.
The government had perceived the problems as the non-collection of water tariff, funds not being allocated for O&M, and
lack of trained manpower with ULBs. The committee however, found that allocation of funds for O&M through budgetary process
had completely failed and local government accounts are not maintained properly. There was lack of accountability within ULBs.
Water leakages are as high as 50 per cent, new water schemes do not meet local needs. There was an emphasis on construction
rather than O&M, and at best they supplied ‘some’ water rather than good quality water in adequate quantities.
The Committee made many suggestions, of which the important ones are:
• Villages should have self-sustainable single village schemes. In smaller rural areas, community driven approaches need to
be initiated. The government should empower local institutions (zilla parishads and gram panchayats) and user groups (village water
committees) to assume the lead role in decision making and operations. Village schemes should be integrated water resources
management (90 per cent of rural water schemes depend on ground water) ensuring source sustainability at local level. The funds
from the state government must be directly transferred to village water and sanitation committees, who should have freedom to
procure the services from the community and market. Multi-village schemes should be constructed where sustainable source of
water is not locally available.
• Larger urban areas generally require larger piped water supply schemes. There need to be a commercial orientation. City water
and sewage establishments (CWSEs) should be set up independently (as a municipal undertaking, company under the Companies
Act, or co-operative societies under the Co-operative Society Act). The CWSEs should enter into long-term concessions (25–30
years) with private firms, selected on a competitive basis. CWSEs should mobilize their own investment resources from the market
on a commercial basis (through capital market, domestic financial institutions or the proposed state revolving fund or bond bank).
• Maharashtra had enacted the Ground Water Act 1993, which gave priority to ground water for drinking use. The Act primarily
relates to drinking water, but the state lacked political will to enforce it. Hence, the state needs to set up a Maharashtra Gr ound
Water Regulatory Authority (MGRA) with provision for regulation of all uses of groundwater including irrigation, establishment
of independent local watershed management units, and community management.
• The report points out that over extraction of ground water is a direct result of free electricity provided to villagers. The
government should change the economic price of electricity for pumpsets so as to prevent over-drawing of ground water. As
groundwater rights are chattel to land ownership, it would be useful to explore the introduction of a community rights framewor k
for water resources, including ground water.
• The committee strongly recommended the establishment of an independent Maharashtra Water and Wastewater Regulatory
Commission so that abuse of the local monopoly of the CWSEs does not take place. The Commission could also regulate the
existing local bodies (both urban and rural) to create incentives for restructuring at the local level.
• The Maharashtra Jeevan Pradhikaran (MJP), a state parasatal body responsible for design and construction of water and wastewater
schemes in urban and rural areas and mobilization of resources on behalf of local bodies, must be restructured. MJP needs to establish
independent corporate entities. The main (future) role for MJP should be limited to project design and construction supervision.
The committee recommended incentive based disbursement of state funds to urban, local and village bodies.
arrangement in Maharashtra, which is similar to many
other states.
Draft National Water Policy 1998: The National Water
Resources Council did not accept the Draft National Water
Policy in its meeting held in July 2000. The working group,
set up to study the draft, consisted of water resources ministers
from all states. It discussed the draft and guidelines for
water allocation among states. The states were vertically
divided with regard to River Basin Organizations (RBOs).
The issues remained unresolved for the following reasons:
• Participants did not want RBOs with statutory powers
as they did not find them in consonance with the
constitutional provisions and the spirit of the federal
structure.
• Some states felt that the priorities with regard to
water allocation should be drinking water, irrigation, hydel
power, aquaculture, agro-industries, non-agricultural
industries and navigation and other uses. They felt that the
Inter-state Water Disputes Act 1956 could be suitably
reviewed and amended to provide for conciliatory powers
in Section 4 (1), timeframe for constitution of tribunal,
completion and adjudication by the tribunal and for
publication of award by the union government.
• A few states are of the opinion that the policy and
guidelines appeared to have been drafted to accommodate
the narrow interests of a few privileged states.
• Some states felt that the centre was trying to take
control over the rivers and other water resources through
this policy.
The working group eventually decided to constitute a
core group of ministers under the chairmanship of the
Union Minister of State for Water Resources to go into the
details of water allocation and the setting up of an RBO.
The final definition of provisions coined by the core group
relating to water sharing is:
The water sharing/distribution amongst the states should
be guided by a national perspective with due regard to water
resources availability and needs within the river basin.
This statement is open to several interpretations. The
group also decided not to empower the proposed RBOs
with statutory powers.
Water conservation, its importance and limitations: One of
the main proponent of water conservation, Rajendra Singh,
who strongly believes in community rights of water, water
harvesting and water conservation received the Magsaysay
Award in 2001 for his work in Alwar, Rajathan. His work
is a good example of integrated water system at village/
community level which is also an economically efficient
solution for drinking water. It has proved that systematic
development of village level watershed can change the
economics of the village community. The strategy of water
harvesting and surface water development was through a
series of check weirs and earthen dams, soil conservation
through series of gully plugs, afforestation and agro-forestry
to meet the requirement of fodder, fuel and fruit as well as
for soil conservation. There are many other successful
examples of water harvesting in Madhya Pradesh, Andhra
Pradesh and Maharashtra at village/community level.
A few state governments have extended the concept of
water harvesting to a city level and have passed resolutions
that all new dwellings should have water harvesting devices
on their roof. These are simple devices. The seasonal
availability of water limits its use but this will help in
recharging the groundwater table.
Development at state level: The chosen method adopted by
states to build urban infrastructure is ‘partnership’ with the
private sector. State governments short of funds have taken
initiatives to establish infrastructure fund/project development companies in partnership with private sector financial
institutions. The role of these institutions is to bridge the
gap of risk perceived by a private promoter and the risk
perceived by the present provider of the service. These are
developments in the right direction. Not all the institutions
are of the same genre, nor is it proposed that they have
similar functions. Table 3.1.3 captures succinctly different
types of institutions. Generally, these institutions are referred
to as Infrastructure Initiative Funds (IIF).
Infrastructure for the Agriculture Sector
The government has finally realized that the value addition
in agriculture sector is constrained by poor infrastructure.
To mitigate this constraint, it announced the first ever
National Agricultural Policy and set a target of more than
4 per cent per annum growth over the next two decades. A
significant development has been the announcement of a
National Policy on Handling, Storage and Transportation of
Food Grains with the objective to harness efforts and resources
of public and private sectors, both domestic and foreign, to
develop the requisite infrastructure. The government accorded
‘infrastructure status’ for bulk grain handling and
transportation, and incentives have been extended. Further,
the government guarantees utilization of this infrastructure.
Twenty locations have been identified in grain producing
centres, consuming centres and port towns for integrated
bulk handling and storage along with testing facilities and
quality control. Punjab’s agro marketing co-operative
Markfed, has prepared a blueprint to provide adequate storage
for 10 million tons of wheat by setting up hi-tech modern
silos. Private sector participation is also envisaged.
India is the world’s second largest producer of fruits and
vegetables. However, more than 30 per cent of the produce
53
Table 3.1.3
Some Examples of Infrastructure Initiative Funds (IIFs)
Model (Main Pupose)
Examples and
Partner Agency
Applicability and Implications
Dedicated IIF Pure
Project Development
APIIF (in partnership with
IL&FS) UPIIF PIIF
Integrated IIF Project
Development & Funding
I-DECK
TNUDF
State Owned Project
Development Company
(PDC)
I-KIN
I-WIN
PDCOR
Other Forms
FFUIDC (Feedback Finance
Urban Infrastructure
Development Company)
is apparently ‘wasted’ in the absence of proper storage and
processing facilities. A subsidy of Rs 78 crore for setting up
cold storages for perishable commodities was provided during
2000–1. It is now proposed to extend the coverage of the
scheme to cover rural godowns. The subsidy to be provided
by the government would be suitably enhanced to take care
of this.
The 2001 Budget proposed a number of initiatives.
Important among them was: total exemption of excise duty
on processed fruits and vegetables, credit linked subsidy
schemes for construction of cold storage in villages and
establishment of agri-business centres and agri-clinics.
Notwithstanding the new government initiatives, the
sector remained moribund by wide ranging restrictions that
have been imposed on inter-state movement, storage and
stocking of food grains and agriculture products.
• Necessary where project definition processes of
departments are inadequate
• IIF can take proactive role in identifying projects
and developing them on its own initiative
• State government should be willing to allocate funds
to IIF without seeking significant returns
• Mechanism must exist for IIF recommendations to
be implemented by respective state government
departments
• Viable developed projects to be supported by purely
private funds. Non viable projects will devolve on the
state government
• Fund may be useful for credit enhancement of
developed, support worthy projects
• Funding support to projects independent of project
development. Development of a project by IIF does not
automatically entitle it to funding support by IIF
• Required in situations where even beyond
development, availability of funding for developed
projects is a constraint
• Impetus and motivation to initiate project
development exercise must come from departments
• State departments to reimburse PDC for expenses
with suitable profits
• PDC recommendations may be adopted by
departments at their own discretion
• Identify projects and develop them
• Secure concessions from government
• Implement projects through JV and invest in the
equity of the JV
CONCLUSION
During the past year, many beginnings have been made.
The transport sector—roads, ports, airports, and connectivity
with ports—witnessed a flurry of activity which will improve
infrastructure and reduce transport time. This could have
major positive feed back effect on the economy. Railways
have been provided a robust framework for change but have
yet to respond positively—it is clearly caught in the crossconnections of vested interests. Power remained in the
limelight, but without any physical improvement in the
sector. Some cobwebs have hopefully been cleared and it is
generally accepted that adequate user charges have to be
levied, billed and collected if the sector is to see any
improvement: the role of the government has to diminish.
The telecom sector has demonstrated that competition can
do what regulation and state control cannot. Deregulation
brought cellular tariffs to nearly a tenth of what they were
two years ago. Urban infrastructure remained long on
promises and short on delivery.
We are seeing emergence of new realism at the state
level. What we are witnessing among the states is
‘institutional competition’. As states compete, and some do
visibly better than others, rulers and administrators would
have to mend their ways to move forward. All state
governments have come to realize that there is no alternative
to competition and public-private partnership in infrastructure.
3.2 WLL, GOVERNANCE, CORPORATIZATION, AND SWANS:
A REVIEW OF INSTITUTIONAL DEVELOPMENTS
Rekha Jain
The telecom sector witnessed several developments over the
year. The government decided to allow ‘limited’ mobility in
the wireless local loop (WLL). This brought the jurisdictional
boundaries of various fixed service providers (FSPs); agencies
such as the Telecom Regulatory Authority of India (TRAI),
Department of Telecom (DoT), and the Prime Minister’s
Office (PMO) over the issues of policy, pricing and allocation
of spectrum (a scarce resource) into sharp focus.
The Department of Telecom Services (DTS) and
Department of Telecom Operations (DTO) were merged to
form into a public sector company called Bharat Sanchar
Nigam Limited (BSNL) with effect from 1 October 2000.
The process of corporatization highlighted the need for
prior ground work in evolving a road map and a blueprint
of the strategy.
The draft of the Convergence Bill which had been
announced last year was made available to the public. The
bill proposed setting up of the Communications Commission
that was to be responsible for regulating both telecom and
broadcast sectors. The bill did not specify the regulation of
competition issues, and role and scope of the appellate
board, a gap that could result in delays in resolving disputes.
Other practical issues in implementing the Convergence
Bill also arise.
Several state governments—Gujarat, Andhra Pradesh,
West Bengal and Rajasthan—have gone for stateswide area
networks (SWANS). Others are likely to follow suit.
Dedicated physical facilities especially cable links for SWANS
need a re-examination, given the growth of the internet, the
networking of Internet Service Providers (ISPs), and the
resulting possibility of virtual networks.
Even after the setting up of TRAI in 1997, the policy
and part of the regulatory function continued to be with
the Telecom Commission. The creation of TRAI should
have also led to redefinition of the role of Telecom
Commission and DoT, but this was not done satisfactorily.
In the creation of various departments (DTS and DTO)
from the DoT), the department had attempted to separate
the policy functions from the operations9. Amalgamation
of DTS and DTO and the subsequent corporatization led
to the creation of BSNL and the DoT, the erstwhile Telecom
Commission. This streamlined the structure by a separation
of the policy and regulatory function (responsibility of DoT)
and the actual operations (BSNL).
Thus there is still much overlap between TRAI’s and
DoT’s defining rules. Currently DoT is responsible for
policy formulation, licensing, spectrum management,
administrative monitoring of public sector undertakings,
research and development, and standardization/validation
of equipment.
Spectrum management and equipment standards are areas
that are usually under the regulator’s purview in many
countries. While the TRAI Act 1997 had precluded it from
spectrum management, the TRAI Amendment Ordinance
2000 gave it only a recommendatory role for spectrum
management and standards. The overlapping jurisdictions
of TRAI and DoT has led to delays in the past as in the
formulation of guidelines for opening up the domestic long
distance market or resolution of issues arising out of the
WLL (with limited mobility) case.
Political Interventions
In order to give the telecom sector a boost, the Prime
Minister, Atal Behari Vajpayee set up a high powered group
on telecom (GOT) in 1999 to evolve a policy framework
for the sector. This was possibly done outside the DoT as
it was felt that it may not be able to conceive radically
different roadmap, or it may even thwart involvement of
9 This was not done as a part of any overall sector restructuring
plan but under pressure from both Indian Telecom Service and
Indian Administrative Service cadres to head DoT. The government’s
inability to handle this issue effectively had resulted in the creation
of these departments. (3iNetwork 2001, Section 8.1).
private sector or deregulation in its own limited vested
interest. The GOT drafted the National Telecom Policy
1999.
Another example of political interference was in a recent
case when BSNL billed advance rental to its customers. The
telecom minister intervened to say that it was a mistake and
that these would not be charged. Such political interference
in organizational issues would create impediments to an
independent functioning and the fixing of responsibility for
decisions. On its part BSNL did not inform the customers
in advance and/or suggest alternative payment methods. For
example, it could have suggested staggered payments or
provided incentives to those who paid the entire amount at
one go, thus smoothening the interaction with the customers.
Role of regulatory agencies in the convergence bill: Even as
the debate regarding the functioning of TRAI continues,
the draft of the Convergence Bill provides for significant
reorganization of the existing policy and regulatory
institutions. The setting up of the Communications
Commission would necessitate requisite review and redesign
of the existing institutions such as TRAI and Prasar Bharti10.
The Bill also envisages important changes in the powers of
the existing bodies in areas such as licensing. For example,
currently, while Ministry of Information and Broadcasting
(I&B) is the licensor for broadcast licenses, DoT under the
Ministry of Communications is the licensor for telecom
licences. The Convergence Bill gives such powers to the
Commission, thus significantly enhancing the scope of the
proposed regulatory institution.
In comparison, under the existing TRAI Amendment
Ordinance (2000), TRAI has a recommendatory role in
licensing with respect to the following: (a) need and timing
for introduction of new service provider (b) terms and
conditions of licence to a service provider; and (c) revocation
of license for non-compliance of terms and conditions of
license. Further TRAI’s function is to ‘ensure compliance of
terms and conditions of license’. From this it is obvious that
it has been hard for the government and the incumbent to
give significant authority to TRAI despite its reorganization.
It remains to be seen how the provision in the bill that gives
even greater powers to new institutions than those currently
existing would be accepted by the government. The bill
itself has not been actively pursued for passage in parliament,
as there has not been significant legislative activity in general
10 Prasar Bharati is a statutory autonomous body established
under the Prasar Bharati Act. The Board came into existence from
23 November 1997. The Prasar Bharati is envisaged to be the public
service broadcaster of the country. The objective of public service
broadcasting is to be achieved through All India Radio and
Doordarshan which earlier were working as independent media units
under the Ministry of I and B. http://mib.nic.in/information&b/
AUTONOMUS/frames.htm.
55
since the inception of the bill. The lack of progress has been
due to pressures from the opposition parties on the
government’s handling of the situation arising out of the
disclosures of the Tehelka tapes.
Telecom and competition regulation: The key issue in telecom
regulation is to design appropriate interventions that achieve
both static and dynamic efficiency. Under the current
regulatory framework, static efficiency is achieved through
ex ante sector specific regulation (such as those related to
licensing) and dynamic efficiency is aimed through ex post
competition policies.
While the ex ante regulation regarding licensing is in
place and significant experience exists in this domain, the
ex post regulation regarding competitive processes has yet
to evolve. In the current multi-service provider regime,
there are likely to be several mergers and acquisitions and
scope for vertical integration in service provision. For
example, Zee Networks and Siti Cable are business entities
that provide various elements of what may become a vertically
integrated service provider covering both telecom and
broadcast service as well as content. This could lead to anticompetitive practices by their bundling of set top boxes,
network and content to subscribers, effectively eliminating
choice.
Technological convergence also has implications for
regulatory institution design. While on one hand convergent
services require that boundaries of sector specific regulatory
agencies be expanded, on the other it implies that general
competition policy would play a greater role in the regulation.
The other issue is the trade off between regulatory capture
and sector specific skills (IIR, 2000, p. 69). A ‘convergent/
competition’ regulator is less prone to capture by players in
a specific sector, due to the diversity of interests across
sectors that is represented, although it may lack the technical
expertise for managing the sector specific issues.
Under the current regulatory regime issues related to
monopolistic, restrictive, and unfair trade practices are to
be handled by Monopolies and Restrictive Trade Practices
Commission (MRTPC) established under subsection 1 of
Section 5 of the Monopolies and Restrictive Trade Practices
Act 1969. While the MRTPC itself has little teeth and is
to be replaced by a Competition Commission, this framework
recognizes the importance of managing competition. On
the other hand, while the Convergence Bill provides for an
Appellate Tribunal, it does not specify its scope. On this
aspect the bill’s focus is procedure oriented as for example,
in specifying the details of the procedures for handling cases
that come before the Appellate Board.
While appropriate regulatory institutional design is one
possible way of dealing with competition and anticompetitive practices, the other could be through designing
of licensing conditions. Such conditions could be ‘effects
based’ general competition related conditions so that the
onus of not indulging in anti-competitive practices is with
the licensee.
There are several examples of how competition related
issues are handled in different countries. There are instances
of sector specific regulation handling these issues (as in
Canada) or sector specific regulator handling it along with
competition specific agencies (as in UK, where Office of
Telecommunications (Oftel) and Monopolies and Mergers
Commissions as well as the Department of Trade and
Industry, the policy making body for telecom have a clear
role and authority in competition related issues). (3iNetwork
2001, pp. 63–5)
Independence of regulators: Currently both TRAI and Prasar
Bharati have budgets allocated from the Consolidated Funds
of India. This requires them to follow the employment,
promotion and other rules and regulations as applicable to
government departments, reducing their autonomy and
restricting choices for appointments. TRAI has been perceived
as following the government’s perspective rather than having
an independent view. This has led to weakening of the
regulatory process.
Despite this lack of independence in TRAI the
Convergence Bill has proposed that the Commission be
dependent on government funding. The funds generated by
the Commission by way of fees are to go to the Consolidated
Fund of India and its budget is to be passed by Parliament.
Further, the employees of the Commission and the Appellate
Tribunal are to be appointed, as well as their salaries and
other conditions of service are to be determined, by the
central government. In addition, the Secretary General,
who will play a very important role in the functioning of
the Commission will be only on deputation from the central
government. These points seem to compromise the
independence and autonomy of these two bodies. The Bill
needs to specify the creation of a ‘Convergence Fund’ that
would have contributions from the service providers for
financing the Commission’s operations.
In USA, Canada and UK, regulatory agencies do not have
independent sources of income. In USA, the FCC (Federal
Communications Commission), which is funded by the
Congress, has traditionally been sensitive to its wishes.
However Commissioners have been known to take decisions
contrary to Congress when they have felt that the President
or the courts would support them. Independence in views
is also brought about by requiring that not more than three
out of five Commissioners be from a single political party.
In UK Oftel’s budget is approved by the Parliament, whereas
running costs are met from license fee which are roughly
proportional to the operators turnover. Despite dependence
on the Parliament, Oftel has shown considerable
independence in decision-making.
Besides overlooking the provision of financial autonomy,
the bill also provides for the central government to issue all
sorts of specific directives relating to licensing that will be
binding on the Commission, thus further compromising
the independence of the Commission. The role of the
government ought to have been limited only to the issue
of general policies and the Commission should have been
able to determine the implementation.
Spectrum management: TRAI and DoT have to work out
an equitable method of allocation of spectrum between
fixed and cellular services. In addition, there is a need to
put in place a mechanism for spectrum allocation that is
applicable to different types of sectors such as telecom,
broadcast and Information Technology (IT).
Traditionally most regulators have different allocative
mechanisms for telecom and broadcasting sectors. Spectrum
for broadcast in the United States was allocated freely owing
to the ‘public interest’ component embedded in such services.
This had enabled a certain kind of regulatory oversight over
television, which may not have been possible otherwise. The
advent of the internet and new models of service provision,
such as bundling of telecom, cable, and internet services,
requires an examination of these regulatory policies. The
lower levels of content regulation on the internet are likely
to put pressures on regulatory agencies to lower content
supervision over television. As a consequence it may become
necessary for the government to review its broadcast spectrum
allocation processes. This need becomes more critical in a
fast changing technological scenario in which broadcast
services turn digital and internet becomes the delivery channel
for different types of services including telecom. By treating
spectrum for these services differentially, the government in
effect dictates the technology for services thus preventing
the market from making those choices.
The issue of service specific licenses can be dealt with by
having two level licensing––infrastructure license and
spectrum license. The idea is to delink particular bands of
spectrum from specific types of service.
For efficient management of spectrum, the Wireless
Planning and Coordination Wing should evolve a time table
for moving government agencies currently using spectrum
in the commercial bands to other bands. Further, all agencies
whether government or private, should pay for the spectrum.
The governments’ payment of such charges will make explicit
the subsidies inherent in the provision of those services that
use spectrum. It will also tend to allow for more efficient
use of spectrum and help find alternative technologies for
services that do not necessarily find wireless to be cost effective.
STATE WIDE AREA NETWORKS
FOR
GOVERNANCE
Although SWANs were designed with the objective of
providing e-governance, the slow pace of development of
applications had led to its limited use predominantly for
voice and video conferencing.
While the build operate transfer framework is useful for
infrastructure development, the basic issue of developing
dedicated infrastructure to serve the objectives of a SWAN
need to be questioned. With the proliferation of internet
usage and internet service providers, achieving the same
objectives through internet would be possible. However, the
need for appropriate application interfacing and last mile
access would still remain.
The current application development process that drives
the e-governance initiatives should include more citizens’
participation and be more citizen centric. It should also
span across departments. Data validation and maintenance
are critical tasks that need to be undertaken in a systematic
manner. A usability review could be helpful in evolving a
portfolio of applications for maintenance. Currently very
few applications are available on SWANs.
Given the current status of application development,
project structures that include stringent service level
agreements drive the cost of implementation high. Currently
state governments bear all the revenue risk. By explicitly
sharing such risks, the focus would turn towards those
applications that citizens are most willing to pay for. The
government may also be required to provide applications
that do not generate revenue (access by poor people). By
explicitly stating such requirements, the costs and subsequent
subsidies can be better targeted.
A realistic demand assessment for bandwidth for such
networked applications, based on the nature of applications
(several types of applications do not necessarily need a
network e.g. land record applications) needs to drive the
requirements.
CREATION
OF
BSNL
Although Mahanagar Telephone Nigam Ltd. and Videsh
Sanchar Nigam Ltd. were corporatized in 1986 and there
had been talk of corporatization of DoT since the submission
of Athreya Committee report in March 1991, the process
of corporatization of BSNL was done in a hurry. The
consultants were given a very short time to prepare a report.
They have been subsequently retained to help in the
restructuring. The corporatization process was not smooth.
Prior to the corporatization, the employees, both in the
workers and officers categories went on strike, paralysing
the service provision and managed to get their demands
met. The demands included salary increases, a ‘no
retrenchment policy’ and the requirement to pay their
pensions from the Consolidated Fund of India and not a
general fund set up for this process as is normally done for
other public sector organizations.
57
In several countries, corporatization has been brought
about after enactment of law/s that created the organization,
specified the functions and defined the corresponding
regulatory framework. Often this has required concurrent
changes to other Acts so as to bring about a smooth
transition11. The corporatization of BSNL was affected
without legislative changes. The employees concerns
regarding the provision of provident fund led to prolonged
strikes.
The organizational structure of BSNL consists of a
Chairman and Managing Director, supported by a board
consisting of five members—finance, planning, operation,
human resources, commercial and network services.
Additional external members are yet to be inducted. The
full time board members are from within the erstwhile
DTS/DTO/DoT. It is well recognized that external ( to the
government and the company) board members can bring
in the required differences in perspective necessary for growth.
The requirement of external directors is mandatory as per
SEBI (Securities and Exchange Board of India) guidelines
for large companies. However, no time frame has been
stipulated by the government for this induction on the
BSNL board.
The corporatization process had little immediate impact
as few changes had been made in the existing administrative
structures. The many levels of hierarchical structures need
to be reviewed, and a flatter structure that could be more
responsive needs to be devised. The consultant’s task is to
suggest the appropriate organizational form and process12.
After corporatization BSNL has been structured as a
single organization. For administrative ease, it has been
divided into circles, roughly corresponding to state
boundaries. However, if privatization is to take place
BSNL would need to be divided either along business lines
or along geographical regions, as otherwise it would be
difficult to find investors with the requisite financing. The
separation could create problems as some of the resulting
units (such as the local business when divided along business
11
For example, in Malaysia legislation was enacted in 1987 to
separate the Jabatan Telekom Malaysia (JTM), the government
department responsible for telecommunications into two parts—the
regulatory unit called JTM and an operating company called Syarikat
Telekom Malaysia (STM), a government owned company. STM was
later privatized into Telekom Malaysia by selling off its stake to
private and institutional investors. Suitable amendments were also
made to the Employees Provident Fund Act and Pension Act to
protect employees’ interests and enable them to continue with
provident fund facility in the new organization.
12 In contrast, in UK, the corporatization and the subsequent
privatization were preceded by changes in the board composition.
Several other changes were made to BT’s structure within the
framework of a white paper that outlined the roadmap for the
privatization. This plan was reviewed periodically.
lines or the eastern region when divided geographically)
may not be attractive to investors. As the road map of
privatization has not been spelt out, it is difficult for the
organization to prepare itself for the future. This uncertainty
has led to a low morale of the employees.
BSNL plans to get into cellular service provision. But
its roll-out seems hesitant. In this segment, private operators
have had a head start and have developed the marketing
expertise, customer databases and infrastructure. For example,
MTNL’s cellular services have been able to register only
10,000 customers in New Delhi and around 8,000 in Mumbai
compared to Bharti’s nearly 33,000 in Delhi for Bharti and
BPL’s 27,000 in Mumbai (as of April 2001), the dominant
operators in the two cities (see the COAI website). Therefore,
to make a success of the cellular operations, BSNL may
need to create a separate entity that could be staffed by
people with a greater market orientation than that available
in BSNL. Such an entity would need to work on a
commercially-oriented manner with management having
the autonomy to give commissions to sales staff; flexible
payment structures; ability to price competitively; give
discretion and responsibility to staff; salaries linked to
performance or targets––attributes that are absent in BSNL’s
operations today.
International long distance could be an area of expansion
for BSNL. Exploiting value added services would require
cultural, overhaul in the organization.
As BSNL changes towards becoming a corporate entity
in practice, a key requirement would be the implementation
of commercially oriented accounting systems including
management control systems. Such a system would require
not only basic changes to the existing accounting systems
right down to the field level, but also training and significant
computerization to implement the system. Given the long
decision cycles in the government, and the massive
investments required, such a system will require a dedicated
project team that would have to have the requisite financial
powers and technical understanding of the management
issues in computerization.
Corporatization thus far has not changed the earlier
decision making structures and processes. There is a need
to train managers to have a business perspective and build
accountability for performance, an aspect that is lacking
in most government departments. For example, it will
have to develop performance norms as per the new
technology inducted and move away from an earlier culture
where employees demanded to be evaluated on performance
as per the norms of older technology, causing low
productivity and additional costs for the network. For
example, the number of DELs (Direct Exchange Lines) per
employee in BSNL (Table 3.2.1) is low, not only in
comparison to developed countries but also in comparison
to countries such as Indonesia and Philippines.
From a monopoly mind set where BSNL was used to
treating customers as though doing them a favour by
providing services, it will have to change to being more
sensitive to customer needs. This change is very critical and
is going to determine whether BSNL continues to be a
profit making entity. Appropriate systems need to be
designed for facilitating customer interactions. For example,
instead of expecting customers to come to its premises to
pick up forms, these could be widely distributed through
retail channels and the web. While it has started distribution
of some forms through the web, it needs to do so for all
its services. Similarly, a variety of options for payment of
bills could be offered. Such systems need to be designed
for the different elements of service.
With corporatization costs are being treated and reported
more appropriately. The costs of its inefficient operations
were hidden and paid for by the tax payers are now revealed
in its lower profits.
BSNL does have tremendous strengths vis-à-vis
Table 3.2.1
Comparison of Telecom Indicators in Different Countries
Country
Denmark
TDC Tele Denmark
Indonesia
Philippines
France Telecom(10 countries)
France (France Telecom)
South Africa
Argentina
Singapore (Singtel)
Japan(NTT)
India(BSNL)
Year
No. of Lines
2000
2000
2000
2000
2000
2000
2000
2000
2000
2000
1999
3735000
3400000
6662065
1999922
3.9E+07
3.4E+07
5075417
3723936
NA
2.2E+07
No of Employees
18363
10900
37705
13285
188866
148846
60613
10259
NA
224000
431874
Number of Lines
per Employee
203.40
311.93
176.69
150.54
207.55
229.19
83.73
362.99
NA
50.00
Source
www.teledammark.dk
www.telkom.co .id
www.pldt.com.ph
ww.francetelecom.com.fr
ww.francetelecom.com.fr
www.telkom.co.za
www.telecom.com.ar
www.sinftel.com
www.ntt.co.jp
ww.dotindia.com
competition, in terms of its reach and trained personnel.
But to build upon it would need full autonomy. That could
prove difficult.
CONVERGENCE BILL HIGHLIGHTS
Key highlights of the Convergence Bill drafted by a
committee under Fali Nariman:
• Formation of a single commission that would address
both content and carriage regulation.
• The enactment of this Act would lead to a repeal of
the Indian Telegraph Act 1885, Indian Wireless Telegraphy
Act 1933, Telegraph Unlawful Possession Act 1950 and the
Telecom Regulatory Authority of India Act 1997.
• Licensing as a key function: (The Ministry of
Communications for telecom; and the Ministry of
Information and Broadcasting for FM Radio.
MAJOR FUNCTIONS
COMMISSION
•
OF THE
REGULATORY
Licensing
59
• Determination of tariffs
• Formulation and determination of conditions of fair
and equitable access
• Promotion of competition
• Protection of consumer interests
• Promotion and enforcement of universal service
obligations
• Formulation of advertising codes for content
application services
• Formulation of commercial codes in respect of
communication services and network infrastructure facilities
• Taking steps to regulate or curtail the harmful and
illegal content on the internet and other communication
services
• Formulation of codes and technical standards and
norms to ensure quality and interoperability of services and
network infrastructure facilities (including equipment)
• Carrying out any study and publishing findings on
matters of importance to the consumers, service providers
and the communications industry
• Institutionalizing appropriate mechanisms and
interaction on a continual basis with all sectors of industry
and consumers so as to facilitate and promote the basic
objectives of the Act.
REFERENCES
3iNetwork (2001), India Infrastructure Report 2001: Issues in
Regulation and Market Structure, Oxford University Press,
New Delhi.
COA/(2000) http://www.coai.com.
Government of Gujarat (2001), The Gujarat Gas (Regulation of
Transmission, Supply and Distribution) Act 2001, Gandhinagar.
Government of India (2000a), Draft Integrated Transport Policy,
Planning Commission, New Delhi.
—— (2000b), Draft National Water Policy (1998), Ministry of
Water Resources, New Delhi.
—— (2001a), Report of the Expert Group—Settlement of SEB
Dues, Planning Commission, New Delhi.
—— (2001b), Report of the Expert Group—Restructuring of SEBs,
Planning Commission, New Delhi.
—— (2001c), The Electricity Bill 2001, New Delhi.
—— (2001d), The Indian Railways Report: Policy Imperatives for
Reinvention and Growth, Expert Group on Indian Railways,
Indian Railways, New Delhi.
—— (2001e), 52nd Report on the Ministry of Shipping, The Parliamentary Standing Committee on Transport and Tourism.
Government of Karnataka (2000), Report of the High Level Committee
on Escrow Cover to IPPs to Government of Karnataka, Banglore.
Government of Maharashtra (2001a), Report of the Energy Review
Committee Part I, Mumbai.
_________ (2001b), Report of the Energy Review Committee Part
II, Mumbai.
_________ (2001c), The Sukthankar Committee Report on
Operation, Maintenance and Management of Rural and Urban
Water Supply Schemes, Water Supply and Sanitation
Department, Mumbai.
Haldia Gajendra (2000), Indian Highways: A Framework for
Commercialisation, National Council of Applied Economic
Research, New Delhi.
Singhal Rajrishi, Malini Goyal and Arindam Sengupta (2000),
‘Tomorrow’s CEO must be a Coach, Not Power-Base’, an
interview with Jack Welch, Economic Times, 18 September.
4
THE CONSTITUTIONAL AND LEGAL
FRAMEWORK FOR GOVERNANCE
4.1 THE FRAMEWORK OF REGULATION
T.C.A. Anant • Jaivir Singh
One of the earliest and possibly the most often cited basis
for government intervention in utility provision arises out
of the ‘natural monopoly’ problem. Additional reasons for
large-scale intervention in markets in less developed countries
(LDCs) have been cited as arising out of capital market
failures and, scale and scope economies. The traditional
analysis of the regulation problem as a natural monopoly
has tended to concentrate on price or quantity instruments,
with little concern about the institutions within which such
instruments are operationalized. An alternative perspective
can be gleaned from the so-called new institutional economics
literature on regulation. This literature exhorts us to be
sensitive to the fact that public utility provision is
characterized by long-term contracts, and therefore the
regulator can itself be viewed as an agency that balances the
interests of both the consumers and the providers of a
service over a long period of time. If perceived in this
manner, the regulation problem becomes tractable as an
exercise in institutional analysis. Given the fiat to regulate,
a regulator has to choose an appropriate instrument to
achieve a regulatory end. This section discusses this issue
and provides some examples of how the choice of such
instruments can affect certain public outcomes. For instance,
a strand of law and economics analysis offers insight into
whether rights should be protected by using ‘property’ or
‘liability’ rules.
The significance of instructional analysis in the study of
infrastructure is immediately obvious once it is realized that
many infrastructure projects involve the use of sunk capital,
implying the presence of considerable asset specificity. The
presence of such asset specificity makes public utility
provision subject to risk because the provider has to invest
in specialized assets that cannot be re-deployed without
incurring substantial loss if the initial contract were to be
disturbed in some manner. In other words, the opportunity
cost of investment in many public utility endeavours is
much higher in best the alternative use, should the initial
transaction be prematurely terminated. This suggests that
the decision to invest in a public utility can be forestalled
on account of transaction cost considerations.
The notion of transaction cost is particularly useful where
transaction costs are perceived as the ex-ante costs of drafting,
negotiating, and safeguarding agreements and the ex-post
costs associated with continuing the transaction relationship
over a period of time in the face of changing circumstances.1
In the presence of substantial transaction costs, institutions
can be perceived as modes of organizing economic activity—
set up to overcome transaction costs. The institution of the
market cannot be expected to allocate resources in the
presence of the problems associated with the infrastructure
provision because standard contract doctrines constructed
to govern discrete transactions are not equipped to handle
the contractual complexity associated with these problems.
In addition to the problem of provision, it needs to be noted
that public utilities involve a large range of users, sometimes
almost as large as the voting population. This implies that
in addition to the concerns of contracting related transactions
costs, providers of public goods have also to worry about
the distribution of benefits and the valuation of benefits
and costs across different segments of the target population.
1
Willamson (1985) offers an instructive analogy by stating that
‘Transaction costs are the economic equivalent of friction in physical
systems’.
The Constitutional and Legal Framework for Governance 61
Thus, in addition to resolving issues of contract formation
and adjudication, the provision of public utility services is
involved with issues of distribution, equity, and fairness.
Therefore, specialized structures of governance are required
to mitigate the problems associated with public utilities. It
has been suggested that regulation can provide such a
structure, where the regulator is seen as an agent who
devises, allocates, and administers a collective contract for
the provision of some natural monopoly output. This
effectively means, to use phrases coined by Goldberg, that
the regulator has to achieve a balance by protecting the
producer’s ‘right to serve’ against protecting the consumer’s
‘right to be served’ (Goldberg 1976).
Conceptualizing regulation in this manner places an
emphasis on mechanisms for maintaining, adjusting, and
terminating long term relationships and also raises questions
about the appropriate instruments one can use for effective
regulation. The discussion on instruments has often been
couched in terms of trade-offs between prices and quantities
(tariffs vs. quotas), command and control vs. market based
instruments as in the discussion of environmental issues,
and property rules or liability rules in the discussions of law
and economics. While an exhaustive discussion on the choice
of optimal instruments is beyond the scope of this paper,
the literature raises certain issues which have a bearing on
our concern with regulatory design. We turn below to some
of these issues.
INSTRUMENTS
OF
REGULATION
One line of inquiry has posed the regulation problem as the
choice between setting a price or quantity signal to achieve
a desired end. Another approach has asked whether one can
best protect property rights, and therefore regulate, by using
property rules or liability rules. Though both these strands
focus on different choices, the conceptual similarity in
delineating the problem is remarkable. In an idealized world
with ‘no transactions costs’ the choice of instrument, and
for that matter the nature of the regulator, is irrelevant.
Prices vs. Quantities
In the context of incomplete information, Weitzman (1974)
has explored the choice between quantitative restrictions
and price restrictions.2, 3 Suppressing all technical detail, it
is useful to spell out the main results. Under conditions of
incomplete information, quantity and price signals will
transmit central commands in very different ways and will
2 Quantitative restrictions take the form of quotas in trade and
capacity restrictions in production whereas price restrictions are
imposed through tariffs, taxes, and subsidies.
3 See also Ray and Sen (1992) and Ray and Sen (1994).
lead to different results. The question as to whether the
quantity mode or the price mode is superior depends on a
number of parameters, which include the shape of the
benefit profiles. Briefly, quantity instruments perform the
best when the benefit schedules are highly curved and the
worst when benefit schedules are linear. On the other hand,
price instruments perform the best when the benefit schedules
are linear and the worst when the benefit schedules are
highly curved. Thus, in the case of industrial pollutants, an
industrial ‘bad’ such as those manifesting a quick and short
horizon irreversible impact—for example poisonous gases—
are more amenable to quantitative restrictions, while others
which have a slow long term reversible impact may be better
addressed through price controls. The distribution of
technological knowhow across firms is another determinant.
When the distribution of technological possibilities is limited
with low variability, a price instrument has a high risk of
failure. On the other hand, when the variability in the
technological possibilities is large and a quantity rule
specifying technology or cost is used, there is bound to be
a considerable risk of ignoring a set of low cost technologies.
One can view some of the possible policy measures affecting
the telecom sector in this light and argue that the government
is best advised not to specify technology in this sector;
instead, it may be more appropriate to impose licence fees,
taxes, or subsidies and let firms choose technology.
Sometimes, in the presence of quantitative restrictions,
regulators design provisions to sell or transfer licenses. If the
sale or transfer of the licence does not change the nature,
location, or type of the good on which quantitative
restrictions have been placed, the key regulatory interest
associated with changes in ownership will be centred primarily
around anti-monopoly concerns. However, in certain cases
the transfer or sale of licences can lead to changes in the
nature or location of the good. In such cases, the impact
of the transfer of licence will depend on the distribution
of consumption patterns. For instance, the impact of allowing
a piece of the spectrum to be shifted from cellular telephony
to radio broadcasts will depend on the distribution of
consumers and their preferences. To take another example,
consider a case where the transfer or trade of licences leads
to differential impacts, depending on the location over which
the restricted good is spread. If one makes emission
restrictions tradable, the consequences of such an endeavour
will depend on the area of impact. If the emission under
consideration is the chemical mercury, which is not degraded
or diluted over a long period, the implication of tradability
can be quite disastrous, whereas tradable permits may
promote efficiency in the case of carbon dioxide emissions.
In the former case, the area of impact would be very local
and irreversible, while in the latter case the area of impact
would be regional, if not global, and the effects may as yet
be reversible.
The crucial point that emerges from this discussion is
that in designing and implementing optimal regulatory
policy, the regulator has to assess distributions of costs and
preferences as well as their levels, the structure of the market,
and the nature and form of contracts between producers
and consumers.
Property Rules vs. Liability Rules
The state can use property rules under which property
rights are guaranteed against non-consensual infringements.
Alternatively, the state can use liability rules which discourage
misuse of resources by requiring offenders to pay victims
for the harm they suffer. The instruments that are used to
control pollution provide an example that illustrates the
distinction between these rules . Pollution can be controlled
through a property rule that imposes a tradable or nontradable4 injunction through appropriate standards on the
polluting firm. Alternatively, with a liability rule no standards
are set but the firm is liable for damages payable to victims
of pollution.
The pioneering essay on the issue, ‘The Problem of Social
Cost’ (Coase 1960), sets out the analysis of the choice across
different rules. In this essay, Coase analyzed situations where
the economic activity of an agent has unintended
consequences on another, that is, an externality is present.
Coase points out that if information is perfect and transaction
costs are non-existent it does not matter on whom the law
places legal liability or whether property or liability rules
are employed—a free bargain can always be worked out
with an end result that is characterized by an efficient
allocation of resources. The other equally significant point
made in this work is that the ‘real world’ is often characterized
by the presence of transaction costs, and if transaction costs
are admitted then efficiency is sensitive to who bears the
legal liability and what rules are used to protect property.
In later works, Calabresi and Melamed (1972) and Kaplow
and Shavell (1996) have extended the analysis of the choice
between property rules and liability rules.
In the presence of externalities and no possibilities of
bargaining, liability principles do better than property rules.
This is because, given that the harm and prevention costs
are the private knowledge of the victim and the injurer
respectively, liability rules induce flexibility since the injurer
will abate the harm as long as the prevention cost is less than
the average harm. Property rules on the other hand end up
using estimates of costs and harm, which lead to inflexible
permissions to pollute/abate with greater error in allocation
on the average.
Bargaining raises the prospect of reducing the disadvantage
faced by property rules as it creates the possibility that
parties can trade their rights in mutually beneficial ways.
However, in this case the crucial parameter relates to the
distribution of costs and harm. In general, the dominance
of the liability rule continues, though asymmetric or highly
skewed distributions of costs and harm can lead to a
preference for property rules.
The advantage of the liability rule is clearly related to the
ability to correctly assess average harm. If the system (legal,
administrative, and procedural) systematically underestimates
harm, then the liability principle can do much worse than
the property rule.
If the problem at hand is such that it involves idiosyncratic
valuation of the resource in question where the two parties
have different private valuation, then property rules dominate
over liability rules. Under a property rule, transfers take
place only if the valuation of the owner is less than the
valuation of potential takers, and that too through a
compensation acceptable to the owner. If liability rules were
used in such instances with compensation being based on
averages of values, more than optimal level of takings or
dispossession will take place.5
Thus, we see that whether we seek to promote effective
allocation of the right to use resources through property
rules or liability rules depends on the ability of the regulator
to assess cost and harm/benefit as well as their distribution
over the target population.
The above discussion has some important lessons for
regulation, since regulators face these choices endemically.
To illustrate, if a regulator is called on to make a decision
on how to allocate the frequency bandwidth, the regulating
agency can use the property rule route by first creating
rights in the spectrum, which in turn can be bought from
the right holder by future users. Alternatively, the agency
can opt for the liability principle and allow people to use
the spectrum in an unfettered way, and if their independent
action leads to harm or major restrictions/constraints on a
potentially expanding service, then the aggrieved party can
5
4
Strictly speaking the case of non-tradable rights do not fit into
the dual categorization of property and liability rules. Instead, they
belong to the set of rules associated with inalienability, where the
court determines who gets an entitlement and the value of the
entitlement, but forbids the sale of the entitlement. See Calabresi
and Melamed (1972). As we have noted earlier in the discussion of
quantitative restrictions, tradability itself depends on the distribution
of impact.
One should note that the acceptability of compensation is
critical to the result. If the compensation is decided by a third
party—court, executive branch, or Parliament—and it is not subject
to review, then we may find excessive dispossession. It could be
argued that one of the key problems in large infrastructure projects
where large populations are displaced is that idiosyncratic valuation
has been performed inadequately. This problem has been compounded
by the restricted and distorted nature of the land market, as pointed
out by Morris (2000).
go to court to seek compensation under the law of torts.
To take another example, let us say an agency empowered
to regulate telecommunications has to ensure that demand
for telephone connections has to be met by a specified
period. The agency can fix prices and hope that suppliers
will meet the targeted demand or it can specify quantities
that suppliers must supply and thereby cover demand. The
optimal decision in all these cases depends on an assessment
of the distribution of technology, benefits, costs etc. as well
as on the ability of the regulator to assess technology and
benefits. In addition, the regulator will be required to
supervise the implementation of incomplete contracts under
imperfect information. Therefore, simply put, the specific
and contextual knowledge is paramount in sectors that are
characterized by rapidly changing technology, such as
telecom. Additionally, while these insights have been worked
out as choices of instruments, the nature of information to
be processed makes it imperative that the institutions that
choose the instruments of regulation, as well as operationalize
them, have the right design and governance.
GOVERNANCE STRUCTURES: LEGISLATURE,
EXECUTIVE, AND JUDICIARY
In all the cases discussed above, it can be discerned that in
choosing and implementing an efficient instrument the
regulator needs to process a variety of different information.
Such assessment includes the distribution of benefits and
costs from the public utility over the target population, the
nature of technology and its distribution over the producers,
and the structure and implementation of contracts between
producers, resource owners and final consumers. Thus, the
regulator must do on a smaller scale what the state is
expected to do in aggregate for all public policy. Thus, even
though it may not be openly apparent, the problems of
regulatory design mirror the concerns of constitutional
governance, albeit on a smaller scale. One can take a cue
from this and first try to articulate the kind of information
that each institution—the legislature, the executive, and the
judiciary—is equipped to process.
To make decisions that explicitly or implicitly affect the
distribution of resources, the legislature, in ideal terms, is
structured to capture the preferences of the voting
population. The executive, largely organized as a hierarchical
system, executes the will of the legislature. To implement
this, the executive processes data by drawing upon scientific,
epidemiological, and statistical study. The executive can be
seen as a hierarchical expert body that makes a number of
technical decisions in the face of incomplete information.
The judiciary resolves disputes keeping in mind procedural,
statutory, and constitutional limitations. Since judicial
decisions have to be perforce fair, judicial information is
gathered from contesting parties in accordance with the
stipulated rules of evidence and procedure. The adjudicating
authority sorts out conflicting evidence to come up with a
decision, where this decision is made under conditions of
asymmetric information.
The specialized information processing abilities of each
institution is starkly encapsulated in the doctrine of separation
of powers. The doctrine of separation of powers can be
viewed as a device that encourages transactional efficiency
by delegating tasks to institutions in accordance with their
ability to process unique categories of information. A heuristic
elucidation of this is possible by considering a problem that
surrounds the recent decision of the Supreme Court of
India requiring all commercial vehicles in Delhi to convert
to compressed natural gas (CNG) fuel to lower pollution
levels.6 However, this decision has not been without
controversy as it appears that mandatory conversion to
CNG by all vehicles is not necessarily the most efficient way
to bring down emission levels. Other options could have
been considered such as changing the composition of diesel
or eliminating fuel price distortions that flow from the
system of administered prices and so on. The decision on
the appropriate technology should have ideally been made
by the executive using a body of experts, which would be
in a position to take into account all relevant scientific and
statistical data, and such decisions need to be flexible to
changes in technology and external conditions. Since a
court is structured to make an assessment on competing
claims, where contesting parties provide relevant information,
it is difficult for the court to make such decisions or alter
them expeditiously. This case illustrates the point that if the
doctrine of separation of powers is violated by one of the
institutions breaching its bounds and taking on the task of
another, certain social costs will emerge because each
institution is built to best process only a certain category
of information. The importance of the doctrine of separation
of powers, among other things, lies in encouraging
transactional efficiency. Admittedly, the analysis of this case
is inherently far more complex because the Supreme Court
had to take recourse to such extreme action because of
endemic executive failure. A similar class of failure can be
seen in the widespread and persistent opposition to large
infrastructure projects. This opposition arises because the
legislature, for a variety of reasons of electoral failure, has
not succeeded in giving adequate voice and transparency to
the project effected people. In these cases, as well, there is
a tendency to turn to the courts for remedy.7 While it is
6
This refers to the interim orders dated 28 July 1998 and 22
September 1998 that have followed from Writ Petition (Civil) No.
13029/1985 put into the Suprme Court by M.C. Mehta. Also see
M.C. Mehta vs. Union of India (2000) 9 SCC 519.
7 The recent judicial intervention on the Narmada dam––Narmada
Bachao Andolan vs. Union of India (2000) 10 SCC 664––is a case
difficult here to detail all the sources of pervasive executive
or legislative failure that characterize Indian governance, the
absence of adequate separation of powers in India can
contribute to an explanation of persistent executive failure.
To pursue this chain of thought in relation to the
regulation of infrastructure activity, it may be noted that
the doctrine of separation of powers impacts on regulation
of infrastructure at two levels. One, regulation is embedded
in the wider configuration of separation of powers that
characterize the governance structure of a country. Two, the
design of regulation itself requires a mix of decisions that
fall in the rubric of these different types of institutions.
A comparison between the role that the doctrine of
separation of powers plays in influencing the design of
regulation in the United States of America and in
parliamentary democracies provides some interesting insights.
In operational terms, the United States of America exhibits
the most unadulterated form of separation of powers. As is
well known, in the US the three bodies, namely the
legislature, the executive, and the judiciary, are distinct from
each other. They are elected8 by different constituencies and
for different terms of office. In terms of regulation, this can
be translated into thinking of the legislature (Congress) as
the law making principal that delegates the responsibility
of implementing the law to the executive (federal
bureaucracy) which acts as an agent (McCubbins, Noll, and
Weingast 1987). As is the case with all principal-agent
relationships, the answer to the question as to whether the
agent will work in the interest of the principal crucially
depends on the techniques employed by the principal to
monitor and control the agent. There appear to be two
techniques whereby the US Congress ensures reasonable
compliance by the bureaucracy. One, the Congress directly
monitors administrative activity using extensive accounting
procedures and has the power to cut out funding to nonperforming agencies. Secondly, rule making by the
administration is controlled by an administrative procedure
referred to as ‘notice and comment’ rule making. This
procedure requires that before rules are announced, the
contents of potential rules are described to the public in an
accessible language and the views of all interested parties are
solicited. In addition to this, the administrative procedure
guarantees interested parties the right to participate in the
administrative process, and therefore the rules can be subject
to judicial review before being formalized. While judicial
review can stall the speed with which rules can be
in point. In this case the court, in our opinion, quite correctly held
for the doctrine of separation of powers. The point is that the court
is simply not equipped to assess distributional impacts.
8 The lower levels of the judiciary are in fact locally elected. The
senior judiciary is appointed on the recommendation of the executive
and approval of the Senate.
implemented, this process controls both arbitrary action by
the executive and forestalls systemic capture of the executive.
Overall, the separation of powers as manifest in the United
States of America acts to ensure that the intention of the
legislature is put into operation in a transparent manner.
In contrast, the separation of powers is much weaker
under parliamentary democracies. Under this system, the
party or the coalition of parties that wins the maximum
number of seats in Parliament forms the government. This
government in turn controls the administration through a
hierarchical set of commands originating from the governing
cabinet. Though ostensibly Parliament is the law maker, it
is the cabinet that not only sets much of the agenda of law
making but also implements the law. This continuum
between the workings of Parliament and the government
tends to blur the distinction between the legislature and the
executive. Under parliamentary systems, the control of
bureaucrats is achieved through informal channels and is
therefore not transparent. Typically, in this system courts do
not play much of a role in monitoring administrative action,
and when approached, largely confine themselves to ensuring
that bureaucrats respect statutory guidelines.9 If perchance
statutory guidelines are vague, courts tend not to intervene.
In this system, if interest groups want to direct rule making,
this has to be done by influencing party politicians and civil
servants informally and not on the basis of legal guarantees.
Since this influence is not transparent, the discretion of
politicians/civil servants often determines as to which interest
group will prevail. The absence of clear separation of power
under parliamentary democracies tends to have an adverse
impact on regulation design because administrative
procedures lack transparency.
It is beyond the scope of the discussion here to enter
into a debate on whether India needs to restructure away
from a parliamentary form of governance. Instead, the
point that has to be realized is that since the doctrine of
separation of powers under parliamentary democracies
operates weakly, this implies that under parliamentary
systems regulatory agencies function in an atmosphere where
procedures are not inherently structured to be transparent.
This lack of transparency raises the onus on the regulatory
agency to implement devices to promote voice and equity
decisions.
9 For example the Supreme Court has held that ‘The executive,
in running the administration of the country, should not be cowed
down and should be allowed to have full confidence in its own
existence so that its decision-making process is not, in any way,
affected. . . . If they were constantly under the fear or threat of being
proceeded against in a court of law for even the slightest of lapse
or under constant fear of exemplary damages being awarded against
them, they will develop a defensive attitude which would not be in
the interest of administration.’ Common Cause, A Registered Society
vs. Union of India (1999) 6 SCC 667.
The nature of the problem can be illustrated by invoking
the case of one of the centrepieces of regulation in postliberalization India––Telecom Regulatory Authority of India
(TRAI)10. In the face of radical technological changes in
telecommunications over the last 15 years, Indian policy
makers have been pressured into allowing private
participation into the sector. In this process, TRAI was set
up as a regulatory body, structured to perform both executive
and judicial functions.
Perusing through the Telecom Regulatory Authority of
India Act, it becomes evident that the Authority possesses
limited executive powers. In Chapter III of the Act, which
enumerates the powers and functions of the Authority,
Section 11(1)(a) lists the areas over which the Authority has
recommendatory powers. These include recommendations
on when new entrants should be invited, the terms and
conditions of licences, revocation of licences for noncompliance of terms and conditions, and efficient
management of available spectrum. In addition to this, the
Authority is supposed to recommend measures to encourage
competition, efficiency, and technological change. In the
same breath, in Section 11(d) of the Act it is explicitly stated
that while the central government might seek
recommendations from the Authority, to quote from the
Act ‘the recommendations of the Authority specified in the
clause (a) of this sub-section shall not be binding upon the
central government’. In Section 11(b) the ‘functions’ of the
Authority are listed, which include ensuring that terms and
conditions of licences are complied with, technical coordination across providers is maintained, quality of services
is controlled, and revenue sharing among providers is
monitored. Next, in Section 11(c), the Authority is given
fiat to levy fees and other charges which have been decided
as a part of the regulatory endeavour. From this description
of the powers and functions of the Authority, it is evident
that key decisions associated with entry, licensing, and
distribution of the spectrum frequency lie with the
government, while the TRAI maintains residual command
over co-ordinating certain practices. In this context, it is
ironical that the TRAI Act should state in clause 11(4) that
‘The Authority shall ensure transparency while exercising its
powers and discharging its functions’, while there is no
device to ensure that the decisions of the Central government
are transparent. It has been periodically pointed out that
notwithstanding the presence of TRAI, important decisions
on the telecom sector have originated from the Prime
Minister’s Office. (Jain 2001).
The TRAI, in its role as the Telecom Disputes Settlement
and Appellate Tribunal, also functions as a court that deals
with disputes that may arise between the licencor and
10
This structure has served as a model for a number of subsequent regulatory institutions.
licencee, between service providers and groups of consumers.
In addition to this, the Tribunal can also hear appeals
against decisions made by the TRAI. The Act grants these
possibilities, as long as the dispute does not come under the
purview of either the Monopolies and Restrictive Trade
Practices (MRTP) Act, the Consumer Protection Act, or the
Indian Telegraph Act. This clearly implies that while the
Tribunal might contain some skirmishes, the solution to
substantial issues surrounding the mitigation of risk and the
guarantee of rights have to be worked out either in other
courts or in the labyrinths of the concerned Ministries.
It has now become standard practice in India when
constructing regulatory institutions to include a wing that
acts as a court. Ostensibly, this is a part of a general trend,
that is encouraged because the civil courts are so
overwhelmingly clogged that it is felt that special courts/
tribunals will speed up the required justice. Thus for example,
Sections 33(1) and (2) of the Gujarat Gas (Regulation of
Transmission, Supply and Distribution) Act 2001 seeks to
exclude jurisdiction of all civil courts from matters in this
area.11 This fragmentation of the court system might ‘speed
up’ some cases, but surely lead to inefficiencies that are
generated by ambiguous jurisdictions. The key problem
with such fragmentation is that it inhibits the development
of unified legal doctrines, for instance in the important area
of contract law.12 It has been suggested that even though
Britain follows a parliamentary scheme of governance, the
success of some of her endeavours to privatize infrastructure
activities can be attributed to a well developed system of
contract law (Spiller and Vogelsang 1996). A well developed
contract law, even in the presence of opaque administrative
action and absence of formal mechanisms to capture different
voices, can restrain regulatory discretion and provide private
investors with adequate assurances against opportunistic
behaviour. Keeping this kind of view in mind, the most
expeditious way of constructing good governance in India might
be to reform the legal system such that it upholds the basic
common law tradition of enforcing contracts.
11
There is a tendency in such legislation to seek to exclude the
jurisdiction of not only the lower courts but also that of the senior
judiciary as well. The Supreme Court in the L. Chandra Kumar case
((1997) 3 SCC 261) has stipulated the structure and role of
independent tribunals.
12 In this connection, it is useful to point out the approach
followed by the Report of the Advisory Group on Bankruptcy Law
(RBI 2001). The committee eschewed the temptation to set up an
independent tribunal and instead opted to recommend a special
bench of the high court to deal with these matters. To enhance
efficiency, it was suggested that this bench be equipped with its own
distinct procedural requirements, as well as a special executive arm
through the notion of a bankruptcy trustee. The trustee will bring
the necessary technical and managerial skill to implement an effective
restructuring or liquidation package.
As is evident from the TRAI example, regulation of
infrastructure activity is problematic because governance
structures force the difficulties of over-and under-delegation
onto the regulatory process. The regulatory agency faces
under-delegation because it possesses only the weak power
of suggesting recommendations on key issues––new entrants,
licences, and distribution of the frequency spectrum.
Concomitantly, these central issues are also in the purview
of the executive branch of the government, which makes
these decisions in a non-transparent manner. The agency is
also burdened with simultaneous over-delegation in its
capacity as a judicial body. The system over-delegates by
breaking up the court system, and prevents unified principles
of contract from emerging. Further, there is a persistent
uneasiness in the air, since such delegation conflicts even
with the limited separation of powers guaranteed by the
Constitution and is open to judicial challenges.
If indeed the governance structure can be described in
this manner, this has had a negative consequence on the
ability of a liberalized economy to deliver in India. It can
be concluded that at least three changes in orientation are
required to usher in effective regulation. First, it is essential
that the regulator either directly or indirectly provides for
effective voice and equity in its decision making processes.
Two, it is also important that the regulatory process provide
for adequate protection of rights through a transparent
process of judicial review. Finally, it is imperative to
encompass an efficient process for executive decisionmaking through a set of incentive compatible hierarchies.
To do this correctly will require us to be sensitive to the
delegation of powers under the Constitution and seek to
rectify institutional failures in the basic constitutional
institutions through a promotion of transparency and
voice.
4.2 HOW PUBLIC FEEDBACK AIDS PUBLIC ACCOUNTABILITY
Samuel Paul • Gopakumar K.
THE DISABLING ENVIRONMENT
SERVICES
OF
PUBLIC
During 1996–7 central and state governments together spent
about Rs 3655 or 25 per cent of per capita income, on
providing public services (World Bank 1997); yet, most of
the available information on these services is generally limited
to expenditures incurred and gross measures of outcomes
such as literacy, production, and other physical indicators.
Beyond this information, from formal sources we know little
about the quality of services provided by the state. And
whatever little is known paints a disturbing picture. To
quote some figures, 60 per cent of families in India do not
have electricity at home; 40 per cent of Indians do not have
access to water at home; 53 per cent of children in India
suffer from malnutrition; 84 per cent of the population have
no access to sanitation, and 58 per cent of primary schools
have no safe drinking water (India Today 2000). And even
where these facilities exist, their quality could be very poor.
Most people hold government responsible for this dismal
state of public services. The utter callousness and lack of
accountability rampant in many public offices raises the
question: why are leaders in government unable to cleanse
the system? Indeed, there are many things that a government
can and should do to improve matters. But for a variety of
reasons discussed below, government service providers
continue to be unresponsive to, and often uninterested in,
the needs and problems of the public.
The Context of Public Service Delivery13
The state in India has traditionally been dominant in the
area of public services, and is often its sole provider. The
downside of this ‘monopoly power’ is that users of most
public services do not have the option to ‘exit’ from the
government supplier to another supplier. It also creates a
pronounced tendency on the part of the service providers
to withhold information from the customers and users,
thereby making it difficult for them to demand accountability.
Secondly, the absence of market competition has not
been compensated for by any other institutional mechanism
to ensure efficient service delivery. Traditional mechanisms,
such as public audit of government expenditure and legislative
oversight, focus only on a review of inputs. Expenditures
are audited to see whether proper procedures and norms
have been adhered to. While this is an aspect of accountability,
it does not tell us anything about how well the money was
spent. This is because very little attention is (or can be)
given to the outputs and outcomes of the inputs. The
problem is exacerbated by the difficulties in measuring
outputs and in monitoring field level activities. Legislative
oversight gets blunted by the vastness of the scope of services
and the lack of information available to the legislators. More
13
This section draws upon ideas articulated in a forthcoming
book by Samuel Paul, Holding the State to Account: Report Cards for
Responsive Governance.
disturbing is the collusion between service providers and
those responsible for monitoring their performance. The
internal working and decision making of public agencies
cannot easily be monitored or even observed by those outside
the system. The scope for the pursuit of parochial and selfserving interests and for corruption is considerable.
Thirdly, citizens are seldom able to engage in sustained
collective action to demand increased public accountability.
There is an implicit assumption that once people elect a
government, it is for the latter to enforce accountability on
all service providers. Perhaps, an even more important reason
for this attitude of citizens is that their motivation to engage
in collective action is usually weak. The fact that the severity
of problems concerning public services that people face
generally tends to vary from day to day and from household
to household implies that sustaining collective action is
difficult, even when a group is able to initiate action at some
point in time. Moreover, some people may not invest time
and energy for collective action, as they feel they could get
a ‘free ride’ from the success of the efforts of others in any
case. This is a major reason why the incentives for collective
action are weak, except in certain critical situations. This
is a general problem with collective action.
Fourthly, the legal framework of the country can be a
barrier to improved public accountability. Administrators
typically try to work within the framework of the laws and
regulations of their organizations. Accounts get audited
because a law requires them to do so. Investments are made
according to the laws and regulations governing the
organization. If the law is silent on the standards and other
attributes of services, as it is in India, provider agencies are
likely to pay less attention to them.14
Why are improvements in public service and ensuring
accountability to consumers and citizens not priorities of
those in power, despite the latter’s claims to the contrary?
A good place to start is with the planning function in the
government of India. These are the focal points for where
the objectives of development, and resource allocation and
management, are articulated and decided. However, the real
problem is that the planners’ influence, if any, is only on
investments, and not necessarily on outputs. The government
has typically seen its task to lie in mobilizing resources for
investment. Rakesh Mohan (2000) has summed up the
situation well: ‘The existing planning system has essentially
resulted in the central government acting as a giant financial
intermediary, borrowing from the public in different ways
to finance plan expenditure at both the central and state
levels. In this system there is no connection between the
viability of projects and their financing costs. The
consequence has been that returns from these investments
have been consistently low’.
14
In the United States and the United Kingdom, the law itself
lays down the standards for electricity supply.
A Way Out of the Impasse?
Could the market have done a better job of producing and
delivering public services than the state? Champions of
privatization will certainly answer this question in the
affirmative. After all, privatization has worked well in many
developing and developed countries. However, privatization
does not mean that government has nothing to do with
these services. It will be necessary for government and its
specialized regulatory agencies to specify the standards and
conditions of the services, regulate tariffs and related financial
matters, and monitor the service providers’ performance. As
India undergoes privatization, if functions such as standard
setting, pricing, and supervision are not well-designed by
the state, ‘reforms’ may result in the creation of a new set
of private sector monopolies whose performance is even
worse than that of the public sector. With the right kind
of initiatives from the government, however, the scope for
improvement is large.
More importantly, some services would necessarily have
to be provided by the state—law and order, for example.
Similarly, basic education, preventive health, maintenance
of certain common facilities, pollution control, etc. are not
tasks that can be left wholly to market forces. At a minimum,
the government has to play a regulatory role and monitor
standards in these services. Getting the government to deliver
these services more responsively to the people will be a
continuing challenge in any society.
While the role of the market has been discussed a great
deal, that of civil society as a force for ensuring better
services has received little attention. Civil society institutions
have played an important role in mobilizing public opinion
in the reform, the state, and its institutions in ex-Soviet
countries, South Africa, and Eastern Europe. Civil society
here refers not only to formal entities like the media or
professional associations, but also to the informal networks
of people from different walks of life. Powerful movements
involving civil society have surfaced in response to major
crises of governance in several countries. The ‘people power’
revolutions of the Philippines that led to the overthrow of
two corrupt presidents are an inspiring example. Similar
civil society movements in Indonesia and Iran also achieved
significant results.
Organized sections of society such as labour and industry
associations have always exerted pressure for or against
major policies. But on the issue of public services there
is no natural organization of citizens. They are after all the
primary stakeholders. Yet it is citizens and their groups
who can and should have exercised the pressure on
government. But their ‘voice’ is seldom well-orchestrated
or heard. Occasional protests in times of crisis are usually
not sustained.
One promising approach is for the public to give their
assessment of services to the public agencies concerned and
act as watchdogs in the process. Campaigns and dialogues
would be more purposive and meaningful when people are
armed with information that is well focused and pertinent
to a given situation. Civil society institutions can potentially
play an active role in assembling and using such information
to stimulate public agencies to improve their services, and
also in drawing people together.
EXPLORING THE POTENCY
REPORT CARDS
OF
‘VOICE’
THROUGH
What are the practical ways to use ‘voice and participation’
to change the highly disabling ambience of public service
delivery? (Paul 1998) When competition is absent, as in the
case of most public goods, popular voice can reduce
information asymmetries, which can challenge service
providers to perform better and lower transaction costs (Paul
1995a). When low incentives and weak monitoring combine
to produce inefficient public services, voice mechanisms can
inform public officials of the problems and act as a kind of
pressure for improvements (Dreze and Sen 1999).
Report Cards on Public Utilities, pioneered by Public
Affairs Centre (PAC)—a non-profit society based in
Bangalore, India— is now widely recognized as a powerful
voice mechanism. It builds on the notion that feedback has
a value to both the actor and the affected. ‘Report Cards’
provide a simple and widely replicable tool for improving
transparency and public accountability. Report Cards
compiled from citizens’ responses to structured queries can
objectively assess both qualitative and quantitative dimensions
of various public services. This Report Card can be used to
stimulate collective action by citizens and provide leaders
with an opportunity to design reforms and bring in a strategic
reorientation (Paul 1998). Experiences with Report Cards,
both national and international, have amply demonstrated
their potential for demanding more public accountability
and providing a credible database to facilitate proactive civil
society responses.
What are Report Cards?
The Report Card methodology presents a simple but highly
flexible approach for organizing public feedback (Gopakumar
1997). This methodology can be used to:
• Generate citizen feedback on the degree of satisfaction
with the services provided.
• Catalyze citizens to adopt proactive stances by
demanding more accountability, accessibility, and
responsiveness from the service providers.
• Serve as a diagnostic tool for service providers, external
consultants, and analysts/researchers to facilitate effective
prognosis and therapy.
• Encourage public agencies to adopt and promote
citizen friendly practices, design performance standards,
and facilitate transparency in operations.
Stages in a Report Card Survey15
•
•
•
•
•
•
•
Identifying issues through focus group discussions.
Designing the instruments of survey.
Identifying the sample for the survey.
Conducting the survey by an independent agency.
Collecting qualitative data.
Placing the results in the public domain.
Conducting advocacy and establishing partnerships.
PAC’s Report Cards were first applied in the urban services
sector. But the approach is equally relevant in many other
infrastructure sectors.
EVALUATING AND BENCHMARKING CIVIL SERVICES
IN BANGALORE
The First Report Card Study of public services in Bangalore
(1993) involved a random sample survey of city households
(Paul 1995b). The residential areas of the city were stratified
by the age of the locality, and six areas were picked at
random from among the old and established, the new, and
the intermediate areas. Within each area, sample households
were selected, using random numbers. Care was taken to
include households across income groups. Samples were
sufficiently large to give reliable results. Questionnaires were
administered to the selected households, provided they had
an interaction with one or more public agencies in the
preceding six months.
The survey attempts to cover three key questions. How
much does it cost the user to avail the services? What are
the costs borne by a non-user in having to do without it?
What is the level of satisfaction with specific dimensions/
features of the service?
A seven-point scale suitably validated is used to score the
degree of satisfaction.
Poor Scores of Public Services
The overall satisfaction with public agencies (general
households) is shown in Table 4.2.1 in which, ‘satisfied’
refers to a rating of six and seven and ‘dissatisfied’ refers to
one and two. In between is a ‘zone of ambivalence’, which
indicates that the respondent is not clear on his/her
preferences. The table shows that none of the eight service
15
See Upp (1995).
Table 4.2.1
Overall Satisfaction with Public Agencies in Bangalore (General Households), 1993
Agency/Service
Telephones
Municipal Corporation
Electricity
Water
Health
Regional Transport Office
Development Authority
Public sector Banks
Average rating
Percentage of
users satisfied
3.6
2.9
3.5
3.0
4.3
3.5
2.5
4.0
Percentage of
users dissatisfied
9
5
6
4
25
1
1
20
28
49
31
46
19
36
65
26
(*Higher is better)
providers in Bangalore receives a satisfactory score from the
respondents. Even the best average scores indicated (hospitals,
4.3; banks, 4.0) do not go beyond the zone of ambivalence,
that is, 3.0–5.0. Second, only one out of 100 respondents
in Bangalore considers the Bangalore Development Agency’s
(BDA) services as satisfactory. Only four, five, and six persons
out of 100 think that Bangalore Water and Sewerage Services
Board (BWSSB), Bangalore Metropolitan Corporation
(BMC), and Karnataka Electricity Board (KEB), respectively,
are performing satisfactorily.
The study also highlighted the phenomenon of corruption
(see Table 4.2.2). Taking all transactions with all eight
services, 14 per cent of the respondents in Bangalore paid
speed money (a euphemism for bribes) to the staff, either
directly or through agents. There is evidence of a higher
concentration of speed money in some agencies than in
others. Thus, every third person dealing with the BDA and
Regional Transport Office (RTO) and every fourth person
dealing with the BMC paid bribes. Respondents also reported
that in 50 per cent of the cases, officials demanded bribes,
thereby emphasizing the extortionary nature of corruption.
The findings of the study elicited wide interest. A leading
daily, the Times of India, started a weekly feature with a
graphic depiction of each one of the findings over a period.
The feature continued for about two months, bringing the
concept of Report Cards to the public attention. Though
the responses from most agency heads and senior government
officials were lukewarm, the BDA, which was rated the
worst across all qualitative and quantitative dimensions of
service delivery, responded with a request for a follow-up
survey. This resulted in a unique collaboration wherein a
public service agency requested an external research group
to provide assistance in getting feedback on various
dimensions of service delivery.
The second study sought to address some pertinent
questions. Are the customers of BDA satisfied with the
quality of service? Is the phenomenon of corruption as
rampant as was brought out by the first Report Card? What
are the perceptible areas of weakness in the functioning of
the BDA? Would the public be willing to participate in the
process of improving the BDA’s services? To better
understand the situation, the functional constraints
experienced by the officials of BDA were also assessed
through interactive discussions. Following the study, a series
of training programmes were organized for the staff of the
BDA.
Table 4.2.2
Bribes Paid to Various Agencies in Bangalore, 1993
Agency/Service
Electricity Board
Water Board
City Corporation
Hospitals
Telephones
Development Authority
Average
Proportion in sample claiming
to have paid a bribe (per cent)
11
12
21
17
33
4
33
14
Average payment
per transaction (Rs)
206
275
656
396
648
110
1850
857
Table 4.2.3
Satisfaction of Users in Interactions with Public Agencies/Service Providers in Bangalore
Service
Per cent satisfied
Bangalore Water Supply and Sewerage Board
Bangalore Telephones
Public Hospitals
Bangalore Development Authority
Per cent dissatisfied
1994
1999
4
6
5
9
14
25
1
10
13
25
30
18
30
8
The most important gain of the survey and the
intervention that followed was the public awareness created
by the Report Card on the need for active citizen participation
in order to improve the quality of civic services. At the time
the Report Card was undertaken, very few active residents’
groups existed in Bangalore. Today, there are over one
hundred such groups who are networked with shared
activities among them (Paul 1998: p 14).
Apart from bringing out the levels of satisfaction or
dissatisfaction with the services, other aspects like staff
behaviour, incidence of problems and resolution were covered.
Most importantly, the study ‘measured’ something as abstract
as ‘corruption’. The additional problems of the urban poor
could also be brought out.
After a gap of more than five years, a second Report Card
on the public services of Bangalore was prepared by PAC
in 1999 (Paul and Sekhar 1999). The main objective of this
exercise was to assess whether the services had improved or
worsened over this period and in what respects. Table 4.2.3
brings out the changes over the five years. Table 4.2.4
similarly brings out the aspect of bribery in the two years
of the surveys.
Table 4.2.3 shows that during the five-year period,
satisfaction has increased across the board. The BDA and
1994
1999
46
31
49
28
36
19
65
31
38
26
11
26
11
47
the RTO though are perhaps the two exceptions where there
has been little change. Table 4.2.4 brings to light some
intriguing findings. Alongside an increase in satisfaction,
there has been a concomitant rise in incidences of corruption
in all agencies, with the exception of the BWSSB, Karnataka
Power Transmission Corporation Ltd. or KPTCL, and the
BDA. Even more disheartening is the fact that the average
amount paid as bribes has gone up dramatically (significantly
more than the consumer price index) in four out of 10
agencies.
DEVELOPING WARD BASED INDICATORS
MUMBAI
IN
Mumbai is estimated to have a population of about 13
million, of which about 5.5 million live in slums. To assess
the spread and impact of critical public services in the slum
areas, PAC in collaboration with the Rationing Kruti Samiti
(RKS)—an umbrella organization of 38 non-governmental
organizations (NGOs) and grassroot organizations in
Mumbai—organized a Report Card Study in 1998
(Balakrishnan and Sekhar 1998). The study probed two
pertinent themes: (1) The overall availability, usage, and
satisfaction/dissatisfaction with public services; (2) In-depth
Table 4.2.4
Bribes Paid to Various Agencies in Bangalore, 1994 and 1999
Agency
Bangalore Water Supply and Sewerage Board
Telephones
Public Hospitals
Bangalore Development Authority
Proportion in sample claiming
to have paid a bribe (per cent)
Average payment per
transaction in (Rs)
1994
1999
1994
1999
12
11
21
4
33
17
33
35
18
52
26
57
43
78
275
206
656
110
648
396
1850
584
929
3759
245
637
500
7690
Table 4.2.5
Availability, Usage and Satisfaction with Public Services in Mumbai, (per cent), 1998
Public Services
Public Toilets
Drinking Water
Garbage Clearance
Domestic Lighting
Ration Shops
High School
Health Services
Availability
Usage
Satisfied
Dissatisfied
92
97
85
97
99
98
96
92
97
84
97
97
96
96
21
59
50
86
32
91
92
73
38
37
10
66
05
08
Note: Numbers are percent of surveyed.
study of problems with services where high levels of
dissatisfaction was experienced, with a view to overcome
these. The salient findings are summarized in Tables 4.2.5
and 4.2.6. Contrary to popular belief, the problem here is
not generally inadequate availability of services. Table 4.2.5
shows that civic facilities are available and much used. What
matters are the other factors brought out in Table 4.2.6.
Based on the findings generated by the study, a one-day
workshop on Developing Partnerships for Action towards
a Better Mumbai was organized by PAC and RKS with over
60 participants, including concerned officials from the
Municipal Corporation of Greater Mumbai, the Department
of Civil Supplies and the Police, representatives of NGOs
and community-based organizations or CBOs, and the Press.
A major achievement of this meeting was the interest
expressed by local government authorities to explore the
possibility of citizen–state interactive forums to address local
governance issues. The meeting also suggested that on a
pilot scale, intervention ought to be planned immediately
in a selected ward to improve the interface between local
officials and citizens groups for better management of the
ward. Accordingly, a project called Watch Your Ward Program
(WARP) was initiated in 10 wards in Mumbai. Voluntary
associations in these wards carried out the survey and the
process of drawing up the results is on. A local NGO,
Apnalaya, was involved in this programme.
BUSINESS ENVIRONMENT
IN
KARNATAKA
According to the government of Karnataka, 104 large-scale
industrial investment proposals worth a total of over Rs.
68,000 crores and 1014 medium-scale projects with a
proposed investment of Rs. 9600 crores have come to the
state during the eight-year period 1991–8. However, an
Table 4.2.6
Reasons for Dissatisfaction among Urban Poor in Mumbai with regard to Certain Services, 1998
Agency/Service
Reasons for dissatisfaction (per cent of Urban Poor)
Ration Shops
•
•
•
•
•
Poor quality of service (82 per cent)
Insufficiency of allotted quantity (95 per cent)
Poor quality of the product (92 per cent)
Long waiting time (average of 3 hours per visit)
Non availability of required commodities (88 per cent)
Drinking Water
•
•
•
•
•
Distance to the tap (average of 70 meters)
Inadequate quantity (82 per cent)
Waiting time was almost 2 hrs on average
Frequent failure of water supply (65 per cent)
Bad quality of water (33 per cent)
Public Toilets
•
•
•
•
Lack of water in toilets (11 per cent reported water available!)
Long wait in queues
Long distance to toilets (average distance is 100 meters)
Needed alternative arrangements (56 per cent of the time)
Garbage Clearance
•
•
•
Distance to the disposal spot (average of 50 meters)
Inadequacy space for garbage disposal (90 per cent of responses)
Irregular clearance (no clearance over a week in 22 per cent of areas)
independent assessment carried out by PAC in June 2000
showed that the actual implementation rates are abysmally
low. Only 5 per cent of the large-scale project proposals and
38 per cent of the medium-scale proposals have been
implemented. An exploratory survey revealed an interesting
spectrum of disabling factors (Paul et al. 2000).
Almost 60 per cent of the investors in the large-scale
sector identified corruption as the most disabling factor in
Karnataka. Four out of 10 respondents have given a similar
negative rating to the state of infrastructure. In contrast,
only three out of 10 respondents have expressed intense
dissatisfaction with taxation and the government–investor
interface (see Table 4.2.7). Similarly, medium-scale investors
cited corruption, power, roads, and their interface with
government as debilitating factors.
CREATING PUBLIC AWARENESS
The media has played a major role in creating awareness and
sensitizing the public. The Report Card findings are generally
publicized prominently by major newspapers. Agency specific
findings and the novelty of the method used were in part
responsible for this response. And, of course, news about
corruption always makes good copy.
Seminars and meetings are also organized in connection
with the release of Report Card findings. Typically, these
involve local activists in civic affairs, representatives of
residents’ associations, and NGOs interested in the problems
of the urban poor. The second Report Card for Bangalore
was presented at a public meeting in which the CEOs of
major public agencies participated and spoke about the
various proposed reform measures.
STIMULATING AGENCY REFORMS
Report Card studies brought to light a wide panoply of
issues, both quantitative and qualitative, and sent strong
signals to public service providers. The use of a rating scale
permitted the respondents to quantify the extent of their
Table 4.2.7
Ranking of Disabling Factors in Karnataka’s Industrial
Environment (as expressed by large scale investors)
Rating1
Factor
Corruption
Infrastructure
Taxation
Interface with
Government
3.54
3.20
3.03
2.64
Roads
Water
Power
Telecommunications
Taxation
Interactions with Government
Corruption
Manpower Availability
Per cent dissatisfied
50.7
44.0
68.0
29.3
49.3
53.3
65.3
21.3
58
41
33
20
per
per
per
per
cent
cent
cent
cent
Note: 1 Respondents were asked to evaluate the above factors on
a scale of 1–5 where 1 was the best and 5 the worst. Ratings
indicate average of the scores of all respondents.
2 Proportion of respondents giving 4 or 5 to a factor on the scale
satisfaction or dissatisfaction with the service of an agency.
The scale was used not only for an overall assessment of an
agency, but also for different dimensions of its service. The
inter-agency comparisons with respect to public satisfaction
and corruption that a Report Card permits also created a
platform to stimulate agency interest in addressing the
underlying problems. Quantification and rankings demand
attention in a way that anecdotes do not. They focus attention
on specific agencies and services, that can be embarrassing
to those in charge, especially because of the adverse publicity
involved.
STRENGTHENING CIVIL SOCIETY INITIATIVES
The findings and information provided by Report Cards
have largely succeeded in catalyzing citizens to take proactive
and creative steps. More citizens are involved today as active
partners and participants. The Swabhimana Initiative in
Bangalore, launched in the wake of the release of the Report
Card findings, is one such example. The Initiative, mooted
by the then Commissioner of Bangalore City Corporation,
is a unique state–citizen forum to improve the quality of
civic life in the city. This forum not only experiments with
Table 4.2.8
Satisfaction of Medium Scale Investors in Karnataka, 1999
Environmental Factor
Intensity of
dissatisfaction2
Per cent satisfied
46.7
46.7
18.7
61.3
18.7
30.7
6.7
72.0
Box 4.2.1
Making an Informed Choice
The Public Affairs Centre’s benchmark survey of the industrial environment in Karnataka in 2000 has been acknowledged as a
key input in bringing about drastic reform measures by the government in the form of the Karnataka Industries [Simplification
of Procedures and Documentation] Act/Rule-2001. Building on to the findings revealed by the survey on the interface with the
various agencies, the new Act has amended many outdated rules and regulations that existed as major inhibiting factors.
In a unique experiment of its kind, citizens’ groups in Bangalore collected a set of crucial information from the candidates st anding
for elections and then disseminated the comparative database widely to enable voters to make an informed choice. Data collected
included candidates’ age, educational qualifications, occupation, value of assets, criminal records (if any), compliance with o ther
legal obligations, and priorities for the ward. This exercise was conducted jointly by PAC and Swabhimana.
CITIZENS’ MONITORING
OF
ROAD WORKS
To enable interested groups and individuals to monitor the quality of roads, PAC in association with the Department of Science
& Technology, government of Karnataka has brought out a ‘Citizens’ Guide on Monitoring the Quality of Road Works’. This ready
reckoner charts out easy and inexpensive procedures and methods to effectively monitor the quality of roads. An interesting outcome
of this has been a Report Card on the roads in Bangalore, based on the Citizens’ Guide, prepared by students in the age group
12–14 years1. Some of its findings are as follows: On an average, on a 300 metre stretch of footpath, pedestrians have to negotiate
73 obstructions, including illegal encroachments and parked vehicles; 65 per cent of the roads had potholes, 61 per cent of the
roads had developed cracks, and 65 per cent were uneven. The findings were then presented to the Commissioner of the city
corporation.
1Times
of India (2001), ‘Who says the juniors aren’t interested?’, Bangalore, 15 July.
new approaches to solving problems, but also disseminates
information widely and performs a watchdog function.
Most of the Report Card studies conducted in various
cities by PAC have been done in close association with
public interest groups and NGOs. For these organizations,
the methodology has provided a strong, coherent, and
credible database, highlighting areas of concern that help
them to strategize their options and sharpen their skills in
advocacy. In Chennai, The Catalyst Trust, a not-for-profit
society, collaborated with PAC in conducting a Citizens’
Audit of Public Services in Rural Tamil Nadu; this exercise
benchmarked the impact of charters and policy statements
on three critical civic services.
DEMOCRATIC RESPONSIVENESS
Report Cards draw attention to a plethora of qualitative
dimensions like satisfaction, expectation on quality and the
like, which are missing from the usual statistics on service
delivery. Report Cards may also stimulate political
responsiveness: Democracy is not just about elections, but
also about what happens in between them. In Bangalore,
the Chief Minister’s programme of monitoring public
agencies in the city though an innovative forum called
‘Bangalore Agenda Task Force’ uses Report Cards repeatedly
to assess the progress of proposed reforms and activities.
Findings from these exercises are presented to the city mayor
and other elected functionaries and also widely disseminated
through the media.
CRITICAL SUCCESS FACTORS
The factors that facilitate successful use of the methodology
are:
•
Felt need for an objective and credible information:
All effective advocacy interventions have been launched
from a need to have a credible database. Most partner
organizations need the strength of numbers to make their
voice more focused and amplified.
• Focus on institutions: Report Cards chart out feedback
on services and not on individuals. The emphasis is on
creating neutral and scientific institutional databases on
organizations and their activities, and to pave the way for
systemic reforms, and not ‘band-aid solutions’ like transfer
of CEOs of poorly rated agencies. This helps to make
advocacy less confrontational.
• Presence of a local champion: Perhaps the most
critical requirement is the need for local stakeholders like
NGOs and citizen groups who will own the database,
contextualize the findings, and strategize local advocacy
actions.
• Emphasis on experiential and not perceptional data:
Report Cards are not opinion polls. They represent codified
experiences of users of services. This ‘user’ dimension gives
the findings more weight and credibility.
• Conducted by independent and professionally
competent group: The credibility of the local champion has
to be impeccable for the results to be treated seriously.
CONCLUSION
There is a growing awareness among decision makers in
government, academia, and advocacy groups on the potential
of public feedback for influencing the policy environment
and also creating empowering initiatives to make the state
more responsive and accountable. In the public sector today,
there is a slow but definite shift in focus to the consumer
and citizen. The involvement of the civil society is a necessary
corollary. What this means is that results on the ground and
sustainability are now the acid tests of public investments
and state performance. Accessibility, effectiveness, and
responsiveness have become the key dimensions of
performance of public organizations. Public feedback
therefore becomes a powerful instrument to ensure public
accountability. Experiments with Report Cards confirm the
value of this public feedback mechanism, both to enable
citizens to signal service providers about their performance
and to stimulate the latter to respond to these signals. The
experiences also reinforce the case for benchmarking
qualitative and quantitative dimensions over time.
The use of public feedback can act as a proxy for the
pressure of competition in a context where customers have
few choices. Report Cards also provide strong signals to
service providers to institutionalize the concept of public
feedback as part of their monitoring functions.
4.3 THE LEGAL FRAMEWORK FOR PRIVATE PARTICIPATION
Piyush Joshi • R.V. Anuradha
Law is the basic instrument that defines rights and obligations.
The legal framework governing a particular infrastructure
sector would, therefore, determine the extent and feasibility
of private participation of facilities in that particular sector.
The term ‘legal framework’, for the purposes of this paper
means the statutes, rules, regulations, and administrative
orders governing a particular infrastructure sector.
Besides defining the feasibility, the legal framework also
affects the economic viability of private participation in an
infrastructure project. In fact, in no other activity is the
close interaction between law and economics so evident and
clear as it is in relation to private participation in
infrastructure projects.
The legal framework is also the primary source of risk
distribution in infrastructure projects. It provides the basic
framework within which the parties determine the manner
in which the various risks associated with a project are
distributed, managed, and mitigated.
CONSTITUTIONAL PROVISIONS
The Constitutional framework in India does not permit for
a single law governing grant of rights for development of
projects in all the various infrastructure sectors. The Seventh
Schedule to the Constitution of India distributes legislative
jurisdiction over infrastructure sectors between the Union
and the state.16 Further, the executive powers of the Union
16 The Constitution of India, vide Chapter I of Part XI, and in
particular Article 246 read with the Seventh Schedule, specifies the
manner of distribution of the legislative powers over various subjects
including infrastructure sectors and taxation. For a more detailed
discussion on this aspect, see Joshi, (2001).
executive extend to the matters with respect to which the
Union Parliament has powers to make laws and similarly
the executive powers of the state executive extend to the
matters with respect to which the concerned state legislature
has powers to make laws.17 Though presence of sector
specific laws supporting private participation in a given
infrastructure sector provide a more secure basis for private
participation, the absence of a sector specific law per se does
not preclude the possibility of private participation in the
particular sector.
If the relevant legislative body has not enacted a law
governing a particular sector that is within its jurisdiction,
as defined by the Seventh Schedule of the Constitution,
then the corresponding executive authority may allow for
private participation in such a sector. Private participation
based solely on the exercise of executive authority is, however,
exposed to a greater degree of political and legal risk since
an exercise of executive authority is always subject to a
subsequent exercise of legislative authority. It also carries a
higher risk of being challenged in the courts of law as being
an unguided, arbitrary, and unreasonable exercise of
discretion. Issues related to the extent of executive authority
may also be raised. If such executive power is exercised, then
it is best done through formulation of a clear policy
framework for the sectors in which private participation is
being allowed.
A good example of an infrastructure sector not having
a specific law governing it is water supply and sewage
treatment. The power to regulate ‘water supply’ is vested
with the state legislature. The exceptions to the jurisdiction
17
See Articles 73 and 162, Constitution of India.
of the state legislature, under the Constitution of India, in
relation to ‘water supply’ are: (i) regulation of development
of interstate rivers to the extent such control of development
has been declared by law to vest with the Union; (ii) law
relating to adjudication of disputes relating to interstate
rivers and; (iii) territorial waters.
A number of states do not have a specific law regulating
water supply for domestic and industrial use. Usually water
supply within a municipal area is governed by the law of
that particular state regulating the formation, powers, and
functions of the municipal bodies within the state. If however,
a water supply project is established in an area outside the
jurisdiction of the municipal bodies, then no specific law
would be governing it. In such circumstances, the executive
power of the state can be exercised to formulate policies,
guidelines, and framework regulating such projects.
Executive power can be exercised to formulate clear
policies and guidelines even in the presence of specific
legislation as long as it is within the framework provided
by the law. The two National Telecom Policies (the National
Telecom Policy, 1994 and the New Telecom Policy, 1999)
are examples of exercise of executive power to provide for
the basis for the grant of licences, under the Telegraph Act,
1885, to private entities for providing various telecom
services.
ESSENTIAL FEATURES
OF THE
LEGAL FRAMEWORK
Apart from the statutory framework governing private
participation discussed above, the contractual documentation
for any project is another aspect that would constitute the
‘legal framework’ governing a particular project. The
statutory framework generally governs a particular sector,
and is very rarely project specific. Its aim is usually to
establish a suitable basis for the project specific contractual
framework to be established. Statutory framework comprises
of the laws, rules, regulations, order etc. enacted by the
relevant authorities, whereas the contractual framework
comprises of the project specific contracts entered among
the participants within the framework formulated by the
statutory framework. The contractual framework will reflect
the negotiated and agreed upon basis of controlling the
interests of the various participants.
The following sections shall briefly analyse the key features
of the statutory and contractual framework that can facilitate
private participation.
Comprehensiveness of Rights
Whatever be the structure for private participation that is
adopted in relation to a particular infrastructure sector, it
would be imperative that all the rights required by the
private participant to implement the project within the
framework of the given structure be granted to the private
participant.
For example, in the case of BOOT (Build, Own, Operate
and Transfer) some of the critical rights that need to be
vested with the private developer are:
• Right to enable it to develop, design, construct, own,
operate, manage, and maintain the infrastructure facility.
• Right to enable it to commercially utilize the
infrastructure facility, including the right to determine,
collect, retain, and appropriate tariff from the users of the
facility.
• Right to enable it to restrict access to the facility or
suspend the supply of service (as the case may be) to
defaulters.
• Right to enable it to create an enforceable and valid
security interest in favour of the lenders over assets and
revenue streams.
Certainty and Continuity
Certainty of the rights vested and of the legal framework
governing the project leads to greater comfort relating to
the scope of the private participation and enforcement of
rights in relation thereto. The continuity of the very same
rights over the term of the project is also of critical importance
for a private participant.
The challenge is in drafting laws that are able to provide
certainty and at the same time enough flexibility to
accommodate any change that may be necessary to regulate
the sector.
Risks, Risk Allocation, and Risk Management
Success of private participation in a project and the ability
of a project to be financed on the basis of project finance
(rather than asset or balance sheet finance) depends upon
an appropriate distribution and management of risks
associated with the project. Theoretically, risks should be
allocated to the participant that is best able to either control
or bear that risk. However, it is risk distribution that makes
negotiation of infrastructure project documentation
complicated, intense, and challenging.18
Consumer Issues
The statutory as well as the contractual framework need to
provide an adequate mechanism to handle consumer issues
in order to provide a suitable framework for the
implementation of the project. A credible, competent, fully
functional, and independent sectoral regulatory agency would
be the first critical step in this regard.
18
For a detailed discussion on risk identification, allocation, and
management, see Joshi (2001), chapter 3.
Box 4.3.1
Legal Framework in Electricity, Telecom, and National Highways1
In order to be effective, the law and policies ought to provide a clear framework for exercise of discretion by the executive authority
in all aspects of project implementation such as selection of private participant, the manner of grant of rights, the rights th at would
be granted, terms and conditions of the grant of rights, etc., as they impinge upon the risks associated with an economic ventu re.
THE ELECTRICITY SECTOR
At present, the Indian Electricity Act, 1910, the Electricity Supply Act, 1948, and the Electricity Regulatory Commissions Act,
1998 constitute the statutory framework for the sector. A comprehensive Bill, namely the Electricity Bill 2001, is expected to repeal
all these three Acts and replace them by an overall legislation that would govern the entire electricity sector.
The present framework governing the electricity sector allows three venues for private participation: generating companies;
transmission licensees; and licensees for supply of electricity (or distribution licensees). A generating company is allowed to only
establish generating stations and enter into an agreement with the state electricity board for the sale of electricity generated from
such generating station. A generating company is allowed to sell electricity to a person other than the relevant state electricity board
only with the prior approval of the competent government(s).
A transmission licensee could be an inter-state transmission licensee or an intra-state transmission licensee. An inter-state
transmission licensee has to be granted a transmission licence by the central government. It has to work under the direction, control,
and supervision of the Central Transmission Utility. An intra-state transmission licensee has to be granted a transmission licence
by the concerned state government. It has to work under the direction, control, and supervision of the relevant State Transmission
Utility.
A licensee to supply electricity (distribution licensee) can also notify that a generating station that is already established or would
be established would form part of the licensee’s entire undertaking and should be considered as assets of the licensee under the
licence so granted. The generating station that would form part of the licensee’s undertaking can even be outside the area for which
the licence has been granted to it.
The Indian Electricity Act, 1910 also contemplates a ‘bulk licensee’. A bulk licensee is a distribution licensee who is authorized
to supply electricity to other licensees for distribution by them.
Even though the legal framework allows for private participation in every aspect of the electricity sector, namely the generation,
transmission, and distribution of electricity, private participation in the electricity sector has been concentrated mainly in the
generation segment, and that too, by adopting the ‘generating company’ route. This is because the legal provisions governing private
participation through other structures is not adequate to support large-scale private investment.
The notable features in the Acts that increase the risks for licensees are as follows:
Power of the State Electricity Board (SEB) to:
• at any time and at its own discretion, permanently close down a generating station established by a licensee 2.
• at any time, acquire/purchase any undertaking, generating station, or transmission line established by a licensee3.
• to declare any generating station established by a licensee as a ‘controlled station’, thereby altering the framework governing
its operation, tariff and acquisition4.
• to regulate any expansion or replacement or works pertaining to a generating station established by a licensee 5.
• to enter into the premises of and shut down any generating station established by a licensee for certain defaults under the ESA6.
The state government has the power:
•
•
•
•
•
to
to
to
to
to
revoke the licence granted to a licensee at any time after consulting the State Electricity Board 7.
unilaterally vary the terms of the licence relating to the consequences of termination8.
amend the licence so granted to a licensee at any time after consulting the State Electricity Board 9.
direct the licensee to sell its undertaking in accordance with the directions of the state government10.
give direction to a licensee in regard to the supply of energy to certain classes of customers11.
1 Each of these sectors is separately dealt with in detail
2 See Section 36 Electricity Supply Act (ESA), 1948.
3 See Section 37 ESA, 1948.
7 See Section 4 (Indian Electricity Act) IEA, 1910.
8 See Section 10 IEA, 1910.
9 See Section 4A IEA, 1910.
10 See Section 5 IEA, 1910 and Section 6 IEA, 1910.
11 See Section 22A IEA, 1910.
in Joshi (2001).
In comparison to the licensee route, the generating company route has lesser risks associated with it under the legal framework,
as all these provisions relating to the licensee are not applicable to a generating company.
THE NATIONAL HIGHWAYS SECTOR
The National Highways Act, 1956 was amended in 1995 to specifically vest the central government with the discretion to ‘enter
into an agreement with any person in relation to the development and maintenance of the whole or any part of a national
highway’.12 Thus, private participation in the development and maintenance of national highways has now become possible through
a contractual arrangement between the central government and the private entity(ies).
Certain basic elements for private participation are still missing in the legal framework. The National Highways Act specifies
that national highways shall vest in the Union of India.13 This provision inherently limits the scope and nature of rights that can
be vested in a private developer as the relevant provisions only state that the government can enter into an agreement with the
private participant in relation to the ‘development and maintenance’ of a national highway. This limits the scope of private participation
to ‘development’ and ‘maintenance’; and not to activities such as ‘operation’ and ‘management’ of the national highway, development
of land appurtenant to national highways, etc.
Another concern for any private entity is the scope and powers of the National Highways Authority of India (NHAI) constituted
under the NHAI Act, 1988. The jurisdiction of the NHAI spans over a national highway or part of a national highway which
has been ‘vested’ in it or ‘entrusted’ to it by the central government. Both terms have significantly different legal consequences:
through ‘vesting’, there can be an absolute transfer of interest in the property, depending on the nature of the vesting; whereas
‘entrustment’ would mean transfer in trust for a specific purpose only. This is significant in view of the fact that it is the NHAI,
and not the central government itself, that has been constituted as the authority who would be signing the Concession Agreements
for private participation in the national highway sector. Unless there is clarity as to the scope of powers and jurisdiction of the
NHAI itself, the very basis of the Concession Agreement through which rights are sought to be granted to private developers, would
be in question14.
Aspects that could be of worry to large-scale and long-term private participation would include:
• Mandatory vesting of all national highways with the Union which precludes vesting of any proprietary interests in private
parties over the national highway itself.
• Authority of the NHAI to enter into the concession agreements is questionable as it is the Union government which is mandated
under the NH Act to enter into the agreement with the private developer. The NHAI Act does not vest adequate corresponding
powers or authority with the NHAI for vesting the rights and powers with a private entity as are provided for in the concession
agreement.
• Framework for the determination and levy of fee for the use of the national highways does not adequately cover and address
critical issues such as: certainty of criteria for determining the fee; protection of the right of the private participants and lenders
to participate in the process of determination of fee; certainty as to the notification of the fee by the government; and certainty
of the actual capital cost of the facility to be taken into consideration.
• Inadequacy of powers conferred on the private participant to enforce the collection, retention, and appropriation of the fee
from the users.
12
13
14
See Section 8A National Highways Act.
See Section 4 National Highways Act.
For a greater discussion on the scope and limits of private participation under the NH Act, the NHAI Act, and the Model Concession
Agreement, see Joshi (2001), pp. 508–40.
Next would be an adequate mechanism to establish the
various basic principles for determination of tariff that would
be protected and enforced by law. Another step would be
to establish the basic principles that would determine and
test the validity and legitimacy of consumer issues. The
Supreme Court of India has identified certain principles for
determining the validity of writ petitions being filed in
relation to a public interest litigation (PIL).19
19 The principles established by the Supreme Court in this regard
include:
• Only a person acting bona fide and having sufficient—interest
in the proceeding of public interest litigation will have the ability
to file a valid PIL. A person prompted by personal gain or private
A CRITIQUE OF THE LEGAL FRAMEWORK
PRIVATE PARTICIPATION
FOR
Even though Indian laws do not clearly prohibit private
participation, and may in fact specifically state and provide
for private participation, most of them still have certain
profit or political motive or any oblique consideration cannot file
a valid PIL. The actions should be for specific redressal of issue
relating to public injury or violation of statutory or legal or
constitutional principles.
• The relief would be corrective and not compensatory in nature.
• The remedy would generally be negotiated or quasi negotiated
rather than imposed. PIL involves collaboration and co-operation.
critical drawbacks which effectively deter private participation
in the relevant infrastructure sector. Some of these drawbacks
are as follows:
• Law may not allow for private interest to be created
in an infrastructure facility: This drawback can be found
in the municipal laws of many states which mandatorily vest
many critical urban infrastructure facilities in the local
municipal authority. For example in relation to water supply,
municipal legislations of many states mandate that all water
treatment plants and distribution facilities within the given
municipal area shall vest in the local municipal authority.
The immediate effect of such a provision is that any such
facility, as and when developed, becomes the property of,
and falls under the complete control of, the local authority.
• Law may mandate certain services to be provided
only through a specific statutory body/authority: A number
of states have enacted laws to establish specific authorities
that are vested with the exclusive authority to establish
infrastructure facilities and provide specific services within
a specified area. For example, water supply and sewerage
boards are generally vested with the exclusive authority to
supply water and undertake sewerage treatment in the area
under their jurisdiction.
• Law may not provide for adequate protection of private
investment: The legal framework may provide wide and
easily exercisable discretionary powers to the government/
government authority to take over a facility established by
a private entity. For example, under the Indian Electricity
Act, 1910 read with the Electricity Supply Act, 1948, the
facilities established by a licensee under the IEA, 1910 can
be taken over by the SEB through a relatively easy procedure
of adequate notification. When private participation was
allowed through the generating company route, these laws
had to be amended to specifically protect the assets developed
by generating companies from such wide discretionary
powers. In the absence of such specific amendments, would
not have been possible to obtain private investment in the
generation sector.
• Law may not adequately provide for vesting of all
relevant rights required for the development and
implementation of an infrastructure project with a private
entity.
• Law may not provide for creation of security interest
over the infrastructure facility in favour of lenders. Lenders
• The legal proceeding should be for enforcement of rights of
persons who are otherwise unable to enforce their rights.
• When the petitioner seeks any relief to serve his self interest,
apart from that of the community, that relief would be refused.
• PIL should not be allowed to be misused for vindicating enmity
or rivalry.
• PIL is not for settling disputes between two individual parties.
are, technically, third parties to any agreement/arrangement
between the government and the private developers. However,
they typically have large financial stakes in infrastructure
projects. The laws governing various infrastructure sectors
in India do not address the aspect of rights of lenders to
a project. Even in an infrastructure sector such as
telecommunications, which has a high level of private
participation, the law and the licence provide for the direct
taking over of the facility by the government in the event
of a default by the licensee or the termination of the licence.
The law as well as the licence itself does not provide a secure
basis for the establishment, recognition, and enforcement
of the rights of the lenders to a project. It is essential to
address this aspect in order to ensure that lenders’ interests
in a project are adequately safeguarded.
• Law may not provide for due recognition and
enforcement of lenders’ rights: In order to enable successful
project financing of infrastructure projects it is critical that
the relevant law enables the creation of the security interest
in favour of the lenders in the assets of the project, recognizes
all the necessary rights relating to the continued
implementation of the project, and allows for a secure and
speedy enforcement of such security rights. This is a function
of not only the infrastructure specific laws but also the laws
relating to banking, property, enforcement of rights relating
to property, and civil procedure followed by courts. It is not
really possible to conclude a pure project finance transaction
in India. All financing of infrastructure projects in India has
a large component of recourse against the equity sponsors
or have a large component of guarantee based financing.
This situation is a direct result of the existing legal framework
relating not only to the specific structures but other general
law relating to enforcement of security rights.
This was one of the main issues that held up the adequate
financing of the basic telephone service projects and certain
cellular projects in 1995–7. This led to a move to formulate
a direct agreement between the government of India and
the lenders, acting through a security agent, that would
allow for rights to be created in favour of the lenders in the
licence and the project and also to regulate the rights of the
government to terminate a licence and take over the network.
However, even though an amendment was circulated to the
licensees indicating that: (a) rights in relation to the licence
and the project can be created in favour of the lenders in
accordance with the direct agreement; and also that (b) the
rights of the government to terminate the project will be
subject to the rights of the lenders under the direct agreement,
till date the draft of the direct agreement has not been
finalized or approved by the government.
• Law may not provide for imposition of tariff/fee/toll
for use of the infrastructure facility/service so provided: It
is common to find that the legal framework of a specific
infrastructure sector may not allow for, or be completely
silent on, the imposition of tariff in relation to the concerned
infrastructure facilities. Many state laws relating to urban
infrastructure such as roads, bridges, and water supply do
not support imposition of tariffs in relation to the use of
such facilities.
• Law may not provide for or support imposition of
regulated yet commercially viable tariffs/fee/tolls: Often it
is found that even if the legal framework provides for
imposition of tariff for use of a specific infrastructure facility,
the tariff so mandated is not one that could provide a
commercially viable proposition to support large-scale
investment of private capital, for instance in the case of
roads and bridges. Many states do have a Tolls Act that
enables the levy and collection by the government of a tariff
on the use of a state road or bridge. However, the level of
the tariff and the extent to which it can be revised is
extremely low and commercially unviable. Similarly, the
framework for the levy, determination, collection, and
revision of the general rates of tariff for supply and usage
of potable water in urban areas do not provide for commercial
viability of investment.
• Law may not allow or support a mechanism for a
procedure that allows for participation of the private
developers in the determination of tariff: To take an example,
the Electricity Regulatory Commissions Act, 1998 empowers
the Central Electricity Regulatory Commission and the
State Electricity Regulatory Commissions to determine tariff
for the sale of electricity within their respective jurisdiction.
The provisions that provide the guidelines for the exercise
of such power by the respective commissions however do
not mandate participation of the private developers in the
relevant aspect of the electricity sector for which the tariff
may be determined by the respective commissions.20
• Law may not have adequate provision for collection
and appropriation of tariff/fee/toll by the private entity
from the users of the infrastructure facility: This is a drawback
that can be commonly spotted in state laws relating to levy
and collection of tolls on roads and bridges as well as
municipal laws governing urban infrastructure such as the
water sector. In the absence of a specific right to retain and
appropriate tariff, there is always the possibility of challenging
the revenue stream from the facility as being a public revenue
20
See Section 28 and Section 29 Electricity Regulatory
Commissions Act (ERCA), 1998. Section 28 of the ERCA, 1998
governs the determination of tariff by the Central Commission while
Section 29 governs the determination of tariff by the State
Commission. The two provisions stipulate certain principles which
the commissions would be ‘guided by’ in the determination of tariff.
The principles so stated are therefore not mandatory factors but only
guidelines. The principles so stipulated as guidelines themselves do
not provide for the participation of the private developers in the
process of determination of tariff by the commissions.
stream that should go into the consolidated fund of the state
rather than a private revenue stream that is the property of
the private developer. This is particularly so in cases such
as tolls on roads and bridges where most of the state laws
governing tolls on roads and bridges specifically mandate
that the amounts so collected shall be part of the consolidated
fund of the state.
• Law may not provide for an adequate independent
regulatory mechanism: The mere establishment of a regulator
is not sufficient. The law has to provide and protect the
independence of the regulator from not only political/
government influence but private influence as well. A general
regulator will typically therefore not be as effective as a
sector specific regulator, given the detailed technical
considerations that are involved in tariff setting.
• Law may not provide for adequate dispute settlement
mechanism: Delay in the implementation of the project
caused due to (expected) delay in the settlement of disputes
will ultimately get factored into the cost of the infrastructure
facility, and could even result in making the project itself
unviable.
Disputes in relation to an infrastructure project can arise
at every stage, right from the very beginning.
Since it may not be a viable proposition to always establish
a separate mechanism intended solely for settlement of
disputes relating to infrastructure projects, settlement of
disputes through conciliation and arbitration is often
regarded as a faster and better mechanism in this regard.
Speedy enforcement of arbitration agreements in the law
would therefore help considerably. The presence of an
independent regulator who can pre-empt, and effectively
redress situations of dispute, is also a critical necessity.
• Law may impose excessive taxes/duties in relation to
the process of implementation of infrastructure development:
It is common to find that the Union laws impose a specific
set of taxes, and the laws of the relevant state impose another
set of taxes, and to compound these, municipal authorities
also impose taxes on various aspects of an infrastructure
project. If the tax laws are not reviewed and harmonized,
it is possible for the private participants and the project itself
to be subject to multiple taxation that could shrink its
demand considerably.
CONTRACTUAL FRAMEWORK
The contractual framework established by the participants
for each specific project has to be within the overall
framework provided by statutory regulations. It is the
contractual framework that actually governs the day to day
implementation of the project. The contractual framework
reflects the risk sharing arrangements agreed to between the
parties.
Even with an excellent statutory framework, if the
contractual framework for a particular project is not
adequate, the project could fail to obtain adequate debt and
equity funding. The contractual framework also fills the
space and the lacunae left by the overall statutory framework.
A complex web of interdependent contractual obligations
often arise in the implementation of infrastructure projects.
It is a common and perhaps inappropriate criticism of
private participation in infrastructure projects that
complicated contracts are used by parties to ‘mystify and
cloud the issues’. It is important to understand that each
of the contracts in this ‘web’ has a specific and critical
purpose to serve, the absence of which would result in
vagueness and ambiguity of obligations and rights of various
participants in the project. This aspect is sought to be
illustrated through the example of the Power Purchase
Agreement and related documents.
A ‘core’ document (for example, a Power Purchaser
Agreement, or a licence or a concession agreement) usually
forms the basis on which the entire contractual framework
emerges. The ‘core document’ is one between the developer
and the relevant government or authority which establishes
the rights of the private participants to develop and
implement the project. From the core document there
emerges a system of contractual documents which tie down
all the participants in the project to each other and establish
the framework that enables the equity and debt financing
of the project and its implementation. A typical contractual
framework comprises of the construction contracts, the
operation and maintenance contracts, the equity financing
arrangements, the debt financing arrangements, and security
documents. The basic aim of the contractual framework is
to ensure that all the major participants to the project have
obligations towards completing their portion of the project
implementation and to ensure their direct privity/
relationship to the lenders, in order to ensure adequate
security for the debt financing of the project on a partial
recourse or non recourse basis.21
A diagrammatic representation of the main contractual
documents forming a typical contractual framework for a
power project in India can be seen in Fig. 4.3.1.
21
Due to the quantum of financing required for the
implementation of an infrastructure project, it is not a viable option
to undertake debt financing on the usual recourse basis as in the
case of industrial projects. Debt finance for infrastructure projects
is sought to be raised on the basis of the project itself with the main
security being the revenue stream generated from the operation of
the project. The emphasis of the security structure is therefore not
on the assets of the borrower itself but in the due implementation
and operation of the project. There is usually no or limited recourse
to the private entities actually implementing the project. This structure
for debt financing is referred to as ‘project financing’ or ‘non recourse
financing’. For further discussion on debt financing of infrastructure
projects see Joshi (2001), chapters 2, 3, and 5.
From these interlocking set of contracts22, it is, therefore,
clear that the contractual framework governing the
implementation of a project is as critical to the implementation
to the project as the statutory framework. The statutory
framework determines the sanctity of the contractual
framework and determines the ability of the parties to enforce
their rights under the contractual framework.
UNIFORM LAW
FOR
INFRASTRUCTURE PROJECTS
As discussed earlier in this paper, the Constitutional
framework in India does not permit for a single law governing
grant of rights for development of projects in all the
infrastructure sectors.
The Constitution of India, through Article 246 read with
the Seventh Schedule, distributes various legislative fields
between the Union Parliament and the state legislature. The
Seventh Schedule provides for three lists of legislative fields:
the Union List, the State List, and the Concurrent List.
Table 4.3.1 depicts an indicative list of items in the three
list.
Further, the Constitution of India, and the state laws,
vest municipalities and panchayats23 with responsibilities
and jurisdiction over certain infrastructure facilities within
their territorial jurisdiction. Matters listed under the
Constitution as capable of being delegated to municipal
bodies pertain largely to urban planing, including town
planning; regulation of land use; water supply within the
municipal jurisdiction; and public amenities.
A majority of matters that may be delegated to panchayats
pertain to agricultural and rural development. Panchayats
in Scheduled Areas24 have greater powers under the
Panchayat (Extension to Scheduled Areas) Act, 1996, as
may be specifically vested with them by each state. The
authority of the gram sabha that could be relevant for
infrastructure projects under this Act are: (i) the right to
be consulted before any decision is made with respect to
acquisition of land in the Scheduled Areas for development
projects and before resettling and rehabilitating persons
affected by such projects in the Scheduled Areas; (ii) the
recommendations of the gram sabha are mandatory prior
to the grant of prospecting licence or a mining lease for
minor minerals in the Scheduled Areas; (iii) the power to
prevent alienation of land in the Scheduled Areas and to
take appropriate action to restore any unlawfully alienated
land of a Scheduled Tribe; and (iv) the power to control
local plans and resources for such plans.
22
For a more detailed discussion on each of these agreements,
see Joshi (2001), pp. 356–71.
23 Panchayats are local self-government bodies at the village level.
24 Areas so declared under the Fifth or Sixth Schedules to the
Constitution of India.
Share Pledge
Agreement
Security
Agent
Agreement
$ Loan
Agreements
JVA/SHA
Rs Loan
Agreements
Security Agreements
Inter Creditor
Agreement
Direct Agreements
PPA Payment
Security
Guarantees
TRA
Hypothecation
Equity
Funding
Agreements
Sponsor
Support
Agreement
Common
Agreement
Mortgage
Equity Agreements and Debt Financing Agreements
Fuel
Supply
Agreement
Fuel
Transport
Agreement
PPA
EPC
Agreement
EPC
Sub
Contract
Agreements
O&M
Agreement
O&M Sub Contract
Agreements
Figure 4.3.1 Illustrative Contractual Framework: Power Project.
Notes:
PPA
JVA
EPC
O&M
TRM
SHA
power purchase agreement
joint venture agreement
engineering, procurement, construction
operations & maintenance
trust retention account agreement
shareholder agreement
Table 4.3.1
Distribution of Activities in Accordance with the Seventh Schedule and Article 246 of the Constitution
Union List (List 1)
Railways
Highways
Shipping and Navigation
Major Ports
Airways, Aircraft, Air Navigation,
Aerodromes
Posts and Telegraphs
Regulation and Development of
Oil fields and Mineral Oil Resources
Regulation and Development of Interstate Rivers and River Valleys
Foreign Loans, Banking Tax on Income
(other than agricultural income)
Currency, Foreign Exchange
State List (List II)
Roads, Bridges, Ferries, and such
communication as is not specified in
List 1
Water supplies, Irrigation, Canals,
drainage—subject to power of Union
Land, Land tenure
Regulation of Mines and Mineral
Development, subject to power of
Union
Gas and Gas works
Local Government
Taxes on Consumption or sale of
Electricity
Rates of Stamp Duty
Any law governing the grant of rights/licence/concession
for development of infrastructure projects would therefore
have to take into account these aspects. The alternative to
sector specific laws is for the legislative bodies to enact a
general law in relation to the sectors that fall within their
jurisdiction. The Union Parliament could enact a law
allowing for private participation in the infrastructure sectors
specified in the Union List and the Concurrent List. Each
state could conceivably enact a relevant law in relation to
the infrastructure sectors falling within its jurisdiction.
A number of states in India are in the process of drafting
laws for facilitating infrastructure projects within their
territories. The state of Gujarat has already enacted such a
law, which we briefly discuss below.
GUJARAT BOT LAW25
The Gujarat Infrastructure Development Act, 1999, (the
‘GIDA’ or ‘Act’) was the first law of its kind in India.
Enacted by the state of Gujarat, it focuses on facilitating
infrastructure development through private participation
within its territory. The Act establishes the Gujarat
Infrastructure Development Board (GIDB), comprising of
members appointed by the state government, and provides
for the basic framework along which the GIDB would
function and facilitate private participation in infrastructure
projects. Several options for such participation are envisaged
in a schedule to the law (build, operate, transfer (BOT);
build, operate, lease, and transfer (BOLT); renovate, operate,
and transfer (ROT)).
The scheme for the concession agreement is to be
separately prescribed. The nature of projects listed as falling
25 For a discussion on the same, especially its creation see
Chakraborty, Atanu (2000).
Concurrent List (List III)
Ports other than Major Ports
Shipping and Navigation in Inland
Waterways
Electricity
Transfer of Property other than
Agricultural Land
Acquisition and Requisition of property
Contracts
Economic and Social Planning Price
Control
Commercial and Industrial Monopolies
within the jurisdiction of the Act are specified in Schedule
1 to the Act consistent with state subjects under the
Constitution. Schedule 1 also mentions ‘Power Generation,
Transmission and Distribution Systems’, which is in the
Concurrent List. While facilitating projects on this subject,
due compliance would have to be made with the Union laws
prevalent in this sector. The Act provides for selection of
the project proponent through the process of competitive
bidding. Direct negotiations are also envisaged in the event
that proposals are submitted not as response to any specific
bidding process, but by the initiative of the concerned
entity(ies).
The law prescribes selection of bidders in an open bidding
process based on three successive sets of criteria: prequalification; technical; and financial. Of these, the Act lays
down the criteria for financial evaluation.
The Act allows the project developer to charge fees as
specified in the concession agreement. Such fees can also be
revised, based on criteria specified in the agreement. The
Act recognizes that rate of inflation and variation in rate
of foreign exchange are factors which may be taken into
account for revision of fees. As financial security, the project
developer is required to open an escrow account or execute
a performance bond.
The Act identifies several ways in which the state
government or its agency can provide assistance for the
project, such as through participation in the equity of the
project company; extending of subsidies; senior or
subordinate loans; executing government guarantees;
operation of escrow account; conferment of development
rights in respect of any land; and incentives in the form of
exemption or deferral of taxes.
The Act also considers the possible scenarios which may
emerge from termination of the concession agreement with
a project promoter, and provides for:
• payment of compensation to the developer in
accordance with the concession agreement;
• take over of the project without repaying the
investments made by the developer upon termination for
default of the developer, but at the same time assuming
liabilities of the developer for repayment of loans taken in
lieu of the project;
• new concession agreement with a person
recommended by the lenders, on the same terms as specified
in the earlier concession agreement.
The GIDA is in the nature of an overarching framework.
Almost all of its specific provisions would require greater
elaboration of basic principles and criteria in order to make
it a strong statute. For instance, the basic principles of the
concession agreement, the aspects that would require
elaboration in the bidding process, the factors to be
considered ‘relevant’ for selection of the project promoter,
and monitoring of the project during its lifetime are some
of the aspects that the law could make clearer. This would
mean guided exercise of executive decision by the
government/statutory authorities, and the establishment of
essential criteria that cannot be deviated from. One example
where this has been achieved is in the Philippines statute
governing infrastructure projects26.
4.4 OPENING DOORS TO ‘THE OUTSIDER’: THE RIGHT TO INFORMATION27
Abha Singhal Joshi
In the government’s role as a provider of social and economic
services—policing, roads, schools, bridges, ration shops—
the right to information of its citizens has never been enforced
and has rarely been invoked. People at all levels have
continued to suffer the colonial regime of secrecy which has
been enforced through enactments like the Official Secrets
Act of 1923—a law which dominates the mindset of the
public official from the clerk to the highest levels of
government. The operation of this legislation has been
supported by other restrictive provisions contained in the
Indian Evidence Act, the Code of Conduct for Civil Servants,
and other practices such as marking the most ordinary
documents as ‘secret’ or ‘confidential’. Information has been
treated as the exclusive domain of government and requests
for the most banal bits of information are treated with
apathy or animosity. In this regime, the functioning of
information ‘touts’ has flourished in every activity and a
parallel system of acquiring information, whether from
‘closed door’ cabinet meetings or from one’s own service or
electricity records, has developed.
Despite court rulings to the effect that the right to
information is basic, there has been little use of the same
right for betterment and accountability. This has been so
because of (i) the blanket restrictions that arise out the
Official Secrets Act 1923, wherein under an undefined
‘public interest’, virtually all information can be denied;
(ii) poor state of records, and even poorer information
retrieval mechanisms; and (iii) untimeliness and poor form
of the little information provided.
Decentralization, the advancement of democracy, political
development, and the emergence of NGOs, and multilateral
agencies (MLA’s) insistence on transparency have all led to
a realization that a right to information would have to come
about. The response of the state in India to the issues raised
by the call for openness has been to legislate in the form of
Freedom of Information (FOI) or Access to Information Acts.
While countries like Sweden and the USA have FOI Acts in
place since the 1960s, other countries that have recently
legislated the right to information are the UK (2000), South
Africa (2000), Ireland, and, closer home, Japan, the Philippines,
and Thailand.
The right to know has been held to be inherent in Article
19 (1) (a) of the Constitution of India, which guarantees
the right to freedom of speech and expression. The basic
argument, even if it pertains to the right of the media to
publish and disseminate information, is that a person must
have information in order to formulate and express his or
her views. This right includes the right to express criticism
or dissent of any policy or decision. The right to know, then,
is closely related to another fundamental right under Article
21 of the Constitution––the right to life and personal liberty.
The right to information is a must for realizing the right
to equality guaranteed by Article 14 of the Constitution.
It stands to reason that in a decision making situation of
large social import, all parties concerned must have equal
access to facts, and a free flow of information would ensure
transparency and in turn, absence of arbitrariness.
26
The Philippines’ statute R.A. No. 6957, entitled ‘An Act for
Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector and for Other
Purposes’, provides a valuable illustration of the nature of aspects that
such a law on this subject could cover.
27 In India Infrastructure Report 2001, Section 5.8, I had very
briefly commented on the Information and the Draft Bill. This
section takes the discussion further.
Box 4.4.1
The Freedom Of Information Bill
The Freedom of Information Bill was first drafted by the Shourie Committee,1 whose terms of reference were:
a. To examine the need and feasibility of either a full fledged Right to Information Act, or its introduction in a phased manner
to meet the needs of open and responsive government.
b. To identify specific areas where right to information can be built into the working procedures and system, especially in
large departmental undertakings, including railways, telecommunications, postal services, passports and banking at the central level.
c. To examine the internal working procedures (of departments and governments) with a view to introducing greater openness
and transparency in handling of employee grievances and internal consultation.
d. To examine the rules framework with particular reference to the existing conduct rules and manual of office procedures
with a view to introducing greater openness and transparency in government working, including dealings with employees.
e. To examine the nature and content of training to promote greater openness and more customer responsive public dealings.
The Working Group consisted of ten persons amongst whom were consumer rights activist H.D. Shourie as the Chairperson,
Soli Sorabjee, a senior advocate and the present the Attorney General of India, and eight civil servants representing various central
government departments. The Working Group gave its report in a period of approximately four months, during which period it
held a total of six meetings to arrive at the draft. The Group consisted mainly of government servants, which surely would have
narrowed the perspective and concerns of the deliberations. Since the Group was dealing with issues where sections of the public
would be pitted against the government, a larger representation from the public in the Working Group would have been necessary.
The composition of the Group, was very urban-centric as well as central government oriented. Availability of information is of
particular importance to governance at the local level––at the level of panchayats and municipalities, besides at the level of the
state government. However, not all concerns of the public were reflected. The Report did not suggest any concrete steps to simplify
the existing procedures. The Report and the Draft Bill also did not indicate how the central law is to function qua pre-existing
systems of information, such as under the Panchayati Raj Acts in various states, or the right to have information under the various
land and revenue laws of the states.
The Group consulted only two people in the course of formulating its recommendations––namely, P.B. Sawant the Chairman
of the Press Council of India and A.K. Venkat Subramaniam, Secretary, Department of Consumer Affairs. Their responses are not
mentioned in the Report. The Report is otherwise silent on the process of consultation, if any, with various interest groups. The
Report makes no mention of the materials referred to except some laws of other countries but omits to mention the relevance or
content of these laws.2 The result was a somewhat skimpy and insipid report which sidestepped most of the terms of reference
and presented a draft Right to Information Bill which left much to be desired.
At the departmental and cabinet committee levels, not much homework went into the Bill, except for the dropping of certain
good provisions, such as the provision for a Council for Right to Information and an independent appellate body. The lack of
application is further reflected in the Hindi version of the Bill, which is a poor and cryptic translation of the English version, with
unfriendly and even wrong usage.
The Bill, after being introduced in the Lok Sabha in July 2000, was debated on for 40 odd minutes and Home Affairs referred
to the Parliamentary Standing Committee on Home Affairs. The Committee heard witnesses which included senior activists and
NGOs working on the issue.3 The Committee submitted its report to Parliament4 on 25 July 2001. The report enumerates the
suggestions and recommendations of the witnesses but does not make any major or concrete recommendations for changes in the
Bill. The Bill is now back on the table of the House and will, in all probability, be passed in its present form.
1
2
Working Group on Right to Information and Promotion of Open and Transparent Government, Government of India, 1977.
For a detailed critique, see Abha Singhal Joshi, ‘An Appraisal of the Report of the Working Group on Right to Information and Open and
Transparent Government’, Commonwealth Human Rights Initiative, 1998.
3 The witnesses include Madhav Godbole, Manubhai Shah, A.G. Noorani, P.B. Sawant, Commonwealth Human Rights Initiative, and Mazdoor
Kisaan Shakti Sangathan.
4 Department Related Parliamentary Standing Committee on Home Affairs, Seventy Eighth Report on Freedom of Information Bill, 2000.
RIGHT
TO
INFORMATION LAWS ELSEWHERE
The processes followed in drafting the ‘Freedom of
Information Bill’ in India is in sharp contrast with the
processes followed in other countries which have drafted
right to information laws in recent times. South Africa,
which passed its law on right to information last
year,28 drafted its Bill after thorough research and
consultation with various departments, institutions, and
ministries and government departments/offices (including
the premiers of provinces, the Public Protector, Attorney
General, South African Police Services, South African
28
Promotion of Access to Information Act, 2000.
Defence Force and the National Intelligence Agency, the
Chief Justice and Judges President of the Supreme Court).
Similarly, the Open Democracy Advisory Forum (consisting
of more than 60 organizations mainly representing civil
society) and various parastatals and non-governmental bodies
participated extensively in the deliberations. As a result,
their law, though somewhat detailed, takes into account
various factors like a not completely literate population.
The processes gone through were also useful in educating
the public about the law.
In the United Kingdom, known to have one of the most
closed systems of governance, the government brought out
a White Paper on freedom of information, on which
comments from the public were sought. The government
had also placed the detailed White Paper on a website for
further reach. Although the Bill, when drafted, diluted
many of the recommendations of the White Paper, wide
publicity enabled civil society groups to engage with their
Members of Parliament (MPs) and negotiate better provisions
of the law.
Flaws in the Laws
Freedom of information laws have been passed by several
Indian states29 in the last four years and the central
government’s Freedom of Information Bill 2000 is pending
in Parliament.
The biggest drawback is the array of exceptions in all the
laws, all so worded as to enable the continuance of
withholding of information on vague and specious grounds.
Tamil Nadu (1997) and Maharashtra (2000) take the lead
with 22 exceptions each, with several sub-sections to them,
where the bulk of the provisions relate to information that
cannot be given. The exceptions are widely worded and
contain an unspecified and vague ‘likelihood’ of harm to
various aspects of government’s functioning. For example,
the Tamil Nadu and Maharashtra enactments both contain
clause 3 (2) (q) which restricts the release of information
‘the disclosure of which could lead to improper gain or
advantage or would prejudice:
i. the competitive position of a department or other
public body or authority
ii. negotiations or the effective conduct of personnel
management or commercial or contractual activities.’
These two Acts also have the onerous provision of entitling
only a person who ‘bonafide’ requires information, to ask
29 Tamil Nadu, Goa (1997), Rajasthan, Maharashtra (2000),
Delhi (2001). Madhya Pradesh passed an Act in 1998, which did
not come into force for want of presidential assent. Madhya Pradesh,
however, has a series of executive orders whereby government
departments are required to give information to the people. Uttar
Pradesh has a Code for Access to Information, which has been made
applicable through an executive instruction.
for it. This single provision strikes at the very root of the
right, as it seeks to maintain the status of treating an ordinary
person asking for information with distrust and suspicion.
Other provisions in other state laws as well as the central
law are equally open to misuse by their very nature. ‘Prejudice’
to the sovereignty and integrity of India, conduct of centre–
state relations, and public safety and order are grounds for
refusal to be found in all the enactments. Under some Acts,
information which would ‘harm the frankness and candour’
of internal discussions can be refused!
Many Exemptions
In the central FOI Bill, ‘cabinet papers including records
of the deliberations of the Council of Ministers, Secretaries
and other officers’ are all exempted from being disclosed.
Practically the entire decision making process on policy is
sought to be kept secret. Yet no timeline is prescribed for
when the same is eligible for disclosure. Moreover, there are
certain institutional exemptions given in Part A of the
Schedule, under which the Intelligence Bureau, Research
and Analysis Wing of the Cabinet Secretariat, Directorate
of Revenue Intelligence, Central Economic Intelligence
Bureau, Directorate of Enforcement, and the Narcotics
Control Bureau are exempt from the operation of the law.
The government has also kept to itself the power to include
more organizations in the Schedule. These kinds of blanket
exemptions are untenable and the extension of the protection
even to the administrative activities of these organizations
is not wise. For example, tenders called for by any of these
organizations should have been in the public domain as
with other departments.
Section 9 of the FOI Bill adds further grounds for refusal,
some of which, such as requests which are too general in
nature or requests for unusually voluminous information,
are valid. The problem clause is 9(c) which allows requests
to be refused if it ‘relates to information that is contained
in published material available to the public’. This clause,
in the absence of casting a corresponding duty on public
bodies to publish and make available certain kinds of
information at an affordable price, would give rise to several
problems of accessibility, such as the inability of people to
access information contained in highly priced publications.
None of the above exceptions are subject to overriding
public interest, that is, that disclosure may be allowed if it
is in the benefit of the public to have the information, as
opposed to the harm that non-disclosure would cause. This
is an essential aspect of modern right to information laws,
and has been included in the laws of South Africa, United
Kingdom, and Japan. Under the Japanese law, certain kinds
of private or corporate information is exempted from
disclosure, but these can also be disclosed where disclosure
is necessary to protect a person’s life, health, livelihood, or
property, or where, on balance the benefits to disclosure
outweigh the interests protected by non-disclosure.
Section 11 of the Indian FOI Bill which pertains to notifying
a third party about whom information is sought to be disclosed,
allows disclosure in case the ‘public interest in disclosure
outweighs in importance any possible harm or injury to the
interest of such third party’. However, curiously, it specifically
leaves ‘trade and commercial secrets protected by law’ out of the
ambit of the public interest disclosure clause. This could be a
cause for serious concern and would give rise to a situation
where trade and commercial secrets, once given into the
confidence of the government, would always remain inaccessible,
public interest notwithstanding. By the application of this
section, a company like the Union Carbide Corporation could
claim secrecy for their patented antidotes to Methylisocyanate,
even though revealing it could mean curing hundreds suffering
from the after-effects of a deadly gas that leaked due to the
gross negligence of the third party in the first place!
That the nature of the widely worded exceptions are sure
to be misused is already becoming evident from the responses
which information seekers are getting in various forums. In
Rajasthan, where the right to information Act came into
force in May 2000, an application for records of Panchayat
expenditure was made by the MKSS30 under the Panchayat
Act rules. Photocopies of development records pertaining
to various schemes such as Indira Awaas, etc. were refused,
citing a Gram Sabha resolution to the effect that giving the
records would create a breach of peace and a law and order
problem and would also create a hurdle in performance of
official functions of the panchayat!
OBLIGATION
STATES
TO
PUBLISH
IN
ACTS
OF
CERTAIN
A positive aspect of the FOI Bill as well as the Karnataka
and Delhi Acts is the obligation31 cast on public bodies to
maintain, catalogue, and publish their records, publish their
own powers, duties, norms of functioning, rules, regulations,
instructions, manuals, etc. They are also under an obligation
to publish all relevant facts concerning important decisions
and policies that affect the public while announcing such
decisions and policies and to give reasons for their decisions,
whether administrative or quasi-judicial to those affected by
the decisions. Moreover, they are required, before initiating
any project, to ‘publish or communicate to the public
generally or to the persons affected or likely to be affected
30 Mazdoor Kisaan Shakti Sangathan, a movement in the backward
areas of Rajasthan.
31 Section 4, FOI Bill, 2000, Section 4, Delhi Right to Information
Act, 2001 and Section 3, Karnataka Right to Information Act, 2000.
Rajasthan has a diluted version of this provision in Section 12-A.
by the project in particular, the facts available to it or to
which it has reasonable access which in its opinion should
be known to them in the best interests of maintenance of
democratic principles’.
The positive and proactive nature of this provision is
limited by two requirements. The first relates to limiting
the giving of information to ‘before initiating any project’.
Although this would give the stakeholders an opportunity
to put in their dissent or concerns on the project, there is
a likelihood of their getting out of the process altogether
once the project has begun. The public body would not be
under a duty to inform the public of subsequent changes
before incorporating them. Section 4 (c), in turn, only
requires relevant facts concerning important decisions and
policies that affect the public to be published while
announcing such decisions.
This provision leaves out entirely the duty to proactively
inform people of other things which are not ‘projects’. For
instance, information concerning the health and security of
people, information relating to climatic or weather
conditions, natural disasters like floods and cyclones, or
pollution and the environment are thereby left out. Much
of this kind of information is not only in the domain and
control of government but it is government alone that has
the resources to spread the information cheaply and quickly
through its various networks at all levels. In particular,
information related to disposal of nuclear wastes ought to
be made available.
Secondly, the duty to inform is restricted to facts ‘to
which it has reasonable access’ and ‘which in its opinion’
should be known to them. Both are manifestations of the
wide discretion that runs through the whole legislation.
PROCEDURES
IGNORED
FOR
OBTAINING INFORMATION
The laws are equally weak in thinking through the procedure
for getting information. Although most Acts, including the
FOI Bill have provision for oral requests, none of the laws
have a provision for acknowledging the request. The
apprehension that in the absence of a requirement to give
a receipt for the request, one would never see one’s application
again, or hear from the department, is very real, considering
the fate of even First Information Reports (FIRs) made at
the police stations. The requirement for charging fees is
likewise left vague and may be a cause for deterring potential
seekers of information if the fee is kept too high, as is the
case in Goa, where every request is to be accompanied by
a fee of a hundred rupees, an amount not easy to procure
for an individual. This kind of fee structure, by its very
nature, excludes a large section of the population from
trying to access information. There is no provision for
waiver of fee for the poor or if the information is sought
in the public interest. Some laws, like the Rajasthan Act,
specifically mention that information will not be given if
the fee is not paid. Others, like the Delhi Act, prescribe a
minimum charge equivalent to ‘the cost of processing and
making available the information’.
Only Internal Appeals Against Denial
The procedure for accessing information in the FOI Bill
becomes even more cumbersome when it comes to appealing
decisions which refuse information. The Act gives only two
‘internal’ appeals, that is, appeals to government from its
own decision. The lack of an independent appeal mechanism,
which is internationally considered a sine qua non for a
disclosure law, strikes at the very heart of the enactment.
Moreover, one would be unable to move the civil courts as
laid down by Section 15. Ultimately, an aggrieved person
would have to move the High Court by way of writ
jurisdiction, which takes us back to the position prior to
the passing of the enactment. Read together with the lack
of penalties for wrongful disclosure, the law is completely
lacking in accountability provisions (which was the problem
to be addressed in the first place) and seems to put a
premium on refusals and delays.
The state laws, except for those in Tamil Nadu and
Maharashtra, are somewhat better in this regard. Goa
prescribes the Administrative Tribunal as an appellate
authority, while Rajasthan has the District Vigilance
Committees at the district level and the Civil Services
Appellate Tribunal as the authority. Delhi makes a provision
for appeals to the Public Grievances Commission. Most of
the states also set up a Council for Right to Information
as a monitoring and implementing body. This useful
provision is left out of the FOI Bill, although it was there
in the Bill as proposed by the Shourie Committee. A body
like this is essential in a scenario where the main hurdle in
information disclosure is mindset and attitudes. An overseeing
body could regulate and facilitate the training and orientation
of public personnel as well as monitor developments and
make suggestions on the operation of the law.
‘Whistleblowing’ Needs to be Protected
The new legislative regime for right to information must
take into account the protection of whistleblowers.
‘Whistleblowing’ is the exposure by an employee, who is
privy to certain information, of wrongdoing which can
harm the public interest. By its very nature, whistleblowing
is a risky thing for the person who reveals information. In
the context of India, as elsewhere, whistleblowing has often
been attended with serious consequences like transfers, even
suspension, or worse still, being kept on a job without actual
work being allocated. Whistleblowing, therefore, must be
protected in order to secure and protect from attack those
employees who follow their conscience, while at the same
time protecting uncalled for exposure on the pretext of
whistleblowing. Whistleblower protection laws have recently
been passed in the UK (The Public Interest Disclosure Act,
1999) and in South Africa (Protected Disclosures Act, 2000).
In the UK, whistleblowing has been exercised and protected
by the law in a range of cases from misappropriation of
Box 4.4.2
Information and Atomic Programmes
These are extracts from an interview 1 with Arjun Makhijani, president of The Institute for Energy and Environment Research,
a US based independent organization which has been given access to the official emission records, including raw data and results
of computer modelling of the Los Alamos National Laboratory, an equivalent of India’s Bhabha Atomic Research Centre (BARC).
The Indian government has to prove that it follows internationally recognized norms of radiation exposure to the workers and
the public. It must allow independent monitoring and make raw data available for scrutiny.... If the government claims that nuclear
plants are necessary, then it should acknowledge that there is a price to be paid in terms of health and environment risks. It has
to inform the public about the sacrifices involved. On the civilian side, the government has a cavalier attitude, dismissing the well
studied evidence about serious birth defects among children born around the Rawatbhata nuclear power plant in Rajasthan.... BARC
should disclose how much of the highly radioactive waste generated from the plutonium processing plant is stored there and in
what forms. It should also disclose the data from the discharge pipes leading into the bay, as also soil, groundwater and air readings....
if the waste is being taken elsewhere, then there are serious transportation risks involved and the analysis of such risks should be
made public.... The use of the Official Secrets Act in preventing public access to data relating to their health is an artifact of British
imperialism and should be abandoned. Moreover, there is no reason to keep health and environment data secret. US laws require
that such data be made public each year. In the case of the Clean Air Act, the data must be given to the Environment Protection
Agency each year, with the nuclear establishment swearing under penalty of perjury that the records are true and complete. In
addition, the US has a strong and justiciable freedom of Information Act.
1
Q&A, Times of India, 2001.
funds in homes for the elderly, to exposing inflated expense
claims of a Managing Director of a US telecom company,
to questioning corporate data on which important
government decisions were to be based, to exposure of
operational irregularities in big companies.32 In the Indian
context of widespread corruption, and dressing up by
governments, public bodies, and corporates to give the
appearance of fairness, ‘whistleblower protection’ would be
vital.
GODBOLE’S CRITIQUE
Inspite of repeated endeavours from various quarters to
change the tone and tenor of the FOI Bill, it seems fated
to be passed in its present form. Madhav Godbole, former
Union Home Secretary has been following the developments
on the proposed legislation ever since the first draft came
out in the form of the ‘Shourie draft’. In his critique of the
Bill (Godbole 2000), Godbole points out various drawbacks
which go towards making the legislation weak. He points
out that the preamble itself does not make a clear and
unambiguous statement that the law is for enforcing a
fundamental right. He also suggests that the title of the Bill
should be changed from ‘Freedom of Information Bill’ to
‘Right to Information Bill’. The words ‘consistent with
public interest’ in the preamble also limit the application
of the Act, as ‘public interest’ is generally construed in
favour of government’s interpretation and may quite often
mean ‘government’s interest’. He further suggests that the
law should cover wider institutions than the ‘state’ in the
strict sense of the word. Non-governmental organizations
(NGOs), co-operative societies, trusts, professional bodies,
and even private companies should be brought within the
ambit of the law for disclosure of information. Godbole,
like others, also finds the exemption clauses too restrictive.
He is also vehemently opposed to class exemptions such as
all ‘cabinet papers’, and argues that the revelation of the
decision making process of the cabinet does not violate the
principle of collective responsibility. Moreover, the committee
of secretaries deals with a large number of issues to do with
economic management, economic policy, contracts, and
tenders, which need not be hidden from the public. Indeed,
disclosure would enhance responsibility and judicious
discharge of duties. He also makes out a strong case for
imposition of fines and penalties for delay in providing
information, especially where the information is denied
deliberately and knowingly.
In toto, the provisions of the Bill read together are a
severe disappointment, even leading to the stance from
some analysts that it is better to not have a law than to have
32
PCAW (2001).
a bad one, as the existing information regime would give
sufficient scope for exercising the right which already exists.33
Private Companies Could be Included
The provision of infrastructure, whether through public or
private bodies, invites an unequivocal application of the
right to information to all projects, as they pertain to basic
entitlements of the people. Godbole also makes a case for
extending the right to information legislation to private
companies too: ‘this is particularly relevant in the context
of the policies for economic liberalization adopted since the
early 1990s and the downsizing of the government envisaged
in the coming years. The excessive preoccupation with right
to information in the government domain alone is thus
misplaced and needs a correction’.
In the context of government either contracting out
basic services to private enterprise or adopting corporate
practices in providing infrastructure, the issue of the people’s
right to know takes on an even greater importance. Large
contracts must be transparently entered into, and there
should be transparency clauses instead of secrecy clauses
between government and private parties, in order that
dealings take place in an open and fair manner34 (Hindustan
Times, 2000).
Accepting the irrefutable logic for transparency and
sharing of information with stakeholders, private enterprise
and multilateral agencies seem to be taking positive action
towards implementing the right to information qua
stakeholders on their own initiative.
WORLD BANK’S PUSH
FOR
TRANSPARENCY
The World Bank, for instance, is taking concrete steps to
increase its ambit of information disclosure and is, even
now, in the process of reviewing and updating its Disclosure
Policy (World Bank 2000). The new proposal recognizes
that ‘an approach that goes beyond disclosure to focus on
the requirements of the development paradigm would
emphasise disseminating relevant information in client
countries’. It also emphasizes the need for upgrading of the
Bank’s Public Information Centres (PIC), for taking proactive
steps to publicize documents like Environment Impact
Assessment (EIA) reports in the local language, and engage
in actual consultation which goes beyond mere form. It
33 See Rajeev Dhavan, ‘Information Now’, Public Interest Legal
Support and Research Centre, New Delhi, mimeo.
34 Hearing a petition asking for a speedy trial of the Howaldtswerke
Deutsche Werft AG, Germany (HDW) submarine deals, the High
Court of Delhi asked the government to consider having a builtin transparency clause while signing multi-crore multilateral contracts,
to avoid the incidence of kickbacks and moneylaundering, which are
a drain on the taxpayer.
suggests the use of information technologies for further
outreach. However, the proposals stop short of disclosing
certain important documents like the Project Status Reports.
In its highway projects, the World Bank has been
attempting to build upon the policy of openness and
consultations. Although the Strategic Options Study (SOS)
for highway projects is prepared on the basis of secondary
data, the feasibility study, which consists of looking at
indicators as well an economic analysis of all options, is a
more consultative process. In the highway project for the
Allahabad Bypass, for instance, public consultations on all
five options had been carried out. The stakeholders had
been informed through advertisements in local newspapers,
through the village panchayats and through the district
administration. The final choice for the alignment was
based on these consultations. Even during the detailed
preparation, information was also exchanged between the
project authorities and the people, which influenced the
design of the project, and the consultation process was
completed by sharing the details of the final project with
the public. After this, EIA and Rehabilitation Action Plan
(RAP) and other policies concerning the rehabilitation of
the people were placed in the public domain. This is surely
a mark of the changing times, when compared to the total
lack of information in the Sardar Sarovar Project (SSP) on
the Narmada ten years ago.
USING
THE
RIGHT
TO
INFORMATION
The right to information is only as good as the use to which
it is put. And continuous and extensive gives meaning to
the information made available. In the US, the Freedom of
Information Act has been used creatively to dig into official
actions in the sphere of drug manufacture, defence,
environment pollution, and hazards of nuclear waste. In
Japan, the Act has been used to disclose cases of bloated
expenses of officials of the ministry of foreign affairs or
‘financial meetings’ in fictitious restaurants. Health ministries
have revealed the additives to drugs with harmful side effects
and urban local bodies have been forced to disclose their
minutes of meetings. The plea that disclosure would ‘hamper’
the work could not be invoked unless it was supported by
substantial proof. Interestingly, in the area of proactive
disclosure, some Japanese prefectures (local governments)
have gone so far as to publicize the next year’s budget,
especially the expected expenditure and inviting citizens’
suggestions. This is in contrast to governments’ usual stance
of keeping all aspects of budgets under close wraps on the
pretext that the economy will all but fall if anything is given
away before the appointed hour. Minutes of meetings in
which competing bidders bid for the construction of a
museum building have been disclosed. In Korea, information
disclosure on economic restructuring has been sought by
NGOs and the law is being reviewed to accommodate these
requests.
THE MKSS EXPERIENCE
Indian experience thus far reveals the potency of the right
to information in equipping the common person to access
information for his possible betterment. The Mazdoor Kisaan
Shakti Sangathan (MKSS) have pioneered the call for the
right to information from the lowest rung of the hierarchy
of both governance, and citizenry––the neglected and poverty
ridden villages of India. In using the right to information,
the MKSS have evolved a novel method of holding
government agents accountable for the fraud perpetrated on
the masses in the name of ‘development’. The siphoning of
huge amounts of development money intended for developing
infrastructure like roads, bridges, water tanks, wells, school
buildings, etc. has been brought to light by accessing
information from government’s own records and juxtaposing
it with the physical reality on the ground. Thus, lakhs of
rupees have been ‘spent’ on paper in purchase of material
and in payment of wages for construction of ‘invisible’ and
non-existent works. The exposure of these documents to the
common people who are supposed to have been the
beneficiaries of these works or employment schemes has
started a virtual movement for accountability, simply
articulated as ‘humaara paisa, humaara hisaab’ ––our money,
our account. Several years of struggle to get access to
information, despite the barrage of resistance from the gram
sewaks (clerical staff of the panchayats) right upto the Chief
Ministers, has finally begun to concretize into a recognition
on the part of both the movement and the government that
the process needs to be institutionalized and the right to
information cannot be demanded or used merely on the
basis of continuous mobilization and informal ‘audits’ by
the people. The first victory for the movement was to get
a notification under the Panchayat Act that records of all
panchayat expenditure could be inspected. The second step
was to get a right of photocopying. In 2000, the state of
Rajasthan passed a Right to Information Act, which can
perhaps be said to be a case of one step forward and two
steps backward. For, although the government assured the
civil society groups that the development of the law would
be a participatory process, the final form of the law left
many of the demands unfulfilled in the law.
The MKSS’ methodology has been an evolving one, but
since its core is very simple, it can, and has, been adapted
to different circumstances with some variation. Harsh
Mander, a senior bureaucrat and active proponent of the
right, has culled out the basics of the methodology of ‘social
audit’ and explained the process for the use of right to
information by citizens’ groups (Mander and Joshi 1999).
Besides the kind of ‘social audit’ of the type practised by
the MKSS35 and other people’s groups, people can use the
right to information to monitor the processes of the formal
governmental audit and insist on adoption in India of the
universally followed practice that audit cannot be satisfied
unless local ratepayers are given a hearing and their objections
taken on record. Even now, for central government schemes,
audit of public works have to be placed before the gram
sabhas and completion certificates can be given only after this.
The important factor in the creative use of the right to
information will be the pressure that stakeholders are able
to exert on the institutions that have been hitherto closed
and which are in no hurry to open up, legal provisions
notwithstanding. The entire exercise will reflect not only on
how money is being used, but also on an equally important
aspect of how discretion is being exercised.
4.5 COMMUNITY PARTICIPATION MAKES A DIFFERENCE:
WATER AND SANITATION PROJECTS IN RURAL INDIA
S. Manikutty
An important factor contributing to the effectiveness of
infrastructure projects is the network of organizations and
procedures through which the community (intended
beneficiaries) participate in the project at different stages.
An approach based on participation by the community
takes note of the fact that a substantial portion of the
knowledge needed to design and operate a project resides
in the community, and this knowledge is crucial for the
eventual success of the projects. Besides knowledge, the
deeper involvement of community members can highlight
possible errors of design and lead to their correction. Bhatt,
Manikutty and Mavalankar (1996) studied the factors that
facilitate or inhibit community participation (CP) in water
and sanitation projects in five states in India, namely Gujarat,
Maharashtra, Rajasthan, Karnataka, and Kerala. They also
assessed how this participation or lack of it affected the
outcomes and functioning of these projects.
In all the states studied, the water and sanitation projects
were funded by bilateral agencies and incorporated
community participation as a mandatory feature. The
technologies used varied among the projects: regional piped
water supply schemes (Gujarat, Maharashtra, and Kerala);
local piped water supply (mini water) schemes (Karnataka);
and hand pumps (Karnataka and Rajasthan). At the time
of the study (1995), all these projects, except Maharashtra,
were in the operation and maintenance (O&M) phase for
quite some time (at least five years), but in Maharashtra, the
construction phase was not over. The projects were managed
in the O&M phase by the State Water Board (Gujarat), local
bodies (Karnataka and Rajasthan), and local water institutions
in combination with the State Water Board (Kerala).
In each of the states, about 12 to 15 villagers were
selected (except in Kerala where 27 ‘wards’36 were studied).
35
For a brief description, see Joshi (2000) and Mander and Joshi
(1999).
36 Wards in Kerala have about 2500 people, and about 10 wards
form a panchayat.
In each village, about the five per cent of the village
population was interviewed, with a minimum of ten and
a maximum of 50 persons in each village. It was ensured
that 50 per cent of the respondents were women.
A community participation index was developed that
would measure the level of participation of each village.
Essentially, the community participation was based on
intensity (typically measured by the proportions of people)
participating in meetings, discussions, decision making,
community census, making contributions in cash, kind,
and labour, to the project, and in involvement of the daily
operations of the facilities. Table 4.5.1 gives the value of CP
index for the states covered.
Table 4.5.1
Community Participation Index in Certain States
State
Kerala
Maharashtra1
Rajasthan
Karnataka
Gujarat
CP Index
(scale of 0–3)
1.80
1.80
1.50
1.45
1.10
Notes: All differences, except that between Kerala and Maharashtra,
were statistically significant.
1 In Maharashtra, CP was measured only in the planning and
construction phases.
FINDINGS
Creation of an institutional structure for participation
at different stages is important
The institutional structure created to elicit and sustain
community participation varied among the states studied,
and this affected the projects. In Gujarat, though village
level water committees called pani panchayats were formed,
the State Water Board, which was the implementation agency,
took little interest in organizing meetings of these committees,
or even in listening to their views. Even the role and status
of pani panchayats and their relationship with the Water
Board were not defined. Thus, the views of the community
were not taken into account in the project planning and
design.
This led to poor utilization of facilitates by the villagers,
especially in the case of sanitation. We give here two specific
instances. During our study, it was reported that more than
50 per cent of the latrines that were built were not used
by the people, since their location in the house made it
difficult especially for women to use them. These latrines
were converted into store places shortly after they were
constructed. In the case of water, the needs of migrating
population and their cattle (the needs of cattle were very
high) were not taken into account during planning, since
the planners missed out this segment altogether. This led
to repeated instances of breaking of the pipes by the migrant
population to obtain water.
In Maharashtra, the institutions to elicit and sustain CP
were slow to develop. The Zilla Parishads or ZPs (the district
councils) were given the responsibility to develop pani
panchayats but they proved to be totally unequal to the task.
An outside educational institution (the Tata Institute of Social
Sciences, Mumbai (TISS)) was brought in and this agency
set up participatory institutions during the planning and
early construction phases (the project was still in this phase
at the time of our study). TISS tried to train the officials of
ZPs, but with no great success (Manikutty 1998: p. 383).
In Rajasthan, an NGO, the People’s Education and
Development Organization (PEDO), was an intermediary
agency entrusted with the planning, design, and construction
of facilities (hand pumps and latrines). This NGO had an
ideological belief in CP, and it went to great lengths to
consult the villagers. It set up an exclusive project organization
for this project, and developed participatory mechanisms.
It insisted on the people attending meetings, ensured
attendance by women, and made it clear that the community
was entirely responsible for all the decisions, and saw itself
only as a facilitator.
Through a programme of education and training, the
villagers were made aware of the implications of decisions,
so that better decisions could be made. PEDO insisted that
all disputes were to be sorted out by the community members
themselves, and PEDO refused to give any decision by itself.
These meetings, however, were not made into an institutional
mechanism, so that once the construction phase was over,
and PEDO handed over the facilities to the village panchayats,
the participation stopped completely.
In Karnataka, the community members were involved in
the location of hand pumps. A crucial role was played by
the Project Advisory Group (PAG), a group consisting of
members from the Karnataka government and DANIDA
(Danish International Development Assistance), the bilateral
funding agency. The Project Advisory Group was created
solely for this project, and this agency put in place a system
of participatory rural appraisal (PRA) for location of facilities
and for identifying the beneficiaries eligible for different
levels of subsidy for latrines. There was, however, lack of
clarity regarding how the participation could be sustained
once the construction phase was over and PAG was wound
up.
The community participation in the planning, design,
and construction phase was fairly good, mainly with regard
to location decisions. However, there were no local
institutions set up to continue the participation at the
O&M stage; in fact even in the construction phase,
participation was minimal. The project became another
traditionally administered project by the Zilla Parishads
(district councils).
Kerala incorporated CP in its project plan and developed
a very sound institutional structure to attain and sustain
participation. A special organization called socio-economic
units (SEUs) was created that was under the Kerala Water
Authority (KWA) that implemented this (piped water)
scheme, but was funded by the donor agencies. Socioeconomic units had, as their personnel, social scientists who
were in charge of development of local participatory
institutions. In each village, Ward Water Committees
(WWCs) were formed that would be totally responsible for
the decisions on the location of water stand posts, health
training, and awareness building. Water committee meetings
were conducted by the villagers themselves, but SEUs
monitored the frequency of the meetings and gave advice
when needed. It insisted on regular attendance by the
community members; those who did not attend a stipulated
number of meetings were excluded from the latrine project.
This was justified on the ground that health education was
also a part of the project, and hence those who did not learn
better health habits were not likely to reap the full benefits
from the project. In the construction phase, WWCs were
responsible for mobilizing labour contribution (mainly but
not solely, for latrine construction), settling disputes, and,
to some extent, keeping liaison with engineers of KWA
(SEUs also acted as the liaison agent). In the O&M stage,
WWCs were responsible for reporting faults, following up
the repairs, and doing some (minor) repairs themselves
through training and paying a local person. Their roles as
well as how their roles differed from those of the other
agencies involved were made clear. This was the most
elaborate and sustainable institutional structure among all
the projects studied.
Institutional Arrangements for Interfacing with
Community Members
Different mechanisms were used to interface with the
community in the different projects. This closely followed
the development of the basic institutions themselves. In
Gujarat, the only mechanism used was large group meetings
with the communities. This was also done in a lackadaisical
manner which conveyed the impression that the Water
Board was not serious about these meetings. An institution
for holding consultations with the villagers on an ongoing
basis was not set up at all.
In Maharashtra, Rajasthan, and Kerala, a variety of
interfacing mechanisms were employed: small group
meetings, informal discussions with villagers, training of
local people as volunteers in health related information
dissemination and involvement in location decisions. In
Rajasthan and Kerala, people were trained in proper use of
facilities and their upkeep and maintenance. In Kerala, they
were also trained in systematically recording faults, reporting
them, following them up, and doing quite a lot of repairs
themselves. A number of income generation activities such
as chlorination of wells were also put in place, which not
only provided an income to these people, but also improved
the health consciousness of the community members.
In Karnataka, there were community meetings and
participatory rural appraisal (PRA) sessions to determine
the places to locate hand pumps, to decide on who would
be eligible for latrine subsidies, and to work out the training
sessions in health awareness. Continuous feedback was also
obtained from the community regarding the facilities and
their use.
These mechanisms led to an active and institutionalized
interaction with the community by the Zilla Parishads. But
these mechanisms were still limited in their scope. Besides,
as the onus of running these participatory institutions was
left to Zilla Parishads, which had no traditions or expertise
to conduct these exercises, and they fell into disuse.
Interfacing with Existing Local Institutions
Our study shows that existing local institutions could be
made use of in W&S projects, provided that these local
institutions are strong and are functioning in a reasonable
way. Not all the projects did or could interface with these
institutions. In Gujarat, there were little contacts with the
local institutions. In Karnataka, there were fairly well
functioning democratic Zilla Parishads earlier, but these had
been dismantled by the government about four years prior
to the study. Only the executive wing (consisting of
government officials) remained. There were no democratic
institutions to which the project institutions could relate
and interface with, although the government machinery of
the Zilla Parishads was there. Hence the effort was either
through a small and inadequate PAG (which was not
intended or equipped to take up these responsibilities) or
through government officials who had no interest in
participation by the community.
In Maharashtra, there was an attempt by TISS to involve
the Zilla Parishads. The attempt was only moderately
successful, due to the limited capacity of TISS to train up
the needed personnel and the unenthusiastic people from
ZP who were to be trained.
In Rajasthan, again, no attempt was made by PEDO to
build on the existing local institutions. The result was that
after PEDO withdrew from the project (after the
construction phase), there was no mechanism at all for the
community to interface with the local institutions.
In Kerala, we see the most effective interface between
local institutions and project institutions. Kerala had a well
functioning panchayat system. SEUs were organized at three
levels: the state level unit; one for each of the three zones–
–northern, central, and southern; and at all village
panchayats. The SEU at the state level was a unit of KWA
and also developed close linkages with other bodies such as
the Ministry of Rural Development. The socio-economic
units at the zonal level developed links with the district level
bodies. Panchayat Water Committees were formed at the
panchayat level and consisted of all the elected panchayat
members and representatives of local organizations. At the
ward level, Ward Water Committees (WWCs) were formed.
The elected ward member to the panchayat was the chairperson of a WWC, and there were representatives from local
grassroot organizations and social workers in the area. At
least two of these representatives had to be women.
This structure ensured that the WWCs would be the
main grass-root unit for generating and sustaining
participation. The higher level committees served to deal
with problems that could not be dealt with at the ward level.
The presence of elected members and the insistence by
SEUs on regular and open meetings in which decisions were
taken, ensured that potential conflicts could be resolved
efficiently. The political clout of panchayat members could
be brought to bear upon KWA to expedite construction and
ensure satisfactory maintenance.
IMPACT
ON
PROJECT OUTCOMES
Our concern was not with CP per se but its influence on
project outcomes. Hence, we measured the outcomes of the
five projects along different dimensions such as technological
outcomes, health outcomes, satisfaction of beneficiaries, use
of the facilities provided by the project, etc. We found that
due to a number of other factors affecting outcomes, a
direct correlation of outcomes to CP did not yield any
results. For example, the percentage of facilities working
depended on the technology of the projects (hand pumps,
for example, were more prone to breakdowns than water
taps from a piped water supply). The satisfaction of users
depended on how badly they needed the services to begin
with, and changes in habits depended on the initial levels
of literacy.
Hence we studied two projects, both piped water schemes,
in adjoining districts in Kerala, both with similar terrain and
with similar demographic and hydrological characteristics as
well. Two villages, one in each of the two project areas, were
studied. The two villages studied were within five kilometers
of one another, although they belonged to different districts.
One of the districts was in the project earlier studied and
had significant CP while the other was delivered by the
KWA in the traditional manner with no involvement from
community. In terms of outcomes, the two projects were
strikingly different, as may be seen from Table 4.5.2.
In the village with CP, supplied water quality was not
only perceived to be better, but was indeed actually so, as
we checked out ourselves. Respondents in the Project II
village stated that the pipes in many places had rusted but
no corrective measures were taken. On the other hand, in
Project I, the respondents stated they had got the pipes
replaced whenever there was a problem.
In the Project II village, there were no records anywhere
in the community to show how many taps were out of
order; while in the Project I village, there was not only such
a record, but also records of the follow up. The involvement
of community members can also be seen from the responses
to the question of responsibility if taps went defective. The
typical response of the villagers in Project I was: ‘It is our
responsibility. Any of us going to the town would follow
it up’, whereas in Project II, the typical response was: ‘It is
KWA’s responsibility to keep the taps working. It is not our
job to follow it up’.
The projects aimed at supplying treated, safe drinking
water as a means of improving the health habits. But Project
I had a programme of health education, in which the
community members not only attended, but also contributed
by mobilizing community members to attend classes and
conducting classes themselves. Some were trained in the
chlorination of wells so that this traditional source also
would be safe for drinking. The Project II village had no
such programmes. In Table 4.5.2, we note the differences
in the usage of the treated water from the source as being
much higher than in Project II, in which the community
members continued to use also the traditional sources. These
continued to be unsafe due to lack of any chlorination
programes.
Table 4.5.2
Outcomes With and Without CP
(percentage)
Project I
in village with CP
Perception of quality of water: 1
Percentage of taps working2
Respondents using only piped water for drinking*
Respondents using only piped water for cooking*
Respondents’ perception of responsibility for keeping the
area near the stand posts clean
Those who use it*
Government**
Caretaker3
Responsibility to set right faults
The community members2
The agency (‘We shall not take any action’)2
No response/do not know**
Initiative taken in the past to report defects2
Per cent of respondents satisfied with the project2
Per cent of respondents dissatisfied with the project2
1
2
3
‘Satisfactory’: 40
‘Good’ : 60
Project II
in village without CP
92
39
40
‘Brackish’: 25
‘Muddy’: 25
‘Unclean’: 50
74
25
27
26
9
23
66
0
34
48
26
0
18
63
19
95
75
10
0
30
40
In both villages, 80 people were interviewed. Figures in percentages.
denotes the difference being significant at 0.01 level; * at 0.05 level; ** at 0.1 level.
The difference was mainly due to non-existence of a caretaker and hence not statistically tested.
Source: Manikutty (1997).
The project I village had, from the very beginning, insisted
upon the community members taking responsibility for not
only keeping the stand posts in working condition, but also
keeping the surrounding areas clean. The Project II village
did nothing of the kind. The appearance of stand posts in
the two project areas studied was strikingly different: while
the stand posts in Project I area were scrupulously clean
(kept clean by the community members), those in the
Project II areas by and large presented a pathetic appearance,
with the surrounding areas filthy and unhygienic. When
questioned, the community members in the Project II areas
did not feel it was their problem.
The Project I village evolved participatory mechanisms at
every stage. Further, it also put in place an institutional
structure to make the participation effective and sustainable,
through building a set of institutions and devising institutional
mechanisms and processes, as we have seen. The Project II
village, on the other hand, saw the project as a purely
technological exercise of building pipes and stand posts, and
no other institution except the engineering department of the
government was involved. The difference in the outcomes
studied above are striking, and serves to underline the role
community participation plays in infrastructure projects.
Application To Other Infrastructure Projects
The lessons learned with regard to the W&S projects may
be applicable in other infrastructure projects as well. For
example, the problem of locating a village telephone is
conceptually similar to locating a water tap. More important
is the notion that an appropriate institutional structure is
needed to implement infrastructure. For example, formation
of users committees, with strong incentives for people to
take part in their decision making, linking them with existing
institutions are all steps that can lead to better implementation
of these projects. The role that democratic local institutions
play in the effectiveness of infrastructure projects cannot be
overemphasized. Though lip service is being paid to the
development of institutions such as gram panchayats, the
fact seems to be that there is really no commitment on the
part of the top, either in the political or bureaucratic system,
to make these institutions meaningful and effective37.
CONCLUSION
Considerable knowledge resides in the communities and it is
necessary to build on this knowledge. Otherwise, vital inputs
may get mixed out. Commitment from communities is also
essential for the sustainability of projects. They help to reduce
monitoring, supervision, and maintenance costs besides
ensuring appropriate design. However, participation cannot
be taken for granted. It will not come about through statements
of intent in project documents. It will come about and will
be sustainable only if appropriate institutions like empowered
panchayats and others are built or allowed to exist.
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5
ENVIRONMENT AND REHABILITATION
5.1 ENVIRONMENTAL GOVERNANCE AND REGULATION IN INDIA
Atiyah Curmally
LEGISLATIVE EFFORTS
Legislative efforts at pollution control in India date back to
the mid-nineteenth century.1 Many of these Acts dealt with
environmental regulation in a piecemeal manner and proved
ineffective at reducing the levels of pollution. Action against
polluters had necessarily to be initiated in courts by those
affected. Pollution and environmental degradation were
addressed very generally in terms of nuisance, negligence,
liability, and a few principles of tort law.
The spate of legislations2 in the post-independence period
also dealt only incidentally with pollution. Both air and
water pollution continued to increase.
Perhaps inspired by the Stockholm Declaration of 1972,
the Water (Prevention and Control of Pollution) Act, 1974
(the Water Act), provided for the institutionalization of
pollution control machinery by establishing Boards for
prevention and control of pollution of water. These Boards
were entitled to initiate proceedings against infringement of
environmental law, without waiting for the affected people
to launch legal action. The Water Cess Act, 1977,
supplemented the Water Act by requiring specified industries
to pay cess on their water consumption. With the passing
1 The Shore Nuisance Act, 1853, the Indian Penal Act, 1860,
the Indian Easement Act, 1882, the Bengal Smoke Nuisance Act,
1905, the Bombay Smoke Nuisance Act, 1912, and the Motor
Vehicles Act, 1939 were some of the pioneering legislative attempts.
2 These included the Factories Act, 1948, the Industries
(Development and Regulation) Act, 1951, the River Boards Act,
1956, the Atomic Energy Act, 1962, the Insecticides Act, 1968, the
Merchant Shipping (Amendment) Act, 1970, and the Radiation
Protection Rules, 1971.
of the Air (Prevention and Control of Pollution) Act, 1981
(the Air Act), the need was felt for an integrated approach
to pollution control. The Water Pollution Control Boards
were authorized to deal with air pollution as well, and
became the Central Pollution Control Board (CPCB) and
the State Pollution Control Boards (SPCBs).
The Bhopal Gas leak disaster of December 1984
precipitated the tightening of environmental regulation. In
1985, the Department of Environment was changed to the
Ministry of Environment and Forests (MoEF) and given
greater powers. The Environment (Protection) Act, 1986
(EPA), was passed, to act as an umbrella legislation. The Act
also vested powers with the central government to take all
measures to control pollution and protect the environment.
The Environment (Protection) Rules, 1986 were
subsequently notified to facilitate exercise of the powers
conferred on the Boards by the Act. The EPA identifies the
MoEF as the apex policy making body in the field of
environment protection. The MoEF acts through the CPCB
and the SPCBs. The CPCB is a statutory organization and
the nodal agency for pollution control. The EPA in 1986
and the amendments to the Air and Water Acts in 1987 and
1988 furthered the ambit of the Boards’ functions.
Constitutional Directives
In terms of constitutional provisions, the 42nd Amendment
of 1976 for the first time imposed an obligation on the part
of the state (Article 48A) and the citizens (Article 51A(g))
to endeavour to protect and improve the environment and
to safeguard the forests and wildlife of the country. The
economic reforms of 1991, the Rio Conference of 1992,
Environment and Rehabilitation
and growing environmental awareness all resulted in further
amendments to the constitution.
Role of the Judiciary
The Supreme Court and High Courts have played an active
role in the enforcement of constitutional provisions and
legislations relating to environmental protection. The
fundamental right to life and personal liberty enshrined in
Article 21 of the Constitution has been interpreted by the
courts to include the right to pollution-free air and water.3
Also, relaxing the enforcement of strict rules of proof and
modification of the traditional rule of standing (locus standi)
so as to facilitate public interest litigations has served, more
or less, to remove the difficulty in individuals approaching
courts for redressal.
The backdrop of all this has been the growing environmental awareness among the public. This has been
demonstrated by public demonstrations and protests
throughout the 1970s and 1980s4, growth in environment
and development oriented non-governmental organizations
(NGOs), citizen groups, and pressure groups in India (today,
roughly 20 times the size in 1985), and the increase in the
frequency of public interest litigations.
Working of Environmental Regulation
An analysis of the principal pollution control legislations,
the Air and Water Acts, reveals that these legislations are
mostly punitive in nature. The Pollition Control Boards
(PCBs) have thus restricted their approach to pollution
control to ‘Command and Control’ (CAC). This implies
that the state agencies are to function as watchdogs to keep
an eye on the existing industries. All new industries, before
they start to function, would in this approach require prior
permission to do so. The agency responsible then permits
them to carry out industrial activity, subject to certain terms
and conditions.
While the basic functions of the CPCB remain prevention,
control, and abatement of air and water pollution, with the
various SPCBs assuming these functions, the role of the
CPCB is restricted to providing technical or scientific
assistance. The CPCB has maintained the major role of
prescribing the standard limits for various pollutants. While
the SPCBs may prescribe stricter limits if they choose, they
may not dilute the standards stipulated by the CPCB.
The SPCBs employ three instruments, namely, consent
to establish producing units, consent to operate, and
3 Subhash Kumar vs. State of Bihar AIR 1991 SC 420, 424;
M.C. Mehta vs. Union of India 1992 (3) SCC 256, 257; and
Virender Gaur vs. State of Haryana 1995 (2) SCC 577, 581.
4 The ‘Chipko Movement’ was in protest against the alienation
of traditional rights of users to forests, and the exploitation of timber
by the forest departments.
97
standards for air and water pollution. Under the Water Act,
consent is necessary for an industry to ‘discharge effluent
into a stream’. Under the Air Act, consent is necessary to
‘establish or operate an industrial plant in an air pollution
control area’. The other functions of the SPCBs are advising
the state governments, formulation of preventive methods,
technology development, regulation of location of industries,
disposal of hazardous wastes, and collection and
dissemination of information on the prevention and control
of pollution.
The PCBs also have the power to move court for
‘restraining apprehended pollution’ as a preventive measure
(Section 33 of the Water Act and Section 22A of the Air
Act). In an extreme case, a PCB can give ‘directions to any
person, officer or authority’ in the interest of pollution
control, which ‘includes the power to direct closure,
prohibition or regulation of any industry or process, or
stoppage or regulation of supply of electricity, water or any
other service’ (Section 33A of the Water Act and Section
31A of the Air Act).
Failure to obtain consent and violation of consent
conditions makes the occupier of an industrial unit liable
for punishment under both Acts. The punishment prescribed
is imprisonment with unlimited fine. For minor violations
of the Acts, such as failure to provide information, obstructing
personnel of the Board from discharging their duties, and
so forth, the penalty prescribed is imprisonment upto three
months or fine of Rs 10,000 or both. More severe
punishments are provided under both Acts for continued
violation after the first conviction (Section 41 to 45A of the
Water Act and Section 37 to 39 of the Air Act).
Thus, the role of the Boards is mostly that of an enforcer,
and the primary functional tool employed by them for
controlling industrial pollution is inspection of polluting
units. The Water Act prohibits the discharge of pollutants
into water bodies beyond established standards (Section
24), and requires that generators of all new and existing
sources of discharge into water bodies get the prior consent
of the PCBs (Section 25 and 26 respectively). It also lays
down penalties, such as fines and imprisonment, for not
complying with these (and other) regulations of the Act.
Prior to 1988, enforcement was through criminal prosecution
initiated by State Boards and by seeking injunctions to
restrain polluters. After amendments to the Act in 1988,
the Boards were given more teeth—they can now close
errant factories or cut off their water or electricity by an
administrative order. The ‘command’ therefore is the
stipulation of certain upper limits of parameters, while the
‘control’ is the power to withdraw the power supply, water
supply, and the imposition of the penalty (fines,
imprisonment).
Concern has been expressed that the existing pollution
control laws are not backed by sound policy pronouncements
and even when they are, it is more as an afterthought rather
than as clearly formulated guiding principles. For example,
neither the preamble nor the provisions of the Water Act
or Air Act provide much concrete policy guidance. The Acts
focus more on procedural details like setting up of the
CPCB and SPCBs, their constitution, structure, powers
and functions. It is only in the list of powers of the State
Board under the Water Act that one finds any hint that the
legislators understood that there might be costs to balance
against the benefits of pollution control: ‘the Boards are to
evolve economical and reliable methods of treatment of
trade effluents’.5 Even the rules6 issued under these Acts
focus almost wholly on procedural matters. These rules
illustrate the forms to be filled out by the Central Board
for its annual report, list the fees for particular pollution
tests, and give sample application forms for consent orders
without describing how to make use of the information
provided. Nowhere do the rules take advantage of the power
granted to assist and guide SPCBs to promulgate substantive
rules with policy import. As a result, policies exist without
laws, laws without policies, and there have even been cases
where policies have followed legislation. As late as 1992,
nearly two decades after the enactment of the Water Act,
the Government of India (GOI) came out with a Policy
Statement for Abatement of Pollution. Some incongruencies
that come to light are the following. The statement
emphasizes ‘promoting technological inputs to reduce
industrial pollution’. However, it fails to assign the agencies
responsible for this task. As of now, the function of PCBs
extends to the granting of consent and implementing
standards. They are not in any position to offer technical
advice required by industry. Further, though ‘public
cooperation in securing a clean environment’ finds mention
in the policy statement, no legislation has evolved incorporating this even a decade after the policy pronouncement.
Pollution control laws have neither kept pace with
constitutional directives, nor have they operationalized the
space that exists for popular participation if these directives
are truly understood. Environmental legislations, such as
the Air and Water Acts, on the contrary, have a strong
centralizing tendency, with the state and Central government
as the exclusive decision makers. Further, none of these laws
provide for co-ordinated functioning of the various
enforcement agencies with the third tier of governance—
panchayats and municipalities. There is nothing at all to
involve local communities.
5 Water (Prevention and Control of Pollution) Act, 1974, Section
17(1)(h).
6 The Water (Prevention and Control of Pollution) Rules, 1975;
The Water (Prevention and Control of Pollution) (Procedure for
Transaction of Business) Rules, 1975; The Air (Prevention and
Control of Pollution) Rules, 1982; The Air (Prevention and Control
of Pollution) (Union Territories) Rules, 1983.
As a result, the activist role played by the higher judiciary
has been on the rise. This has included issuance of
administrative orders to the extent that the courts have been
forced to catalyze the legislature to codify certain legislations.
For example, the Public Liability Insurance Act, enacted in
1991,7 fixed the liability on the occupier of an industrial
unit for the damage caused to a third party. This was the
legislative version of the judicial pronouncement of the
Supreme Court in the Delhi Oleum Gas Leak Case.8
THE PREVAILING FORM
OF
GOVERNANCE
From the characteristics of the pollution control mechanism
in place in India, it can be gleaned that there exists a
command and control regime with a set of laws designed
to perform a preventive rather than a proactive role. Even
the constitutional provisions, while affirming the right of
the State and the duties of the citizens, do so without
upholding the corresponding rights of the individuals and
the duties of the state. In other words, citizens cannot claim
environmental protection as a right and the state is not
bound by any duties to protect the environment. It becomes
evident that environmental policy and law in India has not
evolved in anticipation of a problem, but rather has been
a knee jerk reaction to existing problems.9 Judging by the
prohibitive levels of pollution in existence today it has been
ill equipped to achieve any of the targets specified. The EPA,
for example, came into existence to deal with all anticipated
environmental problems with the hope that mass disasters
of the Bhopal variety are prevented from recurring. In over
a decade of its working, no evidence exists, both in its
content and application, that this law has the potential to
meet the challenges of mass environmental disasters.
Central and state governments and the CPCB and SPCBs
have adopted a soft attitude towards polluting industries
and have done little more than issue warnings. The result
is that these laws are practised more in violation than
conformity and a large number of industries operate without
proper safety and pollution control measures.10
For successful implementation of the CAC policy
envisaged, certain facilities are of paramount importance.
These are infrastructure of the regulatory agencies, a
thorough understanding of environmental problems, and
most importantly the monitoring and enforcement
7 An Act to provide for public liability insurance for the purpose
of providing immediate relief to persons affected by an accident
occurring while handling any hazardous substance.
8 M.C. Mehta vs. Union of India AIR 1987 SC 982.
9 It may have also arisen out of elitist concerns, and not the
concerns of those actually affected. Thus, they are overly ambitious
on paper but lack effective deterrents and are inadequately
implemented.
10 Parikh, Parikh, Tata and Laxmi (1999), p. 15.
Environment and Rehabilitation
capabilities of the regulatory agencies.11 An evaluation of
the PCBs, however, reveals that their working is rife with
shortcomings.
Enforcement
The primary functional tool employed by the PCBs for
controlling industrial pollution is inspection of polluting
units. Given the penalties in force for non-compliance in
India and keeping in mind the extent of the SPCBs’ powers,
the impact of inspections on compliance is only as strong
as the threat of enforcement and punishment faced by the
industrial units. Studies conducted reveal that there appears
to be no impact of inspections on emissions.12 The reality
is that environmental management often degenerates into
crisis management. Inspections are undertaken at the time
that operating consent is granted and thereafter usually only
in response to complaints, accidents, or other emergencies.
Enforcement by the PCBs, as a result, is woefully inadequate.
Further, a study conducted by the Planning Commission
found that they do not have a complete inventory of polluting
and potentially polluting industries. Small industries (capable
of high levels of pollution) have been left out of the purview,
further undermining efforts at pollution control. Small
industries are known to contribute as much as 40 per cent
of air and water pollution.
Monitoring
Monitoring conducted by the PCBs is also far from effective.
Polluting industries may make a one-time investment and
set up Effluent Treatment Plants (ETPs). Around 2–5 per
cent of its capital investment may be so spent on pollution
control. The costs of operating these facilities are anywhere
between 15–30 per cent of the investment made, annually.13
As operating costs are high, industries are often reluctant
to run these plants. Poor monitoring almost always allows
units to get away without operating these plants properly.
The PCBs claim that inadequate manpower limits their
monitoring.
Poorly Staffed
The Planning Commission study revealed that the PCBs are
very poorly staffed. The study highlighted the predominance
of non-technical members in most of the Boards, the lack
of professionals in the composition of the Boards, and also
the tendency to not fill vacancies of members representing
local bodies. Thus, both motivationally and in ability, the
PCBs are ill-structured.
11 To be effective, CAC with ambitious targets, would include
much cost, and steep punitive measures.
12 Pargal et al. (1997), p. 16.
13 Parikh, Parikh and Tata (1999), p. 10.
99
Lack Technical Skills
One of the resons for ineffective monitoring is the lack of
technical skills of the PCBs. For instance, the Biomedical
Waste (Management and Handling) Rules, 1998 specify the
working of incinerators so as to reduce emissions of toxins
like furans and dioxins. However, neither the CPCB nor the
SPCBs have the capacity to even collect samples, let alone
analyse these toxins.
Inadequate Funding
The principal sources of funding for PCBs are government
grants and revenue collected under the Water Cess Act. In
actual fact, PCBs are starved for funds. The result is
inadequate infrastructure in terms of laboratories, monitoring
equipment, and regional offices, inadequate staff, both
technical and administrative, and an inability to discharge
their primary functions. For example, the Bihar Pollution
Control Board (BPCB), which administers pollution laws
in the second most populous state of the country, has
continuously been deprived of funds. For several years, the
state government withheld funding, restricting BPCB
expenditure to less than a third of its modest requisition.
Even ten years after the enactment of the Water Act, the
BPCB did not have a single laboratory or analyst to test
effluent samples.14
A subset of the issue of inadequate funding is the manner
in which the SPCBs have made expenses. An analysis of the
expenditure incurred by the SPCBs during the Eighth Five
Year Plan shows that the primary expenditure was on
administration amounting to 57 per cent. The ratio of
capital expenditure to total expenditure was about 14 per
cent. Maintenance, depreciation, and other expenses
constituted the major chunk of the remaining part. It follows
that expenditure on pollution prevention activities, training,
and research and development was for all practical purposes
negligible.
Lack of Willingness to Implement Policy
A lack of willingness to implement policy is also apparent.
While the PCBs have the authority to cut off the electricity
and water supplies of polluting industries, launch prosecutions, and initiate proceedings against top management
so as to hold them personally liable, the use of these measures
has been meagre. With hardly any local representation
inclusive of people who are affected, this is almost inevitable.
In addition, they have failed to bring the offenders to book.
For example, in Rajasthan only two convictions have been
obtained, despite nearly 7000 cases cases filed in court
against air and water polluters.15
14
15
Divan and Rosencranz (2001), p. 3.
Parikh, Parikh and Tata (1999), p. 13.
Political Interference
However, the argument is made that PCBs are, sometimes,
not able to exercise powers to force compliance because of
interference from powerful interest and pressure groups.
Such interference is sometimes based on the argument that
strict compliance with standards will lead to closure of
industrial units, which in turn may result in unemployment
and protests. This interference is hardly surprising given
that often the Boards are represented by vested interests
responsible for pollution. With the position of the Chairman
of the Boards invariably being a political appointee, political
interference is rampant, and internal sabotage of most cases
is then almost inevitable.
Variations in Enforcement
The high degree of political interference may be one of the
factors responsible for wide variations in enforcement across
states. It has been argued that although states cannot compete
by lowering environmental standards in order to attract new
investment, they can get around this by lax enforcement.16
This could be the outcome of a so-called ‘race to the bottom’
for environmental quality in which states invariably sacrifice
the environment in the competition for jobs and economic
growth. For example, there exists no uniform procedure for
the grant of consents under the Air and Water Acts. Some
SPCBs grant consents for a fixed period, usually between
1 and 3 years while the others may issue open-ended consents.
The consent fee structure and industry classifications also
differ widely across States, suggesting inequitable horizontal
treatment of industrial units. For instance, if an industrial
unit falling in the investment limit between Rs 50 lakhs and
Rs 100 lakhs applies for consent from the Madhya Pradesh
Pollution Control Board, it is bound to pay Rs 7500 as fees
whereas if the same unit applied for consent from the Kerala
Pollution Control Board, the fee would be Rs 2000. Nonfilling of the sanctioned strength is one of the factors behind
widely varying per unit staff ratios across SPCBs. In Andhra
Pradesh, one technical person has to monitor 100 units
whereas Kerala and Himachal Pradesh have 14 and 12
persons respectively for the same task. The norms for
determining the staffing pattern of the boards have not been
prescribed, leading to wide differences in the per polluting
unit availability of staff for monitoring.17
PERVERSE INCENTIVES UNDER CAC
Consent from the PCB is necessary before any industry is
set up. After the consent, the industry is supposed to maintain
16
Gupta (1996).
17 Evaluation Study on the Functioning of State Pollution Control
Boards, Programme Evaluation Organization, Planning Commission.
the characteristics under the prescribed norms. This approach
permits little flexibility in the means of achieving goals as
it forces all firms to make similar efforts to control pollution.
As the standards are source-specific, being neither either
technology based or performance based, this policy gives
little incentive to polluters to search for cleaner technologies
or improved abatement technologies.
Another drawback is the inability to take advantage of
the economic efficiency possible in pollution control. While
standards with strict implementation may limit emissions
of pollutants, they typically exact relatively high costs in the
process, by forcing firms to resort to unduly expensive
means of controlling pollution. On the governments’ side,
they impose high monitoring costs. As the marginal
abatement costs vary among firms, the appropriate
technology in one situation may not be as cost-effective as
in another.
The penalties for non-compliance with standards are
unrelated to the compliance costs. The prosecution and
court decisions are based on compliance or non-compliance
and not on the extent of compliance. The fines are prescribed
in nominal terms and are independent of the quantity and
quality of emissions.
The ambient and source standards are laid down
independently, unrelated in terms of the volume of pollution
generation activities. As a result, it is quite conceivable that
the quality of the environment could continue to deteriorate
even with a high degree of compliance. For example,
according to the standards stipulated regarding the ambient
air quality, five parameters are chosen. If in the analytical
reports of ambient air quality, these five parameters are
under limits, the ambient air is deemed fit for human
consumption. If this indeed were so there would be no
phenomenal rise in respiratory problems.18
Command and Control approaches are inefficient for the
regulatory agency as well, as detailed information about
production processes and various pollution control devices
is required before setting standards. With diverse industries,
it becomes expensive and time consuming to obtain the
necessary information of each industry. The Minimum
National Discharge Standards,19 for example, have been
established to enforce industrial discharges. Set at levels at
or near the maximum effluent reduction technically
achievable, they are in general economically unrealistic and
technically unfeasible. In the face of such standards dictated
by the CPCB, the SPCBs are forced into an inflexible
position in which the only two alternatives they have are
ordering non-compliant industries to close or not enforcing
the standards at all (if they are serious about implementation).
18
19
Brandon et al. (1995), p. 5.
Environment (Protection) Rules, 1986 (Schedules I and VI)
respectively.
Environment and Rehabilitation 101
As a result of these prohibitively high standards it was found
that a significant proportion of units discharging trade
effluents into water streams do not have treatment plants
in the states of Assam, Tamil Nadu, Punjab, Kerala,
Karnataka, Gujarat, and Haryana. Similarly, a considerable
proportion of units emitting air pollutants do not have any
air pollution control measures in the states of Punjab, Assam,
Bihar, Gujarat, Karnataka and Kerala.20 This inflexibility
often results in protracted negotiations and even litigation
with considerable costs involved.
Cost-effectiveness is further hampered by the fact that
standards do not take into consideration factors such as
carrying capacity of the environment. Stipulations for
standards can be broadly divided into cumulative parameters
and specific parameters. Our laws stress cumulative
parameters rather than specific parameters. Many studies
have shown that certain pollutants have the capacity of bioaccumulation. As the number of industries obtaining consent
is on the increase, the pollution load on the ecosystem is
getting heavier by the day. As a result the carrying capacity
at some places has long been crossed.
The existence of more than one set of standards presents
a lack of clarity. For example, the Environment (Protection)
Rules prescribe industry specific standards and national
minimum standards.21 The industry specific standards in
Schedule I are restricted to only select parameters and are
not necessarily exhaustive. The Schedule VI standards apply
to all industrial units for which specific norms are not
published in Schedule I. However it is not clear if the
minimum national standards in respect of other parameters
apply to the industries specified in Schedule I. Consequently,
the adoption of different standards remains within the wide
discretionary powers of the PCBs.
Since the stipulation of standards by the regulatory
authorities there has been no revision in upper limits or
enforcement of stricter limits. Neither has any mechanism
evolved to permit the PCBs to review the same at regular
intervals.
In terms of court-driven implementation of pollution
control measures, on several occasions both the High
Courts22 and the Supreme Court23 have admonished the
PCBs for failing to implement pollution control laws. In
20 Evaluation Study on the Functioning of State Pollution Control
Boards, Programme Evaluation Organization, Planning Commission.
21 Environment (Protection) Rules, 1986 (Schedule I, Schedule
II, Schedule III).
22 Bayer (India) Ltd. vs. State of Maharashtra 1994 (4)
BOM.C.REP. 309, 330; Pravinbhai Patel vs. State of Gujarat 1995
(2) GUJ.L.R. 1210, 1234; V. Lakshmipathy vs. State of Karnataka
AIR 1992 KAR 57, 70; Suo Motu vs. Vatva Industries Association
AIR 2000 GUJ 33, 35.
23 M.C. Mehta vs. Union of India 1998 (3) SCALE 602 and
1998 (4) SCALE 326.
the Ganga Pollution Case,24 the Supreme Court emphasized
that notwithstanding the comprehensive provisions contained
in the Water Act, the State Boards had not taken effective
steps to prevent the discharge of effluents into the river. The
court further observed that when statutory authorities do
not discharge their duties then the courts had the power
to issue appropriate direction. Further, the Delhi Oleum
Gas Leak Case can be used to demonstrate the role played
by the courts in plugging lacunae in the existing legislation.
The Air and Water Acts do not have any provision for
compensation to those affected by pollution. This judgement
widened the scope of Article 21 by lying down that the
power of the Supreme Court includes the power to award
compensation.
But this model of ad hoc court-driven environmental law
enforcement raises severe problems. The appropriateness
and suitability of courts of law in deciding matters that
require technical expertise is questionable. The Indian
judiciary has little technical expertise. Further, long delays
in delivering judgements are more the norm. There is no
viable alternative dispute settlement or conciliation
mechanism either.
SUGGESTIONS
REGULATION
TO
FACILITATE MORE EFFECTIVE
Every pollution control law ought to be preceded by clear
policy pronouncements. The laws enacted ought to
incorporate the policy and worry about appropriate
mechanisms for implementation. Codification and
consolidation of pollution control laws, that do away with
the overlaps is needed. Laws ought to be enforced within
a clear time-bound frame and administrative accountability
ought to be ensured.
However, a country’s institutional capacity to implement
and enforce environmental governance is a key consideration.
Monitoring and enforcement pose huge pitfalls for the
regulatory agencies in India. Inspite of the potential cost of
non-compliance to industries being not trivial (in terms of
the penalties imposed), compliance is weak. The suggestions
made below to facilitate better regulation take into account
the weaknesses of the regulatory agencies, especially in terms
of monitoring and enforcement.
Regulatory Approaches
While regulatory approaches are the most popular approach
to environmental problems, favoured by policy makers
because of the certainty of outcome they offer, they are also
the most costly in terms of monitoring and enforcement.
Nevertheless, in some cases these are the only feasible
24
M.C. Mehta vs. Union of India, AIR, 1988, SC, 1037.
instruments by which to achieve the aims of public policy.
For example, controlling emissions of hazardous substances
will generally best be accomplished by outright bans.
Similarly, land zoning regulations are the most effective
means to ensure that residential areas are not downstream
or downwind from polluting factories. In such cases, strict
implementation of the laws and credibility of the sanctions
imposed must be ensured to make sure that regulations are
effective.
Combination of Approaches: Some regulatory approaches
are more efficient than others. One that is particularly
inefficient is to stipulate abatement technologies—this tends
to discourage innovations that have the potential to limit
pollution emissions more cheaply. In such cases, the use of
a combination of approaches may be a better alternative.
For example, in Malaysia, a combination of standards
and charges has been effective in reducing water pollution
from palm oil mills. After being given one year to install
treatment facilities, palm oil mills were required to reduce
their wastewater discharges, taking biological oxygen demand
(BOD) concentration as the key parameter. Progressively
stringent effluent standards were implemented in four stages.
In addition to the standards, effluent charges are levied on
the BOD load discharged. The palm oil industry has made
steady progress towards meeting the target of 100 mg/l
BOD. A progressive reduction in the total BOD load
discharged was recorded from 563 tons a day in 1978 to
5 tons in 1989 despite a 93 per cent increase in the number
of palm oil mills over the same period.25
Differential Penalties
In instances where monitoring by regulatory agencies is low,
some non-compliance can be attributed to the optimizing
behaviour of firms. This implies that firms may choose to
remain non-compliant if the incremental cost of moving to
compliance is greater than the expected loss associated with
discovery and payment of penalties.
Use of the Becker Model of Deterrence:26 The optimal penalty
literature begins with Becker’s (1968) economic analysis of
crime, the basic insight of which is that potential criminals
respond to both the probability of detection and the severity
of punishment if detected and convicted. Thus, deterrence
may be enhanced either by raising the penalty, or by
increasing monitoring activities to raise the likelihood that
the offender will be caught.
Since increasing the probability of detection requires
some expenditure on government monitoring, Becker’s policy
prescription is to set the probability of detection arbitrarily
low, thus raising the penalty.
25
26
World Bank (1997), p. 42.
Becker (1968).
In reality, however, we do not observe such high penalties
and low detection rates. Among the reasons for not imposing
high sanctions are limited wealth of the offender, risk aversion,
and exogenous conditions such as legislation or social norms
of fairness. Thus, we are left with a government enforcement
policy that requires a significant amount of monitoring
expenditures.
Several innovations have been suggested to reduce
expensive government monitoring. One such innovation is
the idea of differential penalties and differential approaches
monitoring rates based on each firm’s prior compliance history.
For example, SPCBs may employ differential norms for
monitoring units based on complaints made or penalties
issued in the past.
Extending this idea further in the Indian context, one
may consider the idea of differential consents. Consent terms
may be rationalized by classifying industries depending on
their polluting nature and consents may be issued on this
basis for longer or shorter periods. This practice has
apparently been introduced in Maharashtra where less
polluting industries are issued consent for longer periods
and potential heavy polluters are monitored more frequently
by means of annual consents.
Limited Use of Market Based Instruments (MBIs)
Laws, systems, and approaches should be such that
monitoring and active enforcement by regulatory agencies
can reduce considerably in the long run. This can only
happen if potential violators are provided with sufficient
incentives to comply with the laws and penalties against
non-compliance. Any incentive that does not equal the
benefits gained through non-compliance27 will fail to achieve
its purpose. At present, the government does provide
some incentives, such as depreciation allowance, water
cess, concessional custom duty, excise duty, soft loans
for purchasing effluent control machinery, and targeted
subsidies. However, there is little evidence of their
effectiveness.
Although they may appear to be blunter than other more
targeted MBIs, the following approaches have proven easier
to administer and implement.
Removal of Subsidies: Many subsidies actually serve to
reduce the cost of overexploiting or polluting the
environment. Market based instruments that reduce subsidies
that harm the environment reduce costs to the Treasury
with important fiscal consequences. Recent estimates put
environmentally damaging subsidies at over $240 billion
per year in developing and transition economies.28
27
If incentives are not linked to actual levels of pollution in
effluent, then firms could end up with getting incentives and not
incurring the costs in abatement.
28 World Bank (1997), p. 10.
For example, it has been argued that in Brazil, the
exemption from taxation of virtually all agricultural income
(allied to the fact that logging is regarded as proof of land
occupancy) has provided strong perverse incentives to the
private sector to acquire forestlands and to then deforest
them.29
Self-Enforcing Policies: Recognizing that the highly
‘enforcement-intensive’ market based approaches of industrial
countries are difficult to adopt, many developing countries
are experimenting with more self-enforcing policies (such
as deposit-refund schemes and performance bonds) with
fewer points of intervention. In this manner, active
enforcement is kept to a minimum while raising the financial
costs of non-compliance. In both these cases, a financial
bond or deposit is used to guarantee compliance with the
desired outcome such as meeting environmental standards,
or correctly disposing of waste products.
The basic idea of a deposit-refund system is to let those
who generate waste be responsible for the associated costs
and to provide incentives to encourage waste recovery and
recycling. For example, in 1989 Taiwan established a depositrefund system to recycle polyethylene terephthalate (PET),
the plastic commonly used in soft drink bottles. Under the
system, members of the industry have formed a foundation
that administrates a joint recycling fund to cover costs of
collection and recycling of the bottles. The fund is
replenished from a deposit on the sale of each bottle. Those
returning PET bottles to collection locations receive a refund
per bottle. By 1992, the PET recycling rate was 80 per
cent.30
Similarly, performance bonds require firms to post
monetary bonds and forfeit them if they pollute.
Taxes
Environmental taxes send a signal of the right cost to polluters
by including the lot of their negative externality costs.
Rather than result in distortions, these taxes discourage
‘bads’ such as pollution. Taken a step further, environmental
taxes can yield a ‘double dividend’ if the revenue from them
is used to reduce and mitigate the effect of tax distortions.
In situations where weak monitoring capabilities imposes
constraints, blunter instruments, such as fuel taxes, with
fewer points of intervention may be more appropriate.
Reform of Water Cess: Though designed as a resource tax
on specified water consuming units, the water cess is capable
of serving as an effluent tax as well. It has been suggested
that the cess be based on the effluent load generated by a
firm so as to force industrial units to internalize the costs
of their pollution.31 Another suggestion recommended is to
levy the cess only on discharges in excess of the effluent
standards. This is similar to China’s water pollution levy
system given below.
China’s Pollution Levy: An industrial pollution levy system
exists in China on emissions that exceed standards.
Government revenues from the pollution levy have increased
rapidly, from 1.2 billion yuan in 1986 to 2.7 billion yuan
in 1993. The pollution levy now provides about 15 per cent
of all capital expenditure on pollution control and is the
principal source of funding for regulatory enforcement
activities!32
To provide incentives for enterprises to further reduce
the (within-standard) pollutant discharges into water, a fee
charged on the total quantity of wastewater discharged was
introduced in 1993. The collections of this within-standard
fee now amount to over 10 per cent of the collections of
the over-standard fee. Results of the tests of the levy system
suggest that the water pollution levy has been appropriately
targeted and has been effective at reducing water pollution.33
Defining Property Rights
Establishing property rights for land, water, and logging
concessions provides a fundamental incentive for better
resource management. When squatters become owners and
forest dwellers have long-term user rights, there is a builtin incentive to exploit natural resources in a sustainable
manner.
Taking this argument further, property rights, say for
clean air, can be negotiated with ‘polluters rights to pollute’.
A fair trade-off can in principle be arrived upon through
consultation between the directly affected stakeholders.
Systems that debar or discourage such negotiation therefore
end up being far from optimal.
Establishing Tradable Permits
Tradable pollution emission permits are the best known
examples of market creation, and the evidence is that they
are effective as long as a number of important design issues
are addressed. First, the permit must actually create a property
right. If there is any doubt on this count, then firms will
not participate in the market. Second, the question of
initial allocations of permits must be handled equitably.
Finally, there must be no artificial obstructions to trading
permits.
The fact is that as institutional capacity is among the
scarcest of resources in India, there would be good reason
31
29
30
Binswanger (1989).
32
33
Gupta (1999), p. 112.
Afsah et al. (1996).
to seek institutionally less-demanding approaches to
pollution control as opposed to complicated tradable permit
schemes. Keeping this in mind, one way to make a beginning
could be to focus initially on only industrial estates to
implement tradable permit schemes. This would facilitate
identification of small groups of serious polluters, which
the pollution control agency could regulate effectively with
its existing resources. A suggestion is to cap the total
emissions/discharges of the estate and have the potential
occupiers carve up the available pollution limit among
themselves.
In the most recent amendments of both the Air and
Water Acts, the public has been given right of access to
certain information relating to consent conditions imposed
by a Board (Section 49(2) of the Water Act and Section
43(2) of the Air Act) and a citizen can file a complaint with
the court against any polluter after giving notice of 60 days
to the prescribed authorities (Section 49(1)(b) of the Water
Act and Section 43(1)(b) of the Air Act). This has not yet
succeeded in facilitating the involvement of the public.
Some suggestions to better facilitate public involvement
follow.
Participation and Community Involvement
This may be useful especially when institutions are weak
and enforcement expensive. Public participation and
community involvement can be effective in enforcing
sustainable resource use and adapting local conditions to
development needs.
This approach has been effectively utilized in the market
economy, as evidenced by Japan. Local government and
resident groups in Japan negotiate with firms to arrive at
a detailed written agreement on emissions levels. Between
1971 and 1991, the number of agreements increased from
approximately 2000 to 37,000.34
Example of Bhavani Dam:35 A similar approach was
recommended when conflicts arose between agriculturalists,
industry, and domestic users for water in the Bhavani River
Basin in Tamil Nadu. Effluents discharged by industrial
units upstream of the Bhavanisagar Dam would accumulate
in the reservoir. This lead to farmers’ organizations and
NGOs protesting against the effects of effluents on the
quality of water for downstream uses such as irrigation and
drinking, and to the seemingly unbelievable situation of the
downstream users asking the authorities not to release the
dam water. As redressal through the judicial system was
thought to be an expensive and time-consuming process,
the recommendations were that the stakeholders in the
basin establish a forum whereby they could discuss and
34
35
Thomas and Belt (1997).
Parikh, Parikh and Tata (1999), p. 6.
negotiate the issues relating to the use of water resources.
Informal and transparent contractual settlements could be
worked out, and legal remedies were to be sought only if
negotiated settlements failed.
The functioning of the SPCBs as of now precludes
participation of the local populace who may be directly
affected by pollution of their environment. Community
participation could take the form of community groups
monitoring the samples generated by the polluting industries
and getting the same tested (in private labs). Funding for
such activity could be provided under the SPCB separately.
This would effectively prevent the polluters–authorities
nexus. The State Pollution Control Boards could also impart
the necessary training to such groups.
Public Discussion of the Environmental Assessment of
Projects
One avenue to participation that has proven to be particularly
effective is the requirement for public discussion of
environmental assessments of major projects. This has raised
public awareness of environmental problems and given whole
communities an effective voice in deciding how the
development process will affect aspects of their environment.
Attempt to Dilute Existing Legislation: In January 2001, the
MoEF proposed to further amend the existing Environmental
Impact Assessment Notification of 1994 (see Box 5.1.1).
The main proposal is to drop the requirement to hold public
hearings in the case of ‘Small Scale Industrial Units, Mining
Projects up to twenty five hectares, widening and
strengthening of Highways, and modernization of existing
Irrigation Projects’, the argument being that ‘the environment
impacts of such projects can be assessed on the basis of the
information provided by the project proponents to the
Ministry even without a public hearing’. This move has been
widely denounced as an attempt to dilute the notification
and reduce transparency. Small units cause at least as much
as 40 per cent of the pollution in India, Mining units could
be highly polluting and disrupt life for miles around.
Role of NGOs
NGOs can provide the vital link between industries,
communities, and regulatory authorities. In a study conducted
of a sample of 250 industrial plants in India, 51 plants
indicated that they had undertaken abatement in response
to NGO pressure and 102 said they had done so in response
to complaints from neighbouring communities.36 In 1994,
the Philippines received a $20.8 million grant from the
Global Environmental Facility to conduct a seven-year project
to conserve the nation’s biodiversity. Recognizing that the
36
Pargal et al. (1997), p. 6.
Box 5.1.1
GBUS: Greens see Red over Project Clearance Norm Changes1
Shyam Parekh
If a draft amendment to the Environment Protection Act comes through, almost 90 per cent of the industrial projects will come
up without facing environmental public hearings (EPH). This, experts fear, will reverse years of conservation efforts.
The draft notification was issued by the Union Ministry of Environment and Forests on 3 January, 2001. It proposes to amend
the environment impact assessment (EIA) notification on ‘impact assessment of development projects (1994)’, issued under the
Environment Protection Act (1986).
‘It is ironical that a mere three-line amendment will exclude small-scale industries, highway and mining projects besides
modernization of existing irrigation projects from the hearings. Such projects comprise over 90 per cent of the total projects,’ says
Mahesh Pandya of the Centre for Social Justice (CSJ), who attended a hearing in Delhi in this connection on 23 April.
At present, as many as 30 types of projects are required to pass through the EPH to seek environmental clearance from the
Centre. But with these changes four categories will be excluded. And small-scale industries are known for pollution.
Instead of considering the pollution load and other factors, such industries will get clearance on the basis of the investment
and area occupied. The Centre had imposed certain restrictions on expansion and modernization of any project, unless environmen t
clearance was granted by the government.
The draft notification states ‘It has been found that small-scale industrial units, mining projects with lease area up to 25 hectares,
widening and strengthening of highways and modernization of existing irrigation projects have minimal impact, both on the
environment and on people residing in the vicinity.’
It states that the environment impact of such projects can be assessed on the basis of the information provided by the project
proponents to the ministry without a public hearing.
However, Gujarat Pollution Control Board chairman K.V. Bhanujan says ‘such an amendment will not have any major impact
on the environment’.
Says Pandya, ‘There is a general tendency to set up industries even in the small-scale sector anywhere in a haphazard manner.
This is more so in the case of Gujarat where many small-scale industries have mushroomed causing extensive damage to the
environment. No systematic study is conducted or environmental status prepared, before setting up such units. Without proper
effluent treatment plants such small-scale industries [SSIs] add to the pollution load if viewed collectively at the level of a large
industrial unit.’
Some SSIs engaged in the manufacture of pesticides, radioactive goods, and hydrochloric acid figure in the category of highly
polluting ventures. The pollution in the Golden Corridor between Vadodara and Vapi caused by small-scale industries is one such
example.
Experts believe that such units should not be excluded from the purview of rules relating to EPH as it is just because of the
investment range that they are categorized as SSIs. The criteria for EPH should be based on the pollution load of the industry
concerned irrespective of whether the investment involved is large or small.
The CSJ represented that it is absolutely necessary to obtain environmental clearance through EPH in the case of highways
passing through towns, cities and reserve forests. Such EPH should be held in all places through which the highway passes.
Besides, mining projects related to fluospar and radioactive minerals cause undue damage to environment. Such industries should
not be exempted from the EPH on the basis of the limited lease area of occupation.
1
This piece is reproduced by arrangement with the Times of India, and is the copyright of Bennet, Coleman & Co. Ltd.
Source: 18 May 2001, Times of India.
national government alone would not be able to protect
biodiversity, the project was designed to form partnerships
between the public and private sectors by integrating the
assistance of NGOs into the management of protected areas
at national and local levels. This arrangement is being
implemented at 10 priority protected areas (a total of 1.25
million hectares of land, wetland, and water areas).37
accountable. Such public disclosure and public education
campaigns often have a much more powerful impact than
more traditional regulatory approaches. In addition, these
offer the possibility of fulfilling the large and growing need
for pollution control despite limited budgets and staffs, by
allowing the public to monitor the performance of individual
firms and their compliance with environmental regulation.
Information Disclosure
Example of Indonesia—PROPER: Faced with acute
pollution problems, shortage of environmental protection
funding, and weak enforcement of regulations, the
Indonesian government has experimented with a programme
for rating and publicly disclosing the environmental
Informed public opinion can also play a powerful role in
exposing and holding private firms and government agencies
37
Box 5.1.2
The Politics of Pollution1
Delhi Janwadi Adhikar Manch
It is nobody’s argument that pollution is not a serious problem. It affects us all, and in particular the poor. The poor with their
wretched living and working conditions, negligible access to health care, and lack of any alternatives have to bear the brunt of
the ill effects of pollution. A rational approach to tackling the problems of pollution ought bear in mind the causes, the interlinkages
between the various causes, and the different sections of society affected by uneven effects of the same.
We have outlined below the major causes of pollution in the city of Delhi, the sections responsible for this pollution, and those
chiefly affected by it. In the context we have attempted to show the total irrationality of the approaches of various governments,
the judiciary, and the administration to solving the problems of pollution.
A major source of air pollution is the vehicles that ply in the city, contributing 64 per cent of Delhi’s air pollution. Pollutants
from vehicles are no less dangerous than industrial pollutants. Despite the welcome introduction of compressed natural gas (CNG),
most vehicles in Delhi burn up diesel or petrol.
The total number of vehicles in Delhi shot up from 16 lakh in 1990 to 26 lakh by 1996, and is projected to reach 46 lakh
vehicles this year! Given that private cars and two-wheelers account for the majority of the 46 lakh vehicles, it is clear that the
problem of air pollution cannot be tackled without curbing this unrestricted growth of private transport. This is not possible without
providing a vibrant and viable public transport system. It allowed public transport in Delhi to degenerate. Another major cause
of pollution in Delhi is its industry. Some sources put the number of polluting units in Delhi at around 7000 but even official
figures vary. The Central government’s White Paper on Pollution in Delhi (1997) states that the volume of air pollutants that Delhi
has to breathe each day increased from 1450 tons per day in 1991 to 2890 tons by 1995. Obviously, it has increased since then.
Industry used to contribute about 12 per cent of air pollution in Delhi, or about 325 to 350 tons each day. But with the closure
of 243 brick kilns and 46 hot mix plants in 1996, the contribution of industry has reduced to less than 10 per cent. However,
given the toxicity of the fumes emitted, the effects of these pollutants are far more significant than the mere volume. For instance,
among the list of 27 industries targeted by the Delhi government are electroplating, anodizing, plastic, PVC compounds, and other
industries, all of which emit highly toxic fumes during the production process.
The Yamuna river is the main natural source of water to the city. At the point at which the river leaves Delhi at Okhla, the
level of oxygen in the water has been measured at 1.3 mg/litre against the minimum permissible level of 5 mg/litre, and the total
coliforms (bacteria) at 329,312 per 100 ml against the acceptable level of 500 per 100 ml. Contrast this with the levels when the
water enters Delhi at Wazirabad: the dissolved oxygen level is 7.5 mg/litre, and the bacterial level 8506 per 100 ml.
The total wastewater discharged in Delhi is about 2160 million litres a day (mld). Of this, industrial pollution contributes 320
mld; much of the rest derives from domestic sewage. Again, the contribution to toxicity of industrial pollutants is more than as
suggested by the volume of pollutants, given the use and unregulated disposal of chemicals and toxic substances. These either seep
into the ground to contaminate groundwater or flow into the Yamuna via twenty drains in the city, of which the Najafgarh drain
alone contributes over 40 per cent.
There is another factor that makes the problem of industrial water pollution more acute. At Wazirabad Barrage, the point where
the river enters Delhi from the north, the water is trapped to supply Delhi its drinking water. During the dry season, none of
this water is allowed to enter Delhi. Hence from October to June, the ‘water’ that flows through Delhi is the untreated or partially
treated sewage and industrial waste that flows into the Yamuna through the drains, besides some irrigation water for the Agra canal.
This has ominous consequences for those who use the river water downstream.
WHO ARE
THE
MOST AFFECTED?
The effects of pollution on an individual’s health are also influenced by incomes because high incomes improve the ability to mitigate
its worst effects. Better nutrition, airconditioning and bottle water are some means by which people can partially combat pollution.
Yet there is no denying that these effects are nearly universal. For instance, a high proportion of children in Delhi below the age
of 5 years suffer from respiratory disorders, and this affects children from most income groups. But, even here the impact on the
poor is more, given their general poorer health, worse living conditions, and limited access to health care.
The sections most affected by industrial pollution are the workers themselves. Most units that have been targeted for closure
in Delhi operate in small spaces of around 50 square metres, with little or no ventilation. In Wazirpur, acid is used in the process
of steel production. The fumes are so strong that the workers regularly find it difficult to breathe. For instance, workers in a copper
wire unit in Vishwas Nagar knew fully well that they are more affected by the pollutants than those outside. In this factory, copper
is cleaned with chemicals, which emit fumes. Then varnish is applied to the copper wire, and it is heated to help it dry quickly.
This emits a vapour, the regular inhalation of which causes TB. Those we spoke to said they eat gur regularly to prevent getting
TB, and knew several other workers suffering from TB.
Among the list of 27 industries targeted by the government initially is PVC (poly-vinyl chloride), of which hundreds of small
units have shut down in Vishwas Nagar in East Delhi. PVC, or poly-vinyl chloride, is one the most widely used types of plastic.
1
This paper draws much from DJAM (2001a) and DJAM (2001b).
In the manufacture of PVC pellets, dioxins are emitted, among which are some that cause cancer as observed by the WHO in
1997. Besides, in order to give PVC flexibility and strength, a plasticzer called dibutyle phthalate is used in its manufacturing process.
As a recent report states, phthalates can harm the reproductive system, and can cause cancer of the liver and the kidneys. Phthalates
‘are found in the atmosphere of primary PVC processing plants. This results in significant exposure to workers’. A study concluded
that the greatest potential for exposure to dibutyl phthalate is to individuals who manufacture or handle these substances
(http:// 198.252.9.108/govper/EnvHealthPer/2000/Octoo.pdf (Human Expose Estimates for pthalates).
Workers know that the pollution caused within a factory affects them, but as one worker in Tri Nagar said, ‘Hum kya kar sakte
hain? Naukri karna hai’. They have no option. A majority of them are not unionized. The struggles of workers in this city as elsewhere
have mostly remained confined to wage and economic demands. Issues of workers’ safety, health, and working conditions do not
find a place in these struggles.
Besides those working inside dingy, closed units, those most immediately affected are their families who live in jhuggi–jhopris
in the vicinity of industrial areas. It is they who are most exposed to the toxic fumes, chemicals, and drink the groundwater that
is contaminated by toxic pollutants. In Wazirpur, which is a centre of steel pickling and electroplating industry, acid and chemicals
used in steel processing collect in little lethal puddles on the road, through which the jhuggis’ residents walk all the time. The
air is foul with the smell of acid. During monsoon, the drains overflow, forcing people to walk through acid-laden water. Over
years of industrial activity, the acid has seeped into the ground and contaminated the water supply. Besides contaminated water,
the solid waste generated from processing steel lies around in piles. Studies have shown that they contain toxic heavy metals such
as chromium, nickel, lead, and cadmium, which seep into the groundwater. This has serious long-term effects on the slum dwellers.
A third section of people affected by the polluted river are those who use the water downstream. The Central Pollution Control
Board report says that the ‘500 km stretch from Delhi to Chambal [via Mathura, Agra, and Etawah] does not meet the criteria
for its designated use, even in the monsoon season’. Pesticides such as DDT, BHC (benzene hexa chloride), and heavy metals are
found in the water. It is the poor who use this heavily contaminated water for bathing.
In contrast to these poorest sections of people who are most affected by pollution, it is the elite that is most responsible for
it. None of the 46 lakh vehicles that blacken the air we breathe are owned by workers from Vishwas Nagar, Tri Nagar, or Okhla
whose livelihood has been hit. Contrary to middle class perception, the sewage that flows into the Yamuna is not caused by workers’
families in jhuggis: two-thirds of Delhi’s population receives little over two buckets per person per day. Residents of Golf Links,
Sundar Nagar, Vasant Vihar, and other elite colonies use over 450 litres or thirty buckets per person daily.
Despite being the root cause of much of the pollution, elites are disproportionately less affected by it. Middle and upper classes
have access to better nutrition and can withstand infection better. They are cushioned from the effects of pollution in more direct
ways. It is they who have the resources to instal Aquaguard and other systems that purify drinking water. Today, there are numerous
domestic and international companies that sell bottled water, at a price that only the rich can afford, enabling these companies
to make huge profits from the failure of governments to provide clean water to those who can buy it.
The state’s response has been to close or shift out industries, whatever the human costs of such actions have been. Relocating
industry will only export pollution to neighbouring areas. Closure is a knee-jerk reaction, which affects those who are already most
affected by pollution.
Any resolution of the current situation must adopt a holistic perspective, taking into account those who work in the factories,
and their families who live in the area, their physical safety, health, and well-being. And for those same reasons, if small industry
is to continue in Delhi, it cannot continue under the conditions that operate at the moment, violating most labour laws, safety
norms, and in abysmal working conditions.
performance of Indonesian factories. The aim of the
programme is to have a low-cost but effective means of
putting public pressure on factories and providing incentives
for factories to adopt cleaner technologies. The government,
the community, and the market apply the pressure, through
public disclosure, on factories with poor environmental
performance. The Program for Pollution Control, Evaluation
and Rating (PROPER) was introduced to the Indonesian
public in June 1995. Based on the government’s evaluation
of its environmental performance, a plant is assigned a
rating by PROPER. In the pilot phase of PROPER, 187
plants were rated. Those that rated poorly were privately
notified and given time until December 1995 to improve.
Preliminary results show that PROPER has a positive impact
on factories’ environmental performance. By December
1995—the time of full disclosure—the number of poorly
rated plants had reduced.38
Environmental Audits and Self-Monitoring by Industry:
Experience in industrialized countries has also shown that
firms react to popular pressure. To generate such pressure,
citizens may be empowered through a ‘right to information’.
Making publicly available emission measurements and audit
of firms can help citizens to be vigilant. In the Indian
context, publishing details of consent applications, reasons
for rejection and so forth would be the starting point.
Self-reporting is a substitute for government monitoring
efforts that may reduce enforcement costs without
38
compromising deterrence. Polluters are told to report any
violation of pollution standards. The magnitude of penalty
they receive will depend on whether the violation is reported
voluntarily or if government enforcement authorities discover
it when no self-report has been made. If it is the latter, then
the penalty may be considerably higher.
Community Pressure
It has become increasingly evident that it is virtually
impossible for the government to monitor the activities of
individuals, industries, and institutions across the country.
If the government is the sole monitoring agency, then
corruption and inefficiency are likely to creep into the
system. Vigilant stakeholders, with strong and technically
equipped institutional support, can play a very important
role in managing the environment.
‘Coasean Bargaining’: The starting point for thinking about
community bargaining approaches to pollution control is
the Coase Theorem. In his landmark essay, Ronald Coase
(1960) pointed out that pollution control situations have
a certain symmetry. Inefficient pollution imposes costs on
victims, which exceed the costs of controlling that pollution.
In other words, the marginal benefits of pollution control
exceed the marginal costs. The existence of inefficient
pollution damage therefore provides a motivation for the
victims to take corrective action, even in the absence of any
such incentives by the polluters. Such corrective action in
the form of informal regulation will be likely wherever
formal regulation leaves a gap between actual and locally
preferred environmental quality.
Informal regulation can take many forms, including
demands for compensation by community groups; social
ostracism of the firm’s employees; the threat of physical
violence; boycotting the firm’s products; and monitoring
and publicizing the firm’s emissions. Implicitly, such actions
force recognition of the community’s property rights in the
local environment. They frequently work because firms do
not operate in a social vacuum.
Direct Negotiation: This works on the premise that when
formal regulatory mechanisms are absent or ineffective,
communities will seek other means of translating their
preferences into reality. Many cases of direct negotiation
between plant managements and local inhabitants have been
documented around the world. These informal arrangements
may rely upon reputation concerns, direct threats, or social
pressure (as seen in the Bhavani Dam example given above).
Recent empirical work has indicated the widespread existence
of such ‘informal regulation’. Communities are often able
to negotiate with or otherwise informally pressure polluting
plants in their vicinity to clean up.39
Engaging All Stakeholders: In light of the above, one of the
implications for environmental regulatory policy is that the
regulators no longer need to think of themselves as the sole
enforcers. When participation by the community is
introduced into the framework, supplemented by selective
MBIs, then monitoring and enforcing rules and standards
are no longer solely confined to the regulator. Environmental
governance stands would improve greatly working through
very important leverage points of charge, viz. in empowered
communities, and the market.
5.2 THE ASSAULT ON WORKERS IN LAND USE POLICY AND
PRACTICE IN DELHI40
Delhi Janwadi Adhikar Manch41
In the last decade, the working class of Delhi has come
under relentless attack. Hitherto, they were victims of a lowwage economy with little urban space that had compelled
them into living and working in sub-human conditions.
Now as industries close they are threatened by the spectre
of joblessness and loss of their shelter, and are therefore
forced to quit Delhi.
39 Pargal et al. (1996), p. 1.
40 This paper draws much from DJAM (2001a), and DJAM (2001b).
41 Delhi Janwadi Manch is an NGO based in Delhi working for
the rights of workers and the poor displaced by industrial relocation.
It was formed on 16 December 1996, when various organizations
came together to address issues arising from a series of Supreme
The link between livelihood, shelter, and the right to life
was clearly elucidated in the Olga Tellis case in 1986.
The sweep of the right to life, conferred by Article 21 is wide
and far-reaching. ‘Life’ means something more than mere
animal existence. . . . An . . . important facet of that right
is the right to livelihood, because no person can live without
Court orders relocating polluting industries and cleaning up Delhi.
Since then the DJAM has been organizing protest dharnas, holding
public meetings, campaigning against the Supreme Court order
through pamphlets, cultural programmes and rallies, mobilizing
opinion in universities, the media and the public at large, joining
the struggle of jhuggi dwellers against the ongoing demolition
drive.
the means of living, that is, the means of livelihood. If the
right to livelihood is not treated as a part of the constitutional
right to life, the easiest way of depriving a person of his right
to life would be to deprive him of his means of livelihood
to the point of abrogation. [Supreme Court of India, from
the Olga Tellis case (AIR 1986 SC 180)]
Today, fifteen years later, the milieu has changed and the
right to life is being threatened by the same Court in the
name of fighting pollution. There is no doubt that pollution
is a major impediment to the well being of people at large,
particularly for those who are compelled to work in hellholes
and reside in crowded colonies or jhuggi-jhopris, which are
poor in terms of civic amenities. Urban pollution also tends
to pollute adjoining areas. It is our contention that if the
aim is to fight pollution and improve the health of the
citizens then it should begin by addressing the issue in terms
of the disproportionately high impact of pollution on the
lives of the poor working class.
If the Supreme Court itself violates the right to life of
citizens and displaces lakhs of the working class, then the
message is loud and clear that the issue of survival of the
workers has become non-justiciable. This section brings out
the massive displacement of ordinary people with the closure
of industries and the demolition of slums, the working and
living conditions of the bulk of Delhi’s citizens, and the
politics of slum clearance and pollution.
THE LEGAL CONTEXT
In 1985, a lawyer M.C. Mehta filed a writ in the Supreme
Court, No. 4677/85, on pollution of the Ganga river. Since
1996, the Supreme Court began issuing a series of orders
pertaining to the closure or relocation of industries from
Delhi. In 1996, it ordered that: 168 ‘hazardous and noxious’
and ‘heavy and large’ industries be moved from Delhi by
30 November 1996; 513 ‘extensive’ industries (employing
between 50 and 500 workers) in residential areas and 334
such units in other ‘non-conforming’ areas be relocated or
closed down by 31 January 1997; 46 hot-mix plants be
closed down by 28 February 1997; and 243 brick kilns be
closed by 30 June 1997. Around 50,000 workers lost their
jobs following these Supreme Court orders.
In February 1996, in another writ petition, filed in 1994,
pertaining to pollution of the Yamuna river, the Court
directed the Delhi government to undertake the construction
of 15 Common Effluent Treatment Plants (CETPs) to treat
industrial water pollution emanating from Delhi’s 28
designated industrial areas. The Delhi and central
governments were to pay a combined 50 per cent of the cost
and the remaining half was to come from contributions by
industry. Not a single industrial association has paid up its
50 per cent till date. Little progress having taken place for
over five years, on 13 September 1999, the Court asked the
Delhi government to ensure that, from 1 November 1999,
no industrial effluent is allowed to be discharged directly
or indirectly into the Yamuna.
The second round of closures, this time only of polluting
units, began in January 2000, continuing intensively until
March. Hundreds of polluting units were closed down by
teams of SDMs (Subjudicial magistrates). They had a rough
list of polluting units provided by the Delhi Pollution Control
Committee (DPCC)—based on a survey that DPCC officials
themselves confess as being unscientifically prepared — and
also identified other polluting units during their visits and
sealed them with police assistance. According to an affidavit
filed on 8 July by the Chief Secretary, Delhi government,
as many as 3177 units had been shut down by early July
2000.
The further sealing of 27 types of polluting industries,
in non-conforming areas, began in late November 2000
(see Box 5.2.1). The Court order made it clear that this was
an interim step and that the rest of the units operating in
violation of the Master Plan, were to be closed or relocated
at a later date. On 25 January 2001, it decreed that all
‘potentially polluting units would be targeted.
The closure process is thus scarcely complete. At the time
of writing this report, a further 33 types of industrial units
within the ‘F’ category of the Master Plan were being sealed.
Whether they are all actually polluting is unclear. The
Court had asked the government how many polluting units
there were in Delhi. In its stead, the government said its
survey of 1996 had revealed that there were 38,936 units
under the ‘F’ category, more than 32,000 of which were in
non-conforming areas. In the face of opposition from
industry, the government has now been saying that they are
not all polluting. Whatever the real picture may be, closures
are carrying on relentlessly day after day.
In addition, there are thousands of units beyond a certain
size that operate in non-conforming areas. A high-powered
committee made a classification of industry as per the Master
Plan, and proposed the closure of industries operating in
non-conforming and residential areas. Following which, in
1997, the Court ordered units in residential areas to close
down. Their reported numbers vary greatly. In the hearing
on 24 January earlier this year, it was said that a further
57,000 industrial units could close down. Pressurized by the
factory owners, the government has been pleading during
the past few hearings that residential areas where industry
currently occupies over 70 per cent of the area be categorized
as ‘industrial’. At the same time, it has invited applications
from industry to relocate outside Delhi. Hence, besides
these widespread closures, there has been a process of
relocation that has been inching forward over the last four
years or so. Over 52,000 applications for relocation were
Box 5.2.1
Industrial Closures in Delhi
Following a Supreme Court order (of 12 September 2000) that directed the Delhi government that ‘all polluting industries of
whatever category operating in residential areas must be asked to shut down’, teams of sub-divisional magistrates accompanied by
police personnel had begun sealing hundreds of ‘non-conforming’ polluting units. Twenty-seven ‘undisputedly polluting industries’—
acids and chemicals, dyeing and bleaching, electroplating, glass products, plastic dye, polythene, steel re-rolling, PVC compounds,
among others—listed in Annexure III ‘F’ in the Master Plan of Delhi (MPD 2001) were initially targeted by the government.
Over the next few weeks, hundreds of factories in Tri Nagar, Keshopuram, Vishwas Nagar, Rohini, Narela, Samaipur Badli, and
numerous other areas were sealed. The official count of industries sealed in this round of closure between November to January
2001 is 2856.
In a matter of a few weeks, according to our estimate, over 4000 industrial units in this city ceased functioning, throwing over
50,000 workers out of work.
When teams from the Delhi Janwadi Adhikar Manch (DJAM) surveyed some of these localities in December, all kinds of
economic activity were in the process of winding down. The effects of industrial closure tend to be widespread, having negative
spin-off effects in the locality in general, beyond the factory. All kinds of small establishments and the casual, contract, or the
informal workforce within them had been hit by closures.
The majority of these migrant workers from villages and small towns in U.P., Bihar, and other states are completely at a loss.
When the current round of closures first began in late November last year, thousands of workers took to the streets. It was a scene
Delhi has rarely witnessed. Factory owners who needed the workers to add to their protest against closures facilitated these initial
protests. Three workers were killed in police firing in Vishwas Nagar on 20 November, but not a rupee’s compensation was
forthcoming from a single factory owner. Workers and shopkeepers of the area had collected money to send to the families of the
dead. Around sixty workers languished in Tihar Jail, as no factory owner wanted to bail them out. There was intense anger against
factory owners and particularly against the Delhi government.
Those affected comprise a completely non-unionized workforce given the nature of units and production processes in these areas.
In the kind of industrial and ancillary services units that exist in Delhi, there is no security of job. Workers who have worked in
a factory for years can be abruptly thrown out of a job. In some cases, they were asked to come back after 3 January (on the day
of the next hearing of the case in the Supreme Court) by which time, they were told, the situation would be clearer. Some were
told that the factory would reopen on that date. Most were simply asked to leave, or return to their villages. In some cases, workers
were physically forced to sign settlement papers by factory owners with the use of goons and by bribing the local police. The workers
received just the month’s wages due to them. Some received nothing at all since they had taken advances against their wages.
Few have found alternative, even if low paying, jobs in the city. Most workers have returned to their villages, unable to pay
the rents for jhuggis in the city. Even, four months after the closures began, those who left in the hope of being called back to
work had not still returned to the city. Most workers in fact hail from families that do have small amounts of land, but which
is not enough to support the numbers that are dependent upon it. Hence, those affected by these ongoing closures includes not
just the thousands of workers in the city, but lakhs of people in the villages and small towns depending on regular money orders
from Delhi.
submitted, of which 22,000 units have been approved and
deposits paid.
The White Paper on ‘Pollution in Delhi with an Action
Plan’ (1997) brought out by the Ministry of Environment
and Forests, Government of India describes the problem as
being the ‘rise in population and growth in economic activity
[which] has led to increase in pollution in Delhi’. Its last
chapter affirms that ‘the Action Plan goes beyond just
controlling pollution’. It also emphasizes ‘planning and
development of infrastructure which will mitigate pollution’.
Towards this end, the objective was to ‘contain the pressure
of population on Delhi. The [Action] Plan envisages the
deflection of a population of 20 lakhs from Delhi.
Accordingly, the development of priority [satellite] towns
and complexes in the NCR outside Delhi has been projected’.
Such efforts had in the past proven counterproductive. For
instance, the Master Plan had sought to develop Meerut,
Rewari, Khurja, Rohtak, and Panipat so as to decentralize
and decongest Delhi. Not only has Delhi continued to grow
and expand, these towns themselves suffer from excessive
air, water, and noise pollution. In other words, shifting
polluting industries to satellite towns is not a solution but
a problem.
But as we discuss later in this report, pollution appears
to be an excuse being used to throw workers and their
families out of the city (see Box 5.2.2). The Second Master
Plan for Delhi (MPD 2001) recommended that hazardous
and noxious industries [Annexure H (a)] not be permitted
in Delhi. Similarly, heavy and large industries [category H
(b)] would have to be shifted outside Delhi to the National
Capital Region (NCR). These are the categories and industries
that the Supreme Court targeted in its order of 8 July 1996,
leading to the closure in 1996 and 1997 of 168 hazardous
industrial units, 243 brick kilns, and 46 hotmix plants.
The Master Plan also refers to ‘extensive industries’, which
include 81 types of industries, currently the subject of
government attention. Among the closures in 1996 were
847 extensive units in residential and non-conforming areas.
According to the Master Plan, new extensive units were to
be permitted only in identified extensive industrial areas, of
which there are only eight locations: Chilla, Okhla, Najafgarh
Road, Mayapuri, Rohtak Road, Patparganj, South of
Jahangirpuri, Mother Diary, and Samaipur Badli. More
crucially, extensive units in non-conforming areas had to
shift to these specified areas or presumably shut down. It
is not clear how these already crowded industrial areas could
accommodate these non-conforming units.
Further, light and service industries in non-conforming
areas—of which there are thousands—would have to shift
to their industrial use zones: those with 20 or more workers
within 3 years; those with fewer workers would be reviewed
after five or ten years, hence giving them time for relocation.
Then, no new industrial unit of any kind employing more
than fifty workers would be permitted in Delhi. Finally,
only ‘household’ industrial units with a maximum of five
workers and one kilowatt power would be allowed in
residential areas, but no polluting unit would be allowed as
household industry. This, in essence, is a restructuring of
the manufacturing character of the city, for a city of this
size would always have small ‘household’ industry operating,
legally or illegally. Anything larger than that in commercial,
residential, or other non-conforming areas are scheduled to
be evicted (for more on eviction see Box 5.2.3).
The Master Plan refers to 16 new industrial areas for the
growing number of light and service industries, but only
eight have been developed. Besides, two areas for extensive
industries had been promised but none was developed. Of
the 58 modifications to the Master Plan from 1990 to 1998
pertaining to 5007 hectares, land use was modified to
‘manufacturing’ only in four cases, totalling merely 38
hectares. Over the same period, land redesignated as
‘residential areas’ totalled 2782 hectares, and nearly 200
hectares was changed to ‘commercial’ purposes.
By lending its institutional legitimacy to this restructuring
agenda, the Supreme Court has played a role that is nothing
short of dubious. The Court’s periodic obiter dicta regarding
closure and the accompanying demolition of jhuggi–jhopris
betrays its class character. It has referred to the protests of
workers against closures in late November as ‘hooliganism’
having taken over the city. More important than employment,
the Court said, was the health of the city residents, a
blinkered perspective of health that excludes the well being
of those who make the city what it is in the first place. This
concern for quality of life places a disproportionate
responsibility on those who sell their labour power in order
to secure a life. As one woman in a jhuggi in East Delhi
angrily told us, ‘We have lived here for twenty years. Delhi
was made by our labour, and now they are throwing us out.’
The apex Court believes that migrants, who form the
bulk of the city’s workforce, will have no objection to moving
40–50 kilometres away. There is, however, absolutely no
guarantee at all that there will be a job calling them there.
The silence of the Court on the matter of livelihood of
the working class is shocking given that it cannot be unaware
of the huge social consequences of the closures of 1996, when
thousands of workers were abruptly thrown out of their jobs.
In 1996, the Court had at least mentioned some compensation
for workers. Expectedly, the actual task of their payment was
undertaken only when workers began to agitate for
compensation, and even turned to the courts. Yet, the majority
of them did not receive anything, because the majority was
employed in units where workers were not unionized. Even
in large, unionized workplaces—such as Shriram Foods and
Fertilisers, with its workforce of over 1350—the Court finally
dismissed the case of the contract workers. As a result more
than 50,000 workers were reduced to destitution.
Workers and slum dwellers of Delhi as we can see continue
to live under a perpetual state of an undeclared ‘Emergency’
that today derives legitimacy from an active judiciary. On
16 February 2000 in the public interest litigation (PIL) of
Almitra Patel, etc., the Court ordered the Delhi government
and other authorities to remove slums and unauthorized
colonies from the public land threatening to dispossess an
estimated 35 lakh people. The Court stated that, ‘The
promise of free land at the tax payers cost, in place of a
jhuggi is a proposal which attracts many land grabbers.
Rewarding an encroacher on public land with a free alternate
site is like giving a reward to a pickpocket’. Further, ‘When
a large number of inhabitants live in unauthorised colonies,
with no proper means of dealing with domestic effluents,
or in slums with no care for hygiene, the problem becomes
more complex.’ The underlying assumptions link survival
needs with the pernicious activity of the land mafia and
dismiss the dire need for housing of working people by
punishing them for being unable to afford clean living
space! It amounts to victimizing the victim, inverting all
notions of justice and fairness. Not a word about whether
the authorities are obliged to rehabilitate them or not.
Equally, there was no concern expressed over lack of sewage,
latrines, drinking water, and electricity for the 35 lakhs who
reside in slums. Delhi has around 1100 bastis comprising
six lakh jhuggis spread over 9.5 sq kms. Most slums are
located on land owned by DDA, MCD, NDMC, and the
railways, concentrated mainly around industrial areas. The
problem of shortage of dwellings, that too affordable
dwelling, has resulted in the proliferation of slums. This is
Box 5.2.2
Restructuring the City
Having for years allowed industrial units to thrive in residential and other areas, it needs to be asked why the government and
the Court have suddenly woken up at this time to the existence of industries deemed to be ‘non-conforming’ as per the Master
Plan. As it is, Delhi’s industrial growth, post-1947, has always run contrary to conforming, regulated industrial development envisaged
in the Master Plan. By 2000, the Delhi government declared there were 121,000 industrial units that did not ‘conform’ as per
the Master Plan. Durng 1980s and 1990s around 4500—5000 new industrial units were added to the city each year, most of them
in non-conforming areas, operating with a proxy licence that they renew each year. Currently, besides the 28 designated industrial
areas, there are 37 other ‘non-conforming’ areas in which industry thrives. In fifteen of these non-conforming areas, industry has
grown to such a degree that over 70 per cent of it has been taken over by industrial activity.
This proliferation of industry has partly been encouraged by the traditional support of the government to the small scale sector.
Another significant factor of this proliferation is the decentralized process of capitalist production. Enforcing the Master Plan’s
provisions described below and limiting industry by administrative and judicial interventions runs counter to this production system.
Hence, shifting industrial units elsewhere does not mean that conditions will evolve into something better. Many will just close
down while others will come up in other areas under the same working and operating conditions.
The real agenda may not be to control pollution, but to shift it elsewhere. These actions are directed at altering the manufacturing
aspects of the city, to administratively facilitate the removing of manufacturing processes from the city to the degree possible, and
transform the city to a centre of service industries.
If one were to view what has happened in Delhi since, a similar pattern emerges. At least 50,000 workers lost their jobs following
the closures of over one thousand industrial units in late 1996–7. In early 2000, hundreds of industrial units were shut down following
the Supreme Court orders that industries be forbidden from polluting the Yamuna. And in the ongoing round of closures that
began in November last year, the authorities have already sealed thousands of units. Many other units had already stopped operating
before official teams visited them. According to an official figure, in the hearings on 24 January, the government said that from
November to January 2001, 19,496 units had been scrutinized and 2856 units closed, in 1373 units there was no industrial activity,
and in 1549 there was change of trade. By any estimate, at least a lakh or more manufacturing jobs have disappeared from this
city in less than five years!
A panic has been created about the entry of ‘outsiders’ into Delhi who are threatening to change the very profile of the city.
Their ‘illegal entry’ has allegedly not only depleted the water and electricity but has also created a law and order problem. It is
claimed that only by cleansing Delhi of these hordes of migrant ‘outsiders’ can normalcy be restored.
‘Outsiders’ are not the well-to-do white collar executives and corporate but only the working class people hailing from U.P.
and Bihar to Orissa and Tamil Nadu who live in sub-human conditions and contribute their hard labour to the building of this
city, its upkeep and provide various services. Urbanization necessarily means the movement of workers and others to cities, and
there is nothing dysfunctional about it. But high income inequalities, joblessness, slow growth of manufacturing, and even when
there is some growth in manufacturing, its poor employment elasticities result in enhanced migration to the cities. Land reforms
could have considerably stemmed this outflow from rural areas.
The same State that is today throwing out lakhs of workers and the poor from Delhi was responsible for bringing them here
in the first place. The setting up of flyovers, stadiums, and hotels for the Asian Games in 1982 brought in two lakh workers to
Delhi. A large section of them remained here as they got engaged in other production processes. They worked in small-scale industries.
The ‘smooth’ flyovers, and ‘beautiful’ south and central Delhi, and the country clubs, upmarket restaurants and shopping arcades
have been built by the very same ‘dirty’ workers.
The vast majority of migrants who come to Delhi are compelled to live in jhuggies under the most adverse circumstances. Whether
it is water, electricity, toilets, or ration, they struggle for each little thing and live in the perpetual uncertainty of losing the little
world they have made for themselves. Delhi has a population of over 1.4 crore and of this an estimated 30 lakhs live in 1073
unauthorized colonies. Around 35 lakh people inhabit 6 lakh jhuggies spread over 1100 bastis while there are yet another 20 lakhs
in the resettlement colonies. In effect, over 60 per cent of Delhi’s population live in areas where there is a lack of basic requirements
like proper water supply, drains, toilets, health facilities, or schooling for children. They are constantly prone not only to the vagaries
of nature but also most vulnerable to epidemics and diseases. Today the assault on them has mounted. Evictions have became the
order of the day.
a reflection of the main problem of an absence of equitable
land distribution. In virtually all metropolis in India, nearly
two-thirds of the population is forced to live in one-tenth
of the urban land. In Delhi, just 1.5 per cent of the total
urban land is under slums!
For more than 35 lakh slum dwellers in Delhi, losing
their slums would amount to losing their means to earn a
living. This was clearly elucidated in the famous Olga Tellis
case decided by the Supreme Court in 1986. The apex
Court had then stated that the eviction of pavement dwellers
will lead to deprivation of their livelihood and consequently
to the deprivation of life guaranteed to every person under
Article 21 of the Constitution. This can be guaranteed and
ensured by the government if there is adequate supply of
Box 5.2.3
Evictions
During the period of Emergency (1975–7), almost seven lakh slum dwellers were evicted to the fringes of the city of Delhi under
the direct orders of Jagmohan, who was the Chairman of the Delhi Development Authority (DDA) at the time. Ever since then,
there has been a relentless spate of slum demolitions without giving any notice or compensation to the people. The passing of
the Anti-Encroachment Bill in May 1984 in Parliament made the very fact of residing in a basti an illegal act! This strengthened
the hands of political parties and the land mafia who work hand in glove at exacting votes, bribes, and obeisance from thousands
who live in constant anxiety of losing their housing.
The courts in their eviction orders have cited pollution, beautification of Delhi, or the ‘illegal’ occupation of land as the reasons.
Six hundred families who were victims of the 1984 Sikh massacres in Delhi, and were yet to receive alternate housing, were
evicted again in 1996 from their jhuggies in Tilak Vihar. Entire families sat in protest for months on end at Jantar Mantar to draw
the attention of the government to their plight. But they had to give up, when the government decided that Jantar Mantar would
no longer be a site of protest in Delhi. On 13 November 1996, the BSF (Border Security Force) evicted 160 families living in
the old stables of Pataudi House ever since 1947. Free transport was provided and their departure was recorded on video cameras
to record the help rendered by the government while evicting! Tughlaqabad is the last station of the Northern Railways on the
track leading to Faridabad. All bastis lying on both sides of the track from New Delhi railway station to Tughlaqabad have either
been destroyed or are facing the threat of demolition any day. The predominantly Dalit community of both Thompson Basti and
Kasturba Camp were evicted by force for occupying land belonging to the Railways. One hundred and twenty-five out of the 600
jhuggies in Thompson Basti near the New Delhi railway station were earmarked for demolition. On 7 July 1997, the bulldozer
razed it to the ground, but Thompson Press is yet to build its beautiful park for which the basti was removed! Both police and
the RPF (Railway Protection Force) directed sexual abuse at the resisting women. Some of the residents had returned with a
reassurance just 24 hours earlier from the then Prime Minister I.K. Gujral, that the demolition would not take place!
In June 1997, in Kasturba Camp, located on Railway land near the Tughlaqabad station, when the bulldozer was unable to
demolish the 1500 jhuggies and the people fought back the demolition squad, the entire area was set ablaze to rid the land of
jhuggies. In the process, the adjoining jhuggies on DDA land were also burnt down. People were barely able to retrieve their few
belongings. Around the same time, Harkesh Nagar, also located on Railway land on Mathura Road, was similarly demolished. But
the slum dwellers of Anna Nagar and VP Singh camp continue to resist demolition. The residents of VP Singh camp near
Tughlaqabad, living on the land of both the railways and CONCOR India (Container Corporation of India), are engaged in a
legal battle. The 10,000 residents of Anna Nagar located on the same Northern Railway track near the ITO [Income Tax Office]
are fighting a legal battle for their jhuggies that the Railways is bent upon taking over.
In 1996, 300 jhuggies of Naya Bazaar in Peeli Kothi in Old Delhi were destroyed with the assistance of police and no alternate
housing was provided. In the case of both Rampuri near Janakpuri and Indira camp in Jhilmil, communal tensions were whipped
up amongst the slum dwellers to distract them from the immediate demolitions that took place without any prior notice.
Resistance against forcible evictions continues unabated. The residents of VP Singh camp had blockaded the roads leading to
the jhuggies in July 1997 and the bulldozers that were scheduled to appear never came. The slum dwellers of Shastri Park, situated
between Moti Bagh and Nanakpura on the Ring Road in South Delhi, rained stones on the demolition squads who beat a hasty
retreat. Various colonies housing leprosy patients have resisted demolition several times over two decades. In 1986, some of the
jhuggies of Jagatmata Kushtashram were demolished. A sustained protest by the people compelled the DDA to rebuild the broken
houses. There are several such colonies that have fought for their space in the city. They also include Satyajivan Kushtashram of
Srinivaspuri and Jeevandeep Kushtashram of RK Puram.
The last one year has been the worst so far with a series of demolitions taking place on the quiet. Over 15,000 jhuggies that
housed around 75,000 people have been demolished. While most of them have not been relocated, the few instances of relocation
have forced people to live in even more deplorable conditions akin to a living hell. Around 5000 jhuggies of the Rajiv Gandhi
camp near the CGO complex were demolished in early May 2000 amidst fierce resistance by the slum dwellers. Women and children
were beaten up and hundreds injured. Only 500 to 600 families were shifted to Modalband near Badarpur. Two thousand families
from Haathi Park on Deendayal Upadhyaya Marg who were residing there since 1982 were evicted in June 2000. Prior to this,
in February, another 100 families were evicted from the Sadar basti near the New Delhi railway station, and 175 families were
evicted in January from Vijay Ghat. Fifty jhuggies were broken in the Okhla village of Jamia Nagar in March. In June, bulldozers
razed down 200 jhuggies behind Gagan Cinema in the B1 block of Nand Nagri. Three thousand jhuggies in the Seelampur area
were demolished between July to August to clear up space for the setting up of the metro railway project. While only a small section
was shifted to Bhalsava, the majority was thrown to the streets. In the same way, 1000 jhuggies were demolished in Shastriya Park
near the Purana Pul-Ka-Theka. Eighty families were evicted in July from Kisan basti near Chadangi Ram Akhada at Jamuna Bazaar.
In February, 300 jhuggies were demolished from Gautam Nagar basti behind AIIMS. Two years earlier, 1800 families were evicted
from this same basti. Some of the evicted families were sent to Papankalan. The 200 families evicted from Harijan camp in Masudpur
near Vasant Kunj in May 2000 have not been rehabilitated anywhere.
In September 2000, 250 families were evicted from Ravinder Nagar basti near Guru Govind Singh hospital in Rohini. In February,
100 jhuggies in Preet Vihar and 150 jhuggies in Savitri Nagar were demolished without any rehabilitation. In October, around 230
jhuggies from Kushal camp in Jahangiripuri and 250 jhuggies in JJ camp of Shahdara got demolished. Despite wide protests and
campaigns again, the month of November witnessed the demolition of 700 jhuggies near the I.G. stadium at ITO. Three hundred
children in the basti school and another 600 children in adjoining schools were affected despite a legal plea for a stay on the demolitions
until the following March till their school exams could be over. In the same month, another 700 jhuggies were demolished in
Gopalnagar near Kingsway Camp. Some of the families from here were sent to Bhalsava. In the same month again, two entire bastis
were removed from Lakhi park and C park of Jahangirpuri, which in itself was set up as a resettlement colony some years ago. In
January 2001, 150 jhuggies behind the Mata Sundari College were demolished. Sixty jhuggies were pulled down in Dakhshinpuri.
These figures do not represent any final count as the demolition spree continues in Delhi and the majority go unreported in
the media. The massive displacement of people to places like Papankalan, Bhalsava, Narela, and Modalbund is no solution because
these places lack any basic civic amenities. The plots are not yet demarcated in Bhalsava and people continue to live under tin
or plastic sheets in the open and are cut off from any source of work and income. There were slum dwellers from three bastis
staying there already when people from another five bastis were literally thrown there to live in similar condition. The arrangement
here too is for 10 years only, whereas even in the days of the Emergency slum dwellers were given a lease of at least 99 years.
Slum dwellers have always worked against overwhelming odds to obtain water, electricity, toilets, and of course even work for
themselves to eke out an existence. To move out to open fields in remote areas and invest all over again is an enormous burden.
Needless to say, these people will put in their labour, money, and time to make the place liveable. As soon as the land becomes
habitable, the price of the land will go up, and the pressure on it will increase, they will be thrown out once more to begin from
scratch, and always be on the run!
affordable land for mass housing, and grant of tenurial
rights to dwellers.
The Court in the present case ignored the earlier
judgements42 and directed the authorities concerned ‘to
take appropriate steps for preventing any fresh encroachment
or unauthorised occupation of public land for the purpose
of dwelling, resulting in the creation of a slum’. It laid down
the basis for this by saying that ‘the density of population
per square kilometre cannot be allowed to increase beyond
the sustainable limit. Creation of slums resulting in increase
in density has to be prevented’.
Calling slum dwellers ‘encroachers’ today and comparing
them with ‘pickpockets’ flies in the face of the considered
opinion of the very same Court! By bemoaning the inability
of the government to clear slums while maintaining silence
42 It was the failure of the government to discharge its
constitutional obligation that prompted a case in the Supreme Court
challenging the demolition of slums in Bangalore (Karnataka Kolageri
NS Sangathana & Ors vs. State of Karnataka & Ors). The petitioners
contended that the demolitions were illegal as no alternative
accommodation was sought to be provided. They challenged the
Karnataka Slum Areas Act as being violative of Articles 14 and 21
of the Constitution. It was argued that the slum dwellers had been
made homeless because the authorities had failed to discharge their
constitutional and statutory obligations to evolve plans for organized
industrial allocation around urban areas; for maximum utilization
of the potential of land; and for appropriate rural employment
guarantees and measures. The failure of the government to evolve
a need-based and not wealth-based housing policy was also pointed
out. On these contentions, an order was passed in July 1992 directing
the appropriate authorities to look into the grievance ‘after issuing
the notice to both the parties and giving them adequate opportunity
of negotiating in a conciliatory manner’.
on the need for alternative accommodation, the judgement
clearly shows the class bias of the state.
THE HIGH PRICE
OF
SURVIVAL
Urban planning in India has always had little if any housing
plans for workers and migrant labour. Hence, they create
their own homes on public land under flyovers, along the
railway tracks, on the riverbed, or in the shadows of
skyscrapers. And then these bastis become ‘illegal’. All
schemes and policies to house them either gather dust or
get caught in inter-departmental wrangles or are simply
abandoned as soon as they are attempted.
The Delhi Slum Policy announced late last year extended
the cut-off line for the regularization or relocation of slums
from March 1994 to November 1998. It was projected that
almost 10 lakhs slum dwellers could benefit from this
extension. Ironically, there are two qualifying clauses that
undercut this magnanimity of the state.
First, the government is going to take a development
charge from each jhuggi unit! This negates the amount of
investment slum dwellers have already made in their existing
structures. The ‘illegality’ of their huts make them victims
of local policemen, land mafia, local goons, and municipal
authorities all out to extort as much as they can. Right from
arranging water and electricity, to toilets in their basti, slum
dwellers pay for everything through their nose for not only
its cost, but also to appease those who prey upon their
condition. In fact, do not slum dwellers have every right
to a free house with all basic amenities intact in exchange
for freeing up the land for other uses given the current value
of the land?
Secondly, while the Delhi government proposes six lakh
slums to be regularized, it speaks in the same breath of
relocating these slums if required. The link of work and
livelihood to one’s place of residence is crucial. Most slum
dwellers work as vendors, hawkers, sweepers, drivers, and
domestics in nearby residential areas, markets, and offices.
Relocation to far flung areas amounts to destitution as it
deprives thousands of their livelihoods.
In the Bombay Pavement Dwellers Case in 1985, the
Court ruled that Article 21 of the Constitution on the right
to life includes the right to livelihood, and since the livelihood
of pavement dwellers is linked to their place of stay, removing
them from the pavements would be tantamount to
deprivation of livelihood and therefore unconstitutional as
it deprives them of the right to life. Clearly, along with the
right to livelihood, every slum rehabilitation has to be
accompanied by access to water, electricity, schools, health
services, and proper drainage and sewage systems. The living
conditions of those rehabilitated in Papankalan, Bhalsava,
and Modalbund not only violates every aspect of law but
also treats slum dwellers as a ‘problem’ to be disposed of.
Each demolition that takes place with such vengeance in
Delhi today is a clear act of abdication by the government
of any responsibility or accountability to people.
With every demolition and relocation, children repeatedly
discontinue school despite the desperate efforts of parents
to save enough to send them to school in the first place. The
concentration of Muslims, Dalits, and Other Backward
Classes (OBCs) is naturally high in bastis since they form
the marginalized sections of society. Since slum dwellers
form a crucial vote bank for every party that comes to power,
keeping them in perpetual anxiety about their dwelling place
is the surest means to garner votes. As long as slum dwellers
prove to be a rallying point for electoral parties, any party
in opposition invariably raises the question of slum
demolitions. But none of these parties, when they are in
power, live up to the promises made during elections. Finally,
in an increasingly right-wing society, bastis are vulnerable
to caste and communal violence. The struggle to survive as
a community is frequently torn asunder by communal and
casteist interests that thrive on dividing the working class.
THE STRUGGLE OVER URBAN SPACE
Plans, it seems, are violated only by the poor and the
powerless. The rich and the powerful simply change them
to suit their purposes. The initial norm for a decent living
space for the poor in the Master Plan for Delhi, 1962
(MPD-62) was estimated at 80 sq. m per family. This norm
was applied in practice in the initial 18 resettlement colonies
created by the DDA in the 1960s. As the pressure on land
started growing, this was reduced to 25 sq. m for the
colonies resettled after the demolitions done during the
Emergency. Subsequently, the National Housing Policy, May
1992 (NHP-92) provided that ‘in urban areas, the size of
the plot should not ordinarily be less than 25 sq. ms with
a provision for permissible built-up accommodation and
services on individual or shared basis in a neighbourhood
adequately served with community facilities’ (MPD-2001,
annexure N-5). By stating that the norm should not be less
that 25 sq. m, the NHP, without technically violating the
earlier provisions, actually reduced it to less than one-third
of the original norm. The MPD-2001 provided for 18 sq.
m as the norm. In the most recent instances, as in the case
of those resettled in Narela, families have been resettled in
a mere 12.5 sq. m.
The MPD-2001 itself stated that housing needed to be
related to considerations of: (i) affordability; (ii) efficiency
of land utilization; (iii) equity (which it defined as social
distribution of urban land); and (iv) flexibility. ‘(T)he most
appropriate type of general housing would be partially built
housing on individual plots of 70 to 80 sq m.’ (Ibid: 121).
In cases where these were not possible, as in the case of
economically ‘weaker sections’, the Master Plan recommends
that single family housing could be provided on a reduced
size of plots but should have an individual bath and w.c.
About the resettlement colonies and unauthorized colonies,
it has little to say by way of norms. However, the Plan does
provide for ‘equity’ as an important consideration for Delhi’s
land-use planning. When this is read in conjunction with
the NHP-92, it is reasonable to expect that people should
not be uprooted without making alternative provisions.
As per the MPD-2001, the total area of the Union
Territory of Delhi is 148,639 hectares (ha) out of which
44,777 ha had been considered within urbanizable limits
prescribed in the Plan. According to the 1981 Census, this
area accommodates 54.5 lakh urban population. The holding
capacity of this land was estimated at 82 lakhs. Since the
projections for the year 2001 were that Delhi’s population
would be 122 lakhs, the proposal was to, firstly, increase the
holding capacity of the given area (44,777 ha) through
planned efforts and, secondly, to acquire newer areas for
urban extension. In the period between August 1990 and
June 1998, the DDA has acquired 5007 ha land which has
been converted from rural, agricultural, and recreational
use for urban extension. Hazards Centre, an NGO, has
calculated that 92.5 per cent of this area was located in the
new sub-cities of Dwarka (79.2), Rohini (14 per cent), and
Narela (5.6), indicating clearly that the proposed housing
was, by and large, not for the poor. Narela is the only place
where some recently demolished jhuggis have been resettled
in tiny plots. In 1998 the DDA proposed an urban extension
area of another 29,761 ha for accommodating a population
of 50 lakhs, which is being considered by the National
Capital Region (NCR) Planning Board.
The MPD-62, which had envisaged Delhi’s urban growth
to cover 44,718 ha land, proposed the land-use pattern as
in Table 5.2.1:
Table 5.2.1
Land Use Pattern Proposed by MPD-62
Housing
Commercial use
District and regional parks
Government offices
Industries
Warehousing, etc.
Educational, research, and other institutes
Circulation
19,182 ha
602 ha
10,602 ha
364 ha
2347 ha
304 ha
1741 ha
9571 ha
In this distribution, housing constituted about 43 per
cent of the total urban land. Of the 14,000 to 20,000 ha
of the newer areas that the MPD 2001 planners wanted to
acquire, they set aside about 50 per cent for residential
purposes. Housing shortage had been estimated by them to
be at around 3 lakh units—including squatters and
shelterless, as well as families sharing houses in congested
areas. About 20 lakh people have been resettled in
resettlement colonies covering an area of 1570 ha. There are
another 35 lakhs who live in slums or jhuggi–jhopri colonies
which cover an area of about 9.5 sq. km. In other words,
over 55 lakh people, or about 38 per cent of Delhi’s
population lives in a tiny proportion of the city’s urban area.
And most residential areas are reserved for the more affluent
sections. Hence, slums invariably come up in industrial
areas, railway land, or vacant DDA land. The MPD-62 had
in fact, provided for 5 per cent residential area for lowincome housing, but according to one estimate even that
was not adhered to. This prompted unauthorized habitation
(WWF 1993: p. 83).
Population densities vary vastly between areas. In 1991,
while the number of people residing in the NDMC area was
6882 per sq. km, the corresponding number for the MCD
(urban) area was 16,643. In parts of South Delhi, the
density can be 1300 persons per sq. km (ibid: p. 64). The
MCD (urban) figures include areas like Defence Colony,
Greater Kailash, New Friends Colony, Shantiniketan, Anand
Lok, and other such colonies where huge bungalows have
relatively few people staying in them. In parts of Old Delhi
or East Delhi, on the other hand, the densities are likely
to be higher. For instance, in Old Delhi, the average density
was approximately 80,000 persons per sq. km in 1981. In
one census division it was as high as 166,300 persons per
sq. km (ibid). In some resettlement colonies, the density of
population was 700,000 persons per sq. km, which is almost
102 times that of the NDMC area. One of the consequences
of the incapability of the successive governments to either
plan for the working class, or to develop towns around
Delhi as counter-magnets, is the inevitable growth of
unauthorized colonies.
The civic amenities provided are woefully inadequate.
For instance, according to a recent study (FICCI 2000)
about 55 per cent of the households have access to water
only outside the colonies (see Table 5.2.2). The rest depend
on shallow hand pumps. The quality of water is poor because
effluents seep and contaminate the shallow water table, and
epidemics are common. A study conducted by the World
Wildlife Fund (WWF) in 1993 says that as against the
internationally accepted standard of 302 litres person
consumes daily (lpcd), one-third in Delhi receive no more
than 38 lpcd. Further, the distribution of water is even more
skewed with residents of Golf Links and Sunder Nagar
getting 450 lpcd whereas the slums, unauthorized colonies
as well as re-settlement colonies have to be content with 15–
18 lpcd!
Bath and lavatories are available to only 30 per cent of
those settled. Poor maintenance and the non-availability of
water, along with an user charge imposed, creates a situation
where residents do not find it possible to use even these
facilities where provided. This is made worse by poor
drainage. Only 10 per cent of the settlements have street
lights. While illegal connections are rampant, the total power
used by these colonies, as per Delhi Vidyut Board’s (DVB’s)
own internal assessment, is no more than 15 per cent of
total supply.
In this light, the Union Urban Development Ministry’s
estimate prepared on the ‘positive’ fallout of factory closure
and displacement of lakhs of workers shows that this would
result in an availability of 700 mega watt (MW) of power,
50 million gallons of water per day, as well as reduction of
40 million gallons per day (mgd) of sewage disposal. They
also believe that this would result in saving Rs 240 cr of
revenue loss incurred by DVB because of illegal use of power
by units located in residential areas. According to them, this
would suffice to provide water and electricity for the new
housing suburb coming up at Dwarka which will house
10,000 families. In other words removal of 15–20 lakh
workers and their families would help provide for 45,000
people!
As for housing people, there is sufficient urban land
available in and around Delhi to provide affordable and
clean shelter. Nearly 35 lakh people live in just 1000 hectares,
which is but 1.5 per cent of the total urban area of Delhi.
Most of this land is public land. It is perfectly possible in
the name of ‘greater public use’ to use this land for housing
the poor.
It requires no more than 4–5 thousand ha to provide
shelter for 2–3 million persons with a unit size of 75 sq.
Table 5.2.2
Area under Squatter Settlement in Delhi (as of 31.4.94)
Zone
No. of jhuggies
Central
East
North
South
West
Other
Total
50,286
66,798
120,559
123,957
96,866
15,592
4,74058
Land area in sq. metres
1,006,880
1,353,440
2,413,120
2,480,800
1,938,280
311,920
9,504,440
Source: FICCI (2000); based on data provided by the Slum and JJ Department, MCD.
m, which is the minimum required for a family unit. Thus,
the current density per acre could be reduced by two-third.
Those removed can be provided shelter by acquiring just
3000 ha. This land is already available with the DDA,
which, during 1990–8 acquired 5007 ha for urban extension.
In fact, if the apex Court as well as the Union and Delhi
governments are sincere then some of the land acquired in
Narela, Bawana, or Rohini, where industrial units are
supposed to be located, can easily be developed to provide
affordable and clean shelter. Besides more land can be made
available by taking over 68 per cent of the land lying with
units closed by the Supreme Court in 1996. Rather than
demolishing jhuggi–jhopri colonies, the public land on which
they stand can be justifiably used to house the urban working
class population. Surely this is in accordance with the
principle of ‘greater public good’.
No solution would make sense if these shelters come up
without proper water supply, toilets, sewage and drainage
systems, schools, medical facilities, and transport links. The
existing problem of power and water can also be resolved
by an equal distribution of these resources. Surely, reducing
the consumption of water for the affluent can enable slum
dwellers to receive more. In addition, the improvement in
sewage facilities can transform slums into clean and healthy
colonies. In this way, slums can cease to be the eyesore that
upsets the rich so much that they want to wipe them out
completely.
The following fundamental question must be raised:
don’t the poor and working class have a right over the air
and water of our land? We have to challenge the very path
of development that has alienated the poor of this country
from its abundant natural wealth while a handful of people
have established their control over it. The motto of ‘clean
environment’ is also a struggle for equal rights over our
resources. Without that, the slogan of environment would
only strengthen the hands of the powerful, as is evident
from the politics around the Supreme Court orders (see Box
5.2.4). Ultimately it has to be a question of the struggle to
end exploitation.
In 1994, there were 4.8 lakh dwelling units (each unit
with 4.5 persons, totalling 2,164,180 persons) in a total
land area of only 9.5 sq. kms. The total urban area of Delhi
is 625 sq. kms. In effect, the total area under slums is no
more than 1.5 per cent of the total urban area of Delhi!
Box 5.2.4
Who Are The Land Grabbers?
Land is simply not the problem. Had that been the case, the government would have acquired the land that it had got vacated
by industries in the first round of closures in 1996. The Joint Action Committee of Textile Workers’ Unions of Delhi calculated
the value of land occupied by displaced and closed industries on the basis of 32 per cent of the land given to them for commerc ial
development with a 100 per cent Floor Area Ratio (FAR). In the event, 32 per cent of the total area of 162,135 sq. ft is commer cially
developed, Birla Textile was to generate a profit of Rs 340 crores. The government share would have been approximately Rs 700
crores, according to the land-use package ordered by the Supreme Court. Similarly, Swatantra Bharat Mills and DCM silks were
to generate a profit of Rs 700 crores from 441,161 sq. ft and Ayodhya Textile Mills a profit of Rs 225 crores from 1,045,440
sq. ft of land. In these cases, the government share would have come to about Rs 1500 crores and Rs 500 crores, respectively.
If the government wanted to really use the land for developing lung spaces as directed by the Supreme Court or for any other
purpose, this should have been its priority before it went about displacing ordinary working people.
Box 5.2.5
Life at Relocation Sites
BHALSAVA
Bhalsava is four kilometres from Alipur Chowk in north Delhi, approachable by a metalled road from Outer Ring Road (near
Jahangirpuri) that takes one to what is commonly described as Bhalsava dairy. Here is flat, open ground devoid of trees or shade,
open on all sides to the elements. Beyond the houses of the local farmers lies the area where 20,000 people have been left to fend
for themselves. They have been dumped here after the jhuggis they stayed in were demolished, in areas as far away as Garhi,
Gautampuri (near ITO), Pashchim Vihar, Sanjay Camp (Rohini), and Ashok Vihar. And many more are slated to be brought here
from demolished JJ clusters elsewhere. All those brought to Bhalsava had been staying in their area they were brought from for
over ten years.
The process had began on 3 November 2000 beginning with Garhi. The most recent to be dumped here are people from Sanjay
Camp, brought here on 3 April. They were all assured, prior to being shifted, that they were being taken to an area that was developed
with all facilities provided. Not only was this not true but the little that has been made available to them was the result of their
protests.
The land had not been levelled, no drainage has been provided. The soil retains water, and as a result the area becomes muddy
and slushy with the slightest downpour. Since there is no sewage system, the pits dug by people to dispose used water get mixed
with the downpour, making one big slush. People live under plastic and cardboard ‘shelters’.
Before being brought here, people were asked to fork out Rs 7000. The ‘receipts’ given to them mention this as the ‘amount
received towards security and license fee for 10 years’. The same also referred to the plot to be provided to them. The size of the
plot varied from 12.5 to 18 sq. metres. That is barely enough to provide a room or two. Not everyone who lived in the JJ cluster
could raise this amount. Many borrowed at exorbitant rates of interest.
Even then, there are many who still await the allotment of plots after having paid the money. Since the soil is porous, each
plot owner had to spend up to Rs 15,000 just to dig and then fill it up to be able to build a house over it. This is to prevent
seepage. When that is done another Rs 35,000 is required to build a ‘pucca’ house. Not many have the savings or the borrowing
capacity to raise this amount. Thus, even where plots are demarcated, there are raised platforms that stand forlorn.
There is no drinking water available. The water provided is salty, and therefore its use even for house construction is risky. The
DVB has a supply centre and street connections are there, but power supply is erratic.
The nearest hospital is Babu Jagjivan Ram hospital in Jahangirpuri. There is a dispensary in block D1. Only two primary schools
have been set up, in tents (in block A2 and D1). These temporary schools have classes only up to Class 5. The older children
have to travel to their earlier schools spending Rs 20 to 24 each day. The prospect of continuing school in the next academic year
seems bleak for several families who somehow managed to get their children to sit for their final exams this year. The children
had to prepare for exams under candle light and are plagued by mosquitoes. As a result, many have discontinued their studies.
Instead of the ration price of Rs 9 for a litre of kerosene, they pay Rs 15; for sugar, instead of Rs 14 anything between Rs
16–18 per kg; for atta Rs 8 as against Rs 7 in ration shops; and finally rice costs them Rs 12 per kg as against Rs 10. What is
more, the price of fuel made out of dung (gobar ke uple) has more than tripled because the local farmers realize that the people
have no choice but to use it both for fuel and as a mosquito repellent.
Travel costs of families living here have gone up considerably several times. Bhalsava to Paharganj, up and down, costs no less
than Rs 16. The only other option is to board connecting buses from Jahangirpuri. Jobs are scarce in the area, with no industry
and little commercial activity of any other kind, and therefore everyone has found their earnings slump. Daily wagers and rickshaw
pullers barely manage to get work for even 15 days a month.
MADANPUR KHADAR EXTENSION
This is actually part of the village Madanpur Khadar behind Sarita Vihar. In January 2001, the DDA resettled several families
from Ambedkar Colony jhuggis near Nehru Place bus depot. Most families hail from Bihar and U.P., and many had been staying
in Ambedkar Colony for years, some for over 20 years.
The DDA charged Rs. 7000 for 22 sq. metre plots and Rs. 5000 for 12 sq. metre plots. People had to invest in even leveling
this highly uneven land. For a 12 sq. metre plot, three truck loads of material is needed at Rs 300 per truck, or Rs 900 in total.
People have not been told how long they can stay here. They only have a xerox copy of the drafts they deposited with DDA
without any receipt or any idea of the duration of the lease. To try to prevent the transfer of allotments of jhuggis, the application
form also had to contain a photo of the residents. Also, the DDA officials told them they would get no papers for at least five
years to prevent them from selling the plots. But most perturbing is the absence of any idea of security or certainty of residence.
Madanpur Khadar is far away from their earlier places of work. The bus to Nehru Place takes a circuitous route and hence
is Rs 8 one way. Along with the connecting bus to their place of work (many work in Okhla and Gobindpuri), transport fare can
be Rs 20 to Rs 24 per day per person. Some have had to give up work due to the difficulty and expense of commuting. At night,
the last bus to this place is at 7 p.m. Anyone who comes after that would have to walk long distances. Even those children who
used to attend school still travel to Nehru Place. Though there is a government school nearby, the children could not be admitted
because they have been unable to get the ration cards for identity. Ration cards are yet to be issued with the new addresses. Those
who go to school still have to go to their old government school. Even rations are still procured from Nehru Place. Women trudge
there on the first day of each month and get the month’s provisions.
There are drains lining the jhuggis, but the drains are uncovered, shallow, and narrow. In the monsoons, the drains would definitely
overflow all over. The built-up structures of the houses ought not to cover all the floor area, but given the smallness of the 12
sq. metres plots, the houses occupy all the land given. Hence, they are very close to the drains just outside. No electrical power
has been provided officially. There are three contractors in this jhuggi who supply electricity, at the rate of Rs 150 per point per
month. Hence, those who ask for one bulb and one fan connection have to pay Rs 300 a month. This is a very high rate for
the level of power consumed. We were told that the contractors deposit a lakh of rupees with the DVB, and recover their money
through the jhuggi dwellers. Hence, those in the DVB and middlemen profit greatly from these jhuggi dwellers. A tanker comes
in the evening. A few have installed hand-pumps, but the water is hard water, unfit for drinking. There is a row of mobile toilets
at one end of the settlement, but few use that. Most go out into the fields.
There is also the complete absence of any health services for miles around. The fly ash emitted by the chimneys of the NTPC’s
(National Thermal Power Corporation) Badarpur Thermal Power Station on Mathura Road is a continuous nuisance. It is also a
dust-prone area with lots of construction taking place in the vicinity.
Both Bhalsava and Madanpur Khadar are transit camps since the arrangement is valid for only 10 years (several respondents
said five years) whereas even in the days of the Emergency slum dwellers were given a lease of 99 years.
5.3 RAILWAY SLUMS IN MUMBAI
Prem K. Kalra and P. Nandini Kumar
Slums create many problems both for the governments
whose land is illegally occupied and for the slum dwellers
living in a state of uncertainty and an appalling living
environment. Eviction, resettlement, and slum improvement
are possible approaches to the problem, but none of them
have a universal application. The local situation is very
important in the design of a solution. It makes sense to go
beyond formal ownership to recognize the ‘rights’ of squatters
and go ahead with a pragmatic approach. The basic root
causes for the existence and creation of slums are low labour
absorbing industrial growth, poor growth, and high
inequalities. Similarly, vast distortions in the poor’s access
to residential land in the bigger cities, not only due to
unaffordability, but also because of land use plans that
provide little allocation for the poor’s housing, have been
important in creating slums (see Section 5.2).
Eviction assumes that the slum dwellers are illegal
occupants of the public land and hence have no right to
stay, and hence should be evicted. This approach ignores the
fact that the problem arose primarily because of the lopsided policies and laws framed ignoring ground realities.
The only ‘advantage’ of such a policy is that it provides
strong disincentives for those who try to occupy new lands
and form slums.
Resettlement seeks to shift slum dwellers to less valuable
land, often on to the outskirts of the city (where less centrally
located land is available), and provide them with the basic
infrastructure. A likely problem with this approach is that
the beneficiaries cannot find work in the outskirts of the
city. Relocation when accompanied by schemes to build
reasonable housing could work when the outskirts have
much economic dynamism. Inadequate investments in public
transportation restricts the scope of this approach.
Slum improvement accepts the de facto position that the
land has been occupied, often for decades, and tries to
legalize the existence of the slum dwellers on it and improves
the infrastructure thereon. This is probably the most
beneficial for the slum dwellers, but has the danger of
encouraging formation of more slums. Indeed, if incomes
of slum dwellers do not rise sufficiently for them to be able
to ‘afford’ a dwelling, they could rent out the same and
occupy other lands to create new slums!
GENESIS
OF THE
MUMBAI SLUMS
The city of Mumbai, India’s premier city today and with
continuing natural impetus for growth, attracts large
numbers of people every day from almost all parts of the
country. During the 1960s and 1970s, the immigration,
both from within Maharashtra and also from other parts
of the country, especially from areas known for drought and
poverty with few employment opportunities, has been
particularly large. Land in Mumbai has been almost entirely
out of the reach of not only the poor but also the middle
class as well. Even the upper middle classes find it very
difficult to buy a house or flat in Mumbai.
Resettlement and Rehabilitation Policy
In the early 1990s, the World Bank decided that no project
could be cleared without the resettlement and rehabilitation
component. This policy change had an impact upon the
Mumbai Urban Transport Project-II (MUTP-II). The
Government of Maharashtra (GOM) had to formulate a
Resettlement and Rehabilitation (R&R) Policy. A Task Force
was appointed for this purpose whose recommendations
formed the basis of the MUTP-II resettlement and
rehabilitation programmes.
The MUTP-II was to be based on (a) minimization of
displacement; (b) full compensation to the displaced prior
to actual shifting; (c) active settlement, and as far as possible
retaining existing community networks. It also stressed the
need to involve NGOs in resettlement.
Mumbai Urban Transport Project (MUTP)
To address the problem of ever increasing traffic, which the
existing railway system was unable to cope with, the MUTP
was started with the help of World Bank by the state
government. The first phase of MUTP (MUTP I) worth
$25 million, was funded by the World Bank and consisted
of introducing an additional 700 buses, constructing three
flyovers at important road intersections, construction and
improvement of five bus depots and part of a major workshop
for Bombay Electricity and State Transport (BEST), and
installation of new microprocessor-based traffic signals at
77 junctions.
The second phase, called MUTP-II, envisages replacement
of level crossings with road over bridges, signalization and
traffic management, subways, road improvements, new roads,
additional bus transport and improving the suburban
railways. For implementation of rail projects under the
MUTP-II, a separate corporation for suburban railways
called Mumbai Rail Vikas Corporation (MVRC) has been
created as a joint venture of Indian Railways (IR) and the
Government of Maharashtra.
Mumbai Rail Vikas Corporation
The Mumbai Rail Vikas Corporation (MVRC) has a share
capital of Rs 25 crores in the ratio of 51 per cent and 49
per cent between IR and GOM. It planned to implement
12 important rail projects worth Rs 4741 crore. Another
Rs 400 crore project for rehabilitation and resettlement of
22,000 slum families was to be worked out to resettle the
project affected persons.
The Problem of Railway Slums
Workers immigrating into Mumbai in search of employment
found empty railway land on either side of the railway track
and started putting up their dwellings on this land. Railway
lands had been leased by the state government to railways
or were owned by the railways. Over a period, these developed
into full scale slums. About half of Mumbai’s population
lives in such slums without basic facilities like adequate
water, electricity, and sanitation, and of course with no legal
right over their dwellings.
The policy of the government towards these slums until
the 1970s has been that the slums being illegal, the squatters
have to be evicted. The policy did not work as the evictees
always managed to find another area to settle.
The slums occupied this ‘spare land’ meant for expansion,
and blocking growth of the network, badly affecting the
city’s transportation. The adjoining railway tracks became
open latrines, creating health hazards, an overpowering
stench, and what is worse, increasing the probability of
accidents. The frequency of the trains passing on these
tracks is so high that the slum dwellers have to cross the
tracks even when they find the train approaching. Almost
every day, one or another slum dweller is killed while crossing
tracks, often resulting in the motorman being assaulted by
angry mobs. The trains slow down substantially near slums
to avoid such accidents. Where the slums are closer than
30 feet from the tracks, the safety commissioner of the
railways requires trains to reduce speed to 5 kmph. There
are 11 to 15 such points on the Mumbai metro rails. The
reduction in speed, in turn, reduces the number of trips a
single rake (an articulated set of coaches) can make in a day,
effectively reducing the number of available trains to the
growing population. This results in further overcrowding of
the local trains already bursting at the seams.
Confronted with these problems and the need to free
railway land to expand the services, some success was achieved
when several organizations came together to solve the
problem. Complete clearance is yet to be achieved, but there
are notable successes. The key elements of the approach
included: the state government identifying and providing
land for resettlement; railways helping to develop the land;
the municipality providing the offsite infrastructure; twenty
two cooperatives of slum dwellers doing design, construction,
and financing; and HUDCO (Housing and Urban
Development Corporation Ltd.) giving loans to cooperatives
and individuals through NGOs such as the Society for the
Promotion of Area Resource Centres (SPARC), National
Slum Dwellers’ Federation (NSDF) and Mahila Milan.
Organizations
The residents of these railway slums formed themselves into
an association called the Railway Slum Dwellers’ Federation
(RSDF), which is affiliated to the NSDF. The RSDF has
been quite active in articulating the needs of the slum
dwellers and negotiating in all resettlement programmes. It
has also been instrumental in getting the support and cooperation of the slum dwellers for such programmes.
The SPARC is a registered voluntary organization
established in Mumbai in 1984 as a vehicle to explore ways
for city governments to work with poor communities through
partnerships. Today, SPARC is active in 21 cities throughout
India.
Mahila Milan (‘women together’) is a network of
collectives of women who come together to share experiences
to gain recognition in their settlements. It took an active
part in the railway slum rehabilitation programmes.
The NSDF is a national organization of leaders of slums
in India set up in 1974. The NSDF focuses on securing land
tenure and basic amenities for its constituents, and organizes
them in the cities where they reside.
THE STORY SO FAR
Bharat Nagar
Railways wanted to extend the Harbour Line across Thane
to Belapur but there was an illegal settlement of 800 to 900
households on the railway land called Bharat Nagar on the
land. All these households were offered government built
houses a short distance away for Rs 58,000 each, and all but
150 households who could not afford to pay accepted the
offer and moved out. These 150 households were moved to
a transit camp and given a piece of land on which they
would develop their own houses. They formed the Jan Kalyan
Co-operative Housing Society and planned and designed
houses of SPARC who arranged for loans at low interest.
Borivili
In Borivili, 700 families were living within 30 feet of the
railway tracks. This created the problem of safety for the
slum dwellers and low speed for the railways. As a result of
negotiations between the RSDF and the Railways, the RSDF
convinced these 700 families to move 30 feet away from the
track. A wall was built at 30 feet on either side, and the
700 families moved en masse to neatly laid out plots beyond
the 30 feet limit, which developed into a railway slum
colony called Pushpa Vihar. This project met the needs of
both Railways and the slum dwellers. Trains were running
at full speed while children could play safely beyond the
walls. After this experiment, 135 families in Bhandup and
100 families in Vikhroli moved 10 feet away from the tracks
in a similar exercise.
Kanjur Marg
The Government of Maharashtra decided to lay the 6th
corridor––a strip of Central Railway between Kurla and
Bhandup––as a part of the MUTP. The RSDF conducted
a survey and found that there were 1910 households in the
area. The state government found land nearby to
accommodate 1200 households with the idea that as the
work progresses, new land would be found for the remaining
slum dwellers.
The railway slums of Mumbai are one of the toughest
problems to overcome and the gain in allowing the Railways
to expand is enormous. The lessons are clear and would have
been obvious to anyone with a pragmatic bend of mind.
Accepting slums as a reality, regardless of their illegal
status, seems to be the only way out in many situations. A
substantial section of the city’s population live in slums and
cannot be expected to ‘vanish into thin air’. The slums grew
in cities in the first place because of defective urban planning
which ignored the existence of the poor. The slum dwellers
themselves do not like living in slums but live there out of
desperation. Given a chance, they would rather invest their
savings and get a legal permanent structure and lead a safe
and more respectable life. Policies like eviction, however,
push them to the wall and they either rebel or resettle in
some other area. Any process of resettlement and
rehabilitation can only be in consultation with the slum
dwellers. Transferring them to an area far away from their
place of work would not help either, since most women also
work in these poor communities. A servant maid or a
vegetable vendor, for instance, has to live near middle class
localities in the city to attend to work early in the morning.
The other large incentive for eliciting their co-operation is
legal holding of property, which appropriate resettlement
can ensure. Better infrastructure at resettlement sites improves
the quality of their lives.
More often than not, NGOs are less insulated from and
more in touch with the ground realities than government
agencies. The slum dwellers tend to talk more openly with
the NGOs and express their difficulties. Slum clearance of
the variety discussed here is pragmatic, and the gains in such
an approach being able to break the gridlock are immense.
5.4 POWER PROJECTS DEVELOPMENT: REVIEW OF SOCIAL AND
ENVIRONMENTAL ISSUES
Binayak Rath • K Ramakrishnan
Over the years, the resistance to displacement of population
due to power projects has been increasing because of rising
activism both at the political and non-governmental levels.
The international funding agencies, such as, the World
Bank, Asian Development Bank (ADB), and others have
started demanding detailed consultations with and
involvement of those who are directly affected, right from
the conceptualization stage of the projects. They have also
put pressure on the central government, the concerned state
governments, and the developers of such projects to work
towards more committed proposals on resettlement and
rehabilitation (R&R) to the fullest satisfaction of project
affected persons (PAPs). The heightened concern about the
displacement of people and other associated issues are
adversely affecting the growth of the sector. This paper first
examines the environmental and social issues that are faced
by the power projects and then suggests a more effective
manner of implementing the R&R activity.
ISSUES
IN THE
DEVELOPMENT
OF
POWER PROJECTS
While thermal power projects are normally set up at pitheads
of coalfields, hydro power projects are set up at locations
where the topography is suitable for a high dam, such as
at the source of a river/stream. Thus, most power projects
are generally located in remote rural areas. Land is normally
acquired in the name of public purposes/interest through
governmental action. The acquisition of land for the projects
always involves considerable complications due to structural
problems associated with the land. The revenue records are
invariably out of date. The land value shown on the records
is invariably much less than the market value due to wellknown and established reasons. In addition, there may be
more than one claimant for a given parcel of land. Many
a time, the government as well as the Forest Department
also lay claims on plots of land that are in the possession
of the individuals.
The provisions contained in the Land Acquisition Act for
fixing compensation usually leads to conflicts and legal
battles. The rate for forest land is normally fixed at a high
level by the Forest Department. Since it involves transfer
of funds from one government department to another,
generally there is no dispute over the price. However, in
many cases the prices for fertile agricultural land of the poor
farmers are generally fixed at rates that are unacceptable to
the project affected families (PAFs). In recent years with
increased awareness, active participation of NGOs and social
activists, the acquisition of land and involuntary displacement
of the people are facing increased resistance. However, neither
the governments nor the project developers are still willing
or able to propose viable and practical solutions, so that the
development of the project not only meets the intent for
which it is set up but also ensures that the life of those who
are directly adversely affected by the location of the project
is better than before, that is, the fruits of development also
touches project affected families.
Power projects always affect the physical environment of
the surrounding area. In addition to loss of flora and fauna
due to land acquisition, a coal based thermal project generates
a large amount of ash––it is said that a thermal plant in
India produces ash, and power is merely a by-product.
Indian coals are among the worst in the world with as much
as 40–5 per cent ash. The ash generated in rural areas could
possibly be utilized effectively for landfills, for construction
of roads, and for development of wasteland. However, in
and around cities, it only adds to atmospheric pollution.
Thermal projects also pollute the water bodies in the vicinity
of the project due to mercury/heavy metal (from coal)
contamination. Hydro projects raise the issues associated
with submergence of huge areas of forests and physical
habitats. In spite of these adverse environmental impacts,
there is little effort to search for cleaner but costlier modes
of generating power because of the low value attached to
the degradation of environment.
Though land is a productive asset (possibly the only one
with the rural poor), the compensation offered is invariably
lower than its true value. Delays and arbitrary settlement
of land acquisition usually sow the seeds of future problems
and complications. Moreover, one time lump-sum payment
for the land leads to the cash being frittered away causing
deprivation in the future. The meagre amount paid to the
land oustees (LOs) as compensation is consumed and not
invested in productive assets that can generate income in
the future. The difficulties faced by those whose land is not
acquired but who live in the same village or in the vicinity
are even worse. They do not get any benefit but suffer the
negative impact of the project. The statutory technoeconomic clearance as suggest by the Central Electricity
Authority (CEA) overlooks the costs that a project could
incur in taking care of the environment—physical and socioeconomic.
In addition to the above difficulties, the developer of a
power project faces several difficulties arising from reasons
that include the following:
• the multiplicity of government agencies that he has
to deal with for obtaining the requisite clearance;
• reluctance of financiers to fund the project without
statutory clearances and reluctance of government agencies
to give statutory clearances without financial closure;
• cost escalation due to delays in obtaining clearances;
• unreasonable demands from project affected people;
and
• interference from local small-time politicians.
The government has been bringing out new guidelines/
regulations governing the environment from time to time,
in particular since the early 1990s. These steps have generally
been more in reaction to events and to pacify critics, than
to meet the genuine needs for a pragmatic and integrated
view of large development projects. Some of the measures
have led to impractical and even impossible requirements
being placed on the projects. An illustrative list of the
‘impossible’ regulations is land for land, providing jobs to
all or most displaced people, controlling pollutants to
advanced countries’ standards, and 100 per cent ash
utilization. Such requirements have caused the need for
costly and imported technologies to mitigate the effects and
acquisition of more land with consequential effects on the
costs of the projects. As a result, the tariffs have been pushed
up. The time has come to review the stringency of these
regulations so that development does not suffer.
In short, power projects, perhaps like all other large
developmental projects, face enormous hurdles arising from
archaic and apathetic governmental procedures and legitimate
concerns for environmental degradation and the impact
these projects have on the economic and the social fabric
of the project affected communities.
MITIGATION MEASURES
The progress of development projects has been adversely
affected over the past several years due to ‘extreme’ positions
taken by those who oppose the current form of development.
In the early years of independence, the civil society did not
get involved in issues arising from the setting up of
development projects. In the last few decades, however, the
various movements against one development project or the
other have succeeded in focusing attention on the costs
borne by those affected and displaced, and served to
considerably change the attitude of the government as well
as the developers and other stakeholders to improve the
rehabilitation packages. These movements have, however,
degenerated into aggressive environmentalism, based on
exotic ideas that ignore the local realities and the desperate
need for fast paced development for a poor nation. The
combination of democratic rights and the gullibility of the
poor has become a potent weapon in the hands of these
activists to slow down, if not stop, development projects.
Governments in democratic societies find this opposition
difficult to handle. The best way to handle the situation is
to ensure that environmental, economic, and social issues
are adequately addressed right at the conceptualization stage,
in consultation and association with all stakeholders, the
local community and PAFs, NGOs, activists, and the local
governments. This process of consultations and dialogue
between all constituents should be maintained throughout
the life of the project.
Involuntary resettlement not only engenders feelings of
alienation and helplessness, but also tends to adversely affect
the prevailing social and economic cohesion. Many a time,
projects taken up as rehabilitation measures are not in
conformity with the local values and extant systems. Hence,
they fail to achieve the desired objectives. Government too
tends to push all the consequences of land acquisition and
the responsibilities of R&R solely on to the project developer.
This is not effective since the government is possibly in a
much better position to ensure success of rehabilitation
efforts than a private developer. Besides, a large project
typically generates impacts that have far wider ramifications.
If this is recognized, then there could be other ways of
mitigating the negative impact on the local communities.
Institutional development is necessary to ensure that
development projects meet the objectives. There is no
articulated institutional developmental strategy in the
country within which the development projects can be
planned. Currently, the institutions that are in existence
suffer from shortages of staff with necessary skills and
experience. The institutional framework also suffers from
absence of effective management control systems to evaluate
the outcome and performance of people oriented activities.
Project developers in India have a tendency, possibly in
connivance with the local leaders and local government, to
avoid measures to fully mitigate the impact on the physical
and social environment. The participation of overseas equity
institutions and banks has improved the institutional
structure and has generally made the Indian organizations
respect the statutory and institutional requirements to protect
the environment and the interests of project affected people.
The knowledge and skills available with the regulatory
agencies (currently, largely governmental agencies) to deal
with the complex issues related to EIA (Environment Impact
Analysis) and SIA (Social Impact Analysis) studies in a
pragmatic and cost-effective manner are extremely limited.
The policies formulated and implemented to mitigate the
negative impact on the environment and the economic and
the social fabric of the region are therefore many a time
quite inadequate. Another issue that remains inadequately
addressed by policies is the disparity that is created between
those affected and those who are not affected by the project.
Another major issue in R&R today is the problem of
high and inflated expectations. The expectations today may
be a backlash of the years of neglect. However, increasingly
they have become far more than what can be reasonably met
by a project to remain economically viable. Costs, when
firmed up at the feasibility stage can be dealt with, but the
increasing uncertainties and delays may cause many
developers to take steps to avoid the responsibilities. High
quality R&R programmes are currently not on the agenda
of the heads of the projects. This is essentially because
generally the performance of a project head is judged by the
yardstick of efficiency in the operation of the plants and not
by the efficacy of the efforts to address the concerns of
rehabilitation and resettlement.
BUILDING
A
FRAMEWORK
FOR
R&R
Projects are increasingly being influenced by the cultural
orientation of people directly affected by it. Projects now
focus on solutions not only to the technical problems, but
also to the social issues. Any abatement measure, imposed
on or adopted by a developer, has to be practical, feasible,
and desirable. It should not and cannot be a substitute or
a replication of governmental efforts in rural development.
Projects have to ensure that the improvement in the standards
of livelihood of the projected affected persons is at least
proportionate to the extent of impact the project has on
such people. However, given the endemic shortages in our
country, there is a larger society beyond those directly affected
by the project whose interests too have to be considered.
If the efforts to help the project affected persons impose a
more than necessary burden on the larger society or create
disparities with the neighbouring society, then more problems
are likely to be created in the long run. There is therefore
a need to evaluate various demands and costs more holistically.
What is required is a paradigm shift from government
diktats through legislative requirements to one of consultation
and working in an integrated manner. This calls for a multipronged approach, one driven with a missionary zeal. While
organizations have to accept that it should be a mission of
the organization to resettle and rehabilitate the people in
an equitable and fair manner so as to help improve the
quality of those involuntarily affected, it should equally be
necessary to keep in view the requirements of the larger
society while determining the expectations on the developers.
In our suggested framework, the developers are seen as
facilitators and not as providers of the services required for
R&R of the PAPs. It would be more appropriate for the
developer to provide funds for the same purpose to a ‘service
provider’ who is qualified, approved, and registered with the
government agencies to take up such services. The service
provider should undertake the R&R activities in a
professional manner in collaboration with the PAFs/PAPs
and NGOs. A specified percentage of the project cost should
be set aside so that project developers know their costs and
accordingly decide on the viability of the project. While a
part of this corpus could be used for initial expenses and
investments, the balance could be kept aside to meet recurring
expenses. This can be used to sustain the families while they
are being trained or empowered to obtain sustainable/
alternative employment.
The required services should flow through various arms
of the state in collaboration with the developers. More
attention needs to be paid, both in the institutional design
as well as actual working, to ensure effective maintenance,
conservation, and improvement in the facilities provided
during the lifetime of the project. Once these are
institutionalized with the active involvement of PAPs, the
chances of success will increase and the benefits will reach
a larger segment of the population.
The framework also ought to define the role of NGOs
and other voluntary bodies, which get involved in any
project. Their skills are put to proper use––as watchdogs of
the policies and programmes. The NGOs should also play
a major role is eliciting the commitment, support, and
active participation of the local communities and affected
families. They should also be involved in capacity building
of PAPs to deal with the changes brought about by the
project.
Involvement of the staff of the organizations at all levels
is one critical aspect in ensuring efficacy of the mitigation
measures adopted. Various functional specialists should be
involved to create better awareness across the organization
on what is at stake for the organization. This single step will
go a long way in ensuring reduced tension between PAPs
and the personnel of the project and hence the developer.
Currently, more often than not, the two adopt adversarial
postures, since the project employees feel that the problem
is not their creation but they are there to just do their jobs,
whereas to the PAPs, the employees are seen as representatives
of the developer and all their frustration are hence directed
against them and their families.
RECOMMENDATIONS
FOR
EFFECTIVE R&R
Based on the discussions thus far, we suggest the following
framework for improving the effectiveness of the resettlement
and rehabilitation activity associated with large development
projects:
• The developers’ ought to see the R&R efforts as a
commercial opportunity and as an opportunity to serve
society. The removal of uncertainty about the costs of R&R
by freezing the funds commitment at the start of the project
would go a long way in changing the mindset.
• The monitoring mechanisms for both the physical
and social environment should be institutionalized.
Involvement of PAPs and NGOs should be formalized
through a fair system of seeking their representation.
• The facilitators and NGOs should work together to
change the attitude of PAPs to a participatory one rather
than one of confrontation. The current attitude of PAPs of
total dependence on the government and/or on the developers
should change to one of self-sustenance and self-support,
of course, with the requisite assistance from the developers,
the government, and the NGOs.
• The fact that all projects take up large-scale plantations
as part of the measures to protect the physical environment
can enable them to create sustainable employment for selected
and needy PAPs in the rearing of trees.
• Since fuel is a major constraint in the rural areas, this
is one requirement the projects should address directly. This
will be much more desirable than provision of electricity,
which in any case is a relatively high cost resource and
should necessarily become an input to PAFs only after other
basic inputs such as health care, drinking water, education,
and sanitation are made available.
• It would be wise to allow the PAFs to participate
actively in the design and construction of their new habitats,
particularly their personal spaces. The new habitats should
contain basic common facilities such as school, health care,
water supply, sanitation, and approach roads. It is generally
found that most are willing to pay for better services. The
PAPs should be trained in management of the common
facilities created as a part of the R&R efforts by adhering
to the principle of recovering legitimate charge from the
users of facilities for maintenance and enhancement of the
common facilities.
• The PAPs should be educated and trained by NGOs
to contribute to the betterment of the environment. They
should be motivated, if necessary through use of monetary
incentives to seize the opportunities to have sustainable
development rather than merely look for immediate gains
or benefits.
• Finally, the government policies and regulatory
structures should be re-examined so as to make them pragmatic and development oriented. The emphasis should be
on evolving regulations that ensure that large development
projects are commercially viable as well as acceptable to the
people.
5.5 THE CNG VEHICLE PROGRAMME IN DELHI
B.P. Pundir
In India, the first serious measures to control vehicular air
pollution started in April 1991 when emission standards for
the new passenger cars and two and three wheelers were
brought in. These were followed by the emission standards
for new diesel vehicles in 1992 and the progressively stricter
emission standards were enforced starting from the years
1996 and 2000. In the year 2000, emission regulations were
similar to Euro I norms. The Ministry of Environment and
Forests, Government of India had recommended these
emission norms, and they were notified by the Ministry of
Surface Transport, Government of India. The government
was discussing still tougher emission norms on the lines of
Euro II, III, and IV. These were to be brought in phases
over the period from 2002 through 2007. However, some
environmentalists perceived that the government was going
too slow and was taking a lenient view of the urban air
pollution problem. Public interest litigation in the Supreme
Court of India resulted in additional measures for
enforcement, particularly in the capital city of Delhi and
over the period from 2002 the three other metro cities.
Notable among the directives issued by the Supreme Court
were the use of unleaded gasoline in 1995 and adoption of
Euro II norms for the passenger cars from April 2000 itself
in Delhi. Unleaded gasoline was introduced throughout the
country during 1999 and Euro II norms are proposed for
the rest of the country from the year 2002.
To combat the high concentration of suspended
particulate matter mostly emanating from diesel vehicles
operating in the city of Delhi, the Supreme Court ordered,
on 28 July 1998, that, (i) All pre-1990 taxis and three
wheelers be phased out by 31 March 2000 and replaced by
new vehicles running on clean fuels; (ii) All public buses
older than eight years be converted to use Compressed
Natural Gas (CNG) by 1 April 2000; (iii) The entire city
bus fleet operated by Delhi Transport Corporation and
private owners to be converted to use CNG by 31 March
2001.
Further in its order of 29 April 1999, the Supreme Court
directed all diesel taxis to be converted to use CNG unless
they meet Euro II norms for diesel.
‘Clean fuel’ has not been explicitly defined thus far,
though the Supreme Court in its ruling has directed the use
of CNG. In fact, when the concerned fleet operators could
not adhere to the deadline of April 2001, the Supreme
Court on 26 March 2001, asked the Environment Pollution
(Prevention & Control) Authority (EPCA) to define ‘clean
fuel’. The EPCA was asked to recommend other possible
fuels that could be used as ‘clean fuel’.
Diesel with sulphur content lower than 0.005 per cent
by mass is being proposed as a clean fuel. Here, it is important
to note that the low sulphur diesel is not going to significantly
reduce the particulate emissions, unless the diesel engine
technology currently in use in India improved. Fuel sulphur
contributes about 0.021 g/kW-hr (grams per kilo watt hour)
of particulate emission mass for every 0.1 per ceny sulphur
in fuel (Singal and Pundir 1996). Thus, even if sulphur
from the current diesel fuel containing 0.05 per cent
in Delhi is totally eliminated, an average reduction of
0.0105 g/kW-hr in particulate emissions may be expected,
which is insignificant compared to average particulate
emissions from the diesel buses operating in Delhi. It may
be viewed in the context that the year 2000 Indian norm
for diesel particulate emissions for heavy vehicles is 0.36 g/
kW-hr, at the maximum. The older diesel buses could be
emitting around 1.0 g/kW-hr of particulate matter. Total
elimination of sulphur from the current level of 0.05 per
cent of sulphur by mass in Delhi would amount to only
1–3 per cent reduction in particulate emissions. In the rest
of the country too, elimination of sulphur completely while
retaining the current or older diesel engine technology
amounts at best only to a 5–15 per cent reduction in the
particulate emissions. This means that the key to reduction
in particulate emissions is the diesel engine technology. It
may be mentioned that diesel sulphur in the USA and
Europe was brought down to 0.05 per cent maximum when
the particulate emission standards were lowered below 0.13
g/kW-hr for the urban buses in the USA in 1994. The diesel
engine technology at that stage had already advanced to a
level that smoke from these vehicles was not visible to the
naked eye. This certainly cannot be said about the current
Indian heavy-duty diesel vehicles. Use of low sulphur diesel
fuel (0.05 per cent sulphur) in such vehicles will serve no
purpose. Quick adoption of new diesel engine technology
on production vehicles is possible. Then use of 0.05 per cent
sulphur diesel fuel would be a worthwhile measure.
CNG
IN
DELHI
Phasing out of commercial vehicles, older than a certain
age, has been implemented. There was some resentment by
operators on account of the likely economic hardships. On
the other hand, conversion of commercial vehicles,
particularly the buses, to CNG operation has been very
slow. The Supreme Court in its order of 26 March 2001
Box 5.5.1
NGV Programmes Elsewhere
Natural Gas (including CNG) Vehicle (NGV) programmes are being implemented in over 40 countries, to solve the urban air
pollution problem, and also to increase the usage of natural gas, often indigenously available. In other countries vehicle conversion
and demonstration trials have been carried out. The extent and success of these programmes has varied considerably. Table B5.5.1
brings out the number of natural gas vehicles on the road c. 2000.
Table B.5.5.1
Natural Gas Vehicles on the Road in Certain Countries (Nos), c. 2000
Asia
India
China
Japan
Pakistan
Malaysia
Indonesia
Bangladesh
Myanmar
Thailand
South Korea
No. of NGVs
45,000
15,000
6684
4000
3700
3000
1000
200
82
22
Other countries
Argentina
Italy
USA
Brazil
Russia
Venezuela
Canada
Egypt
New Zealand
Germany
No. of NGVs
462,186
320,000
90,000
60,000
30,000
27,542
20,505
19,000
12,000
5000
Source: Duncan (2001).
The two largest NGV programmes, in Italy and Argentina, are primarily centerd on passenger cars and taxis. Due to withdrawal
of subsidies, in New Zealand the number of NGVs has reduced to just about 10 per cent of its size during the 1980s. In the
USA, NGV programme is driven by clean air legislation. About 2000 heavy-duty vehicles operate on LNG (liquefied natural gas),
while 80 per cent of CNG vehicles are light duty vehicles. About 2000 CNG transit buses are in operation. As mentioned earlier,
in the USA natural gas buses were introduced when the diesel particulate emission standards were lowered below 0.13 g/kW-hr
in 1994 and 0.091 g/kW-hr during 1995. For meeting these limits, diesel buses required use of particulate traps, which is a much
more expensive technology than the natural gas vehicles and its durability was also not proven.
The data for India includes about 20,000 CNG taxis operating in Mumbai. In China, natural gas vehicles form an important
component of the vehicular air pollution control strategy. By the end of year 2000, 15,000 CNG vehicles were in operation in
some large cities, including Beijing and Shanghai.
In general, heavy-duty NGV programmes for heavy duty vehicles have been slow to take off. This is due to high cost of conversions
and technology constraints. In Asia, besides India, Thailand has focussed on conversion of buses to natural gas to reduce urban
air pollution.
had allowed six months grace period (upto 30 September
2001) to comply with these requirements. It was to apply
only for those operators who had placed, or would place,
firm orders for CNG vehicles on or before 31 March 2001
as a replacement of vehicles presently being operated by
them. The deadline for placing order for CNG vehicles was
subsequently extended by about a month. The Court has
further asked the EPCA of NCT (national capital territory),
Delhi to examine whether low sulphur diesel fuel could be
regarded as a clean fuel.
Delhi has in all about 30,000 buses, including contract
carriages operating long distance destinations out of Delhi.
Of these, approximately 12,000 are more than 8 years old.
Within the city, about 10,000 buses are under operation.
Three wheelers number around 87,000. Table 5.5.1 gives
the break-up of CNG vehicles as on April 2001 in Delhi
(for information on NGV Programmes in Other Countries.
See Box 5.5.1).
By 30 September 2001, at least 10,000 buses were to be
converted to CNG or go off the road. DTC (Delhi Transport
Corporation) had placed order for 1880 CNG buses by
March 2001. Private owners may be lagging behind in this
respect. The production capacity of CNG buses in the
country at the moment is about 1000 units per month. The
CNG buses requirement of Delhi can, thus, be met in about
a year’s time if funding for procurement is available. The
number of CNG three wheelers and taxis is, however,
adequate.
Table 5.5.1
CNG Vehicles in Delhi (March 2001)
Buses: DTC
Private
Cars/taxis/vans
Three wheelers
Number
175
100
11,100
13,500
SUPPLY INFRASTRUCTURE
In Delhi, 68 CNG filling stations have been set up. The
CNG dispensing stations, depending upon the type of
infrastructure employed and forms in which natural gas
is available at the site and storage facilities, are categorized
as mother, on-line, or daughter types. Mother filling
stations compress the natural gas available from the pipeline
network at the site to high pressures of 250–300
atmospheres, which is stored in high pressure storage tanks
for dispensing to the vehicles. On-line stations directly
deliver the natural gas to the on-board vehicle storage
cylinders as the gas is being compressed. Both these types
of dispensing stations complete filling of gas into onboard vehicle cylinders to about 200–50 atmospheres
pressure in a short period of less than 10 minutes even
for heavy vehicles. The daughter CNG filling stations on
the other hand employ a cascade of high-pressure cylinders
filled with CNG at mother stations. Such a system can
refuel only small vehicles like three wheelers or taxis, and
has a high amount of residual gas at low pressures, which
cannot be delivered to the vehicles at the desired pressure.
The break-up of different types of CNG filling stations
at present in Delhi, including total dispensing capacity, is
given in Table 5.5.2.
Table 5.5.2
CNG Filling Stations in Delhi (March 2001)
Station type
Mother
On-line
Daughter
Daughter-booster
Total compression capacity (kg/day)
Average daily sale (kg/day)
8
13
44
3
196,072
95,000
Although the total dispensing capacity is 196,072 kg per
day, yet there are frequent complaints by taxi and three
wheelers of long wait extending from 1 to 2 hours43 and
not getting CNG at the required pressure as these are mostly
served by the daughter stations. To fuel 10,000 buses, with
an average operation of 400 km/day/vehicle requires total
dispensing capacity of about 1,300,000 kg per day. Thus,
by September 2001 the CNG dispensing capacity was to
be increased by a factor of 6.5 to service the bus fleet alone
for implementation of the Supreme Court orders. Only the
mother or on-line CNG filling stations can fuel the buses.
About 100 to 125 additional CNG filling stations would
be required to meet this demand. The cost of a CNG station
varies from approximately $2,00,000 to $1 million (Jones
2001). A CNG dispensing mother station costs around Rs
4 crores excluding the cost of land in Delhi.
The experience and the public reaction on implementation
of the Delhi CNG vehicle programme so far is summarized
below:
• Adequate infrastructure was not available for
conversion to CNG, particularly the buses
• TELCO and Ashok Leyland, the two heavy vehicle
manufacturers in India, could not meet the demand of new
CNG buses
• TELCO and Ashok Leyland were not involved in
conversion of old vehicles to CNG operation, and the quality
of conversion has not been satisfactory
• Bus operators complained of engine overheating
43
Status prior to the events in August 2001, when waiting
periods began to exceed days.
• CNG refueling infrastructure is not adequate as
consumer complaints of low pressure are many
• Long refueling time and hence long queues with
waiting period of 1–2 hours
• Certification and inspection of converted buses were
inadequate. There were reports of use of spurious cylinders
resulting in bursting of cylinders and accidents
• Three-wheeler operators complaints of high
maintenance costs.
The overall impressions of the programme have not been
encouraging primarily due to poor implementation, planning,
and strategy. Several challenges are faced in an alternative
fuel programme like the one being implemented in Delhi.
CHALLENGES
The introduction of an alternative fuel is a complex issue
where several facets of the problem are to be addressed.
Technical and economic objectives may not be met due to
faulty selection of target vehicles and equipment. If the
programme aims also at converting the existing vehicles, the
programme should target only the vehicles in good
mechanical condition and where maximum environment
and/or replacement benefits are possible. In Delhi, a company
obtained type approval certification for conversion of a
1992 model bus. However, it has been rendered inapplicable,
as the buses older than 8 years were withdrawn in the year
2000. The operators, who have deposited advance money
to get their fleet converted by this company, have been
subjected to avoidable hardships.
Many a times, dual-fuel technology is touted as an
appropriate technology with the justification that it provides
a flexible fuel option. In the dual-fuel vehicles, conventional
fuel is partially replaced by the alternative fuel and the
vehicle uses both the fuels simultaneously. It is argued that
if alternative fuel is not available, the vehicle can be operated
on the conventional fuel, hence giving flexibility of operation
to the user. However, pollution mitigation being currently
the principal objective of such programmes, the dual-fuel
option does not provide the necessary environmental benefits.
Table 5.5.3 gives a comparison of the typical emission
potential of CNG–diesel dual fuel and dedicated spark
ignited CNG heavy-duty vehicles (Weaver 1989). It is quite
clear that vehicles with closed loop catalyst, as type 4 in
Table 5.5.3, give significant reductions in nitrogen oxide
and particulate emissions compared to the diesel version
and should be considered for Delhi. In addition, carbon
monoxide and hydrocarbons, emissions although higher
than the diesel version, are still quite low.
Technology and infrastructure to manufacture new
vehicles to meet the programme targets should be available
well in advance, for which adequate lead time is to be
provided to the original equipment manufacturers (OEM).
Secondly, the manufacturers should be given firm assurance
about the number of vehicles required for them to plan the
production through a well-planned CNG vehicle phase-in
schedule. The concerned vehicle safety and emission
regulations and standards are to be formulated in advance.
This enables the vehicle manufacturers and companies
undertaking conversion jobs to have full information on
what standards to follow and meet. In India, such regulations
for heavy vehicles were formulated and notified only in
February 2000 just about a year before the implementation
date. Thus, the time available to the vehicle manufacturers
for fine-tuning of the design and to undertake production
to meet the mandated targets of CNG vehicle introduction
was inadequate.
Poorly managed demonstration programmes lead to
negative perceptions. Many a times the public and operators
perceive the alternative fuels as only an inferior substitute,
due to lack of proper public awareness campaign. This
perception is further strengthened by poor quality conversion
jobs done on demonstration vehicles. Poor performance of
the converted demonstration vehicles may cause incalculable
harm to any well meant programme that is not planned
well.
Table 5.5.3
Emission Potential of Engines
Engine type
1.
2.
3.
4.
Diesel
Diesel and NG Dual Fuel
TNO closed loop without catalyst
TNO closed loop with catalyst
Cycle
13- Mode
13-Mode
USHD Transient
USHD Transient
Emissions g/kW-hr
HC
CO
NOx
PM
0.46
21.74
4.85
1.36
2.17
17.12
31.64
9.02
13.59
8.15
9.33
1.58
0.54
0.34
<0.013
0.013
Note: NG: Natural Gas; USHD Transient: US Heavy Duty Transient Test Cycle; HC: Hydrocarbons; CO: Carbon Monoxide;
NOx: Nitrogen Oxides; PM: Particulate Matter; TNO : TNO (Netherlands Organization of Applied Scientific Research).
Source: Road Vehicles Research Institute.
Co-ordination is the Key
Typically, a number of participants and interest groups are
involved in the success of such programmes. Fleet operators,
fuel suppliers, vehicle manufacturers, regulatory bodies,
market administrators and financial services are the main
stakeholders, among others. Co-ordination and leadership of
all these stakeholders is a major challenge. Suitable
environment for market development and balance between
demand and supply of services is to be maintained. The
programme should receive a clear endorsement of the
government to provide necessary confidence for the investors
to participate. A central agency to co-ordinate the total
development of the programme, creation of technical
standards, mentoring and monitoring of various participants,
overcoming technical, market, and legislative constraints etc.
would significantly benefit implementation of the programme.
Fuel Supply
Failure to provide an adequate fuel supply infrastructure has
resulted in long queues at the few filling stations in Delhi.
Nothing could have been more adverse publicity for the
programme. There are choices here in terms of higher capital
cost of fast filling stations versus low cost but slow rate filling
stations, and scheduling—wherein heavy vehicles could use
night hours for filling. Ultimately, of course, the option is
really to have the lowest operation costs, including the cost
of waiting at filling stations, that includes the opportunity
cost of a bus or a taxi that has to wait. There is still no
recognition of these problems in the implementation process.
The production of specifically built CNG vehicles by the
OEMs is the best route to vehicle performance, emissions,
and cost, relative to conventional vehicles. The potential of
cost benefits are most favourable for the heavy vehicles, as
the dedicated CNG heavy vehicles can be built at costs
comparable to those of diesel vehicles. This would avoid the
high cost of conversion and improve the economics of
operation. The cost of conversion of existing vehicles today
is slated approximately at Rs 4.0 lakhs for a bus. The
operator does not see a short payback period for this
investment, and hence there is very little voluntary
enthusiasm towards the programme. The major constraint
for the OEMs, however, is the economic scale of production.
If the total demand is around 20–30 thousand vehicles only,
with no significant sustained annual demand, it is not
economically attractive to the vehicle manufacturers to make
large investments for the production of state of art technology
vehicles. The creation of infrastructure and trained manpower
for servicing is also linked with the total demand of such
vehicles and the business opportunities it provides.
A long-term energy and transport policy for the country
can provide confidence to the associated industries to make
the necessary investments in creating fuel supply
infrastructure, production of purpose built vehicles with
best performance, and service infrastructure. An easier way
to motivate bus operators to CNG conversion would have
been to provide a fuel price advantage for CNG, say for the
next five years. That also would have given clear policy
directions to the vehicle manufacturers and energy companies
to commit resources to CNG, without too high a policy risk.
CONCLUSIONS
The conversion of light vehicles to CNG operation has been
quite satisfactory. The relatively easy availability of technology
and low cost of vehicle have been the primary factors
responsible for the high conversion of the light vehicles.
However, the rate of conversion of buses to CNG has been
nearly insignificant.
A study of various alternatives should have preceded the
decision taken for CNG conversion. It is unfortunate that
the definition of ‘clean fuels’ is being sought now when the
CNG bus programme has failed to meet the mandate. This
definition should have been available through discussions
with technical experts before requesting the Supreme Court,
through a public interest litigation, to issue its order in July
1998 on the use of clean fuels in all commercial vehicles by
1 April 2001. Possibly, other options, like advanced diesel
engine vehicles meeting Euro III norms etc., could have been
allowed in parallel. Once the old buses are being scrapped,
the introduction of advanced diesel vehicles with matching
fuel could have given the desired effect, of course over a little
longer period, at much lower vehicle and infrastructure
costs. Sustainability of such a programme would also have
been easy. Many cities in the West, having a much larger
population of vehicles, are far cleaner than Delhi, without
enforcing conversion of all buses to CNG operation.
Once the decision on CNG conversion was taken, an
institutional leadership could have avoided a system failure.
A central nodal agency should have been made responsible
to co-ordinate and implement the programme. Presently, the
formulation of emission standards is the responsibility of the
Ministry of Environment and Forests. The Ministry of Surface
Transport notifies the standards, and enforcement of the
Motor Vehicle Rules is a state subject. Delays in notification
and issuing of standards and in general lack of coordination
among these agencies, result in keeping manufacturers in
confusion on the standards to follow and comply with.
Working through fuels and specific technologies is at
best a poor second to notifying realistic emission regulations
with seriousness of enforcement and adequate notice for
industry, enforcing agencies, and others to get prepared.
This is the route that most countries having successful
vehicle emission reduction programmes have adopted The
choice of technology, engine types, and fuels has been left
for the market forces to decide.
5.6 ENVIRONMENTAL IMPACT OF LARGE DAMS: A SOCIAL CRITIQUE
Bernard D’Mello44
Large dams have contributed in a significant way to extending
irrigation and thereby facilitated the spread of the ‘green
revolution’ in Indian agriculture.45 In the light of the
outcome of the Supreme Court judgement on public interest
litigation (PIL) related to the Sardar Sarovar Project (SSP),
a part of the Narmada Valley project, we analyse the
judgement and its critique by People’s Union for Democratic
Rights (PUDR), to focus on the issues it raises with respect
to the attitude of the power elite (Mills 1963) and the state
towards those who remain unrepresented in the power
structure of the society. Even though Environment Impact
Analysis (EIA) and Social Impact Analysis (SIA) is prescribed
and for large dams, it has been ritualized as a mere appendage
to sanctify the process driven by the interest of the elite. The
focus of our analysis is on social and environmental aspects
of large dams, which is equally relevant for large infrastructure
projects entailing endowment redistribution or social impact,
in general. Based on our analysis, we are led to conclude
on a realistic, but what may seem to some a rather pessimistic,
note that the power elite of the country has to go a long
way in incorporating the liberal values of pluralism, legalism,
scientism, and political equality in its decision-making
processes. It is only if and when these values permeate the
power elite’s decision-making that EIA and SIA can get
truly institutionalized. Otherwise, they may simply remain
rituals as pretence of a liberal democratic society. The lack
of concern towards some of the positive values of liberalism
is but a symptom of a deep malady of the Indian politicaleconomic system.
THE NARMADA CAMPAIGN
AND
PIL46
In this section, we draw on commentaries on campaigns
around the adverse environmental and social impact of the
Sardar Sarovar Project. At the outset, we must make it clear
that we do not accept the characterization of the conflicts
that we are analysing here as ‘environment versus development’ conflicts. This is because to us the notion of
44
The author is grateful to Ram Guha and Sebastian Morris for
critical comments on an earlier version of this essay. The usual
disclaimers apply.
45 This is a social critique of the environmental and social impact
of ‘large’ dams and assessments made of such impact. We are not
dealing with the question of technical choice between ‘large’ and
‘small’ dams. Much of that controversy reveals widespread technical
incompetence on both sides of the debate.
46 See Divan and Rosencranz (2001).
development, without any prefix, denotes, in a Polanyian
perspective (Polanyi 1944), ‘habitat’––the habitability of
the natural environment as well as the security of individuals
in their socio-cultural environment––and ‘improvement’–
–productivity and economic growth.
Development and concurrent ‘underdevelopment’ of the
huge order of magnitude caused by the Narmada dams
project spurred a social movement of the victims of the
project. The Narmada Bachao Andolan (NBA) was formed
in 1989, with the coming together of smaller groups in each
of the three states, Maharashtra, Gujarat and Madhya
Pradesh—groups that organized the victims at the local
level. The NBA leader, Medha Patkar, who essentially derives
her legitimacy on a moral and charismatic basis, not only
won the confidence of the people who were to be adversely
affected but also influenced the financial decision-makers
and environment lobbyists in Washington and Tokyo against
the project. Initially, the Narmada Valley project was to be
financed partly by the World Bank, which seemed to have
endorsed the project plan, with all its failures. But later
under public pressure, the Bank withdrew in March 1993,
after an independent commission appointed by it, the Morse
Commission was highly critical of the resettlement and
rehabilitation policy and practice.47
The NBA now began demanding that the Indian
government appoint a commission to undertake a comprehensive review of the project. The jal samarpan or selfsacrifice by drowning, during the monsoon months, has
been the most powerful ‘Gandhian’ tactic employed. That
was how the NBA forced the central government to announce
a review in August 1993, but predictably, the Gujarat
government refused to participate. In May 1994, the NBA
filed a PIL against the project in the Supreme Court under
Article 32 of the Indian Constitution.48 This PIL was filed
in the public interest by the NBA to protect the right to
livelihood of the adversely affected persons due to the SSP.
According to the petitioner, at least 150,000 persons in 245
villages in the submergence zone are/will be badly affected.
They are mostly tribal people and other marginalized peoples,
being forcibly displaced and uprooted. They are not being
given a chance to be heard and are not receiving proper
compensation and resettlement. The project authority is
going ahead with the project without having completed the
studies required to arrive at an EIA and an SIA. It is
47
As per a reviewer with ‘inside information’ there was a subsequent internal report of the Bank questioning the Morse report.
48 Writ Petition (Civil) No. 319 of 1994.
violating a number of the conditions laid down by Narmada
Water Disputes Tribunal (NWDT) on the basis of which
a conditional clearance was given by the MoEF.
The Supreme Court (SC) judges, Chief Justice A.S.
Anand, Justice B.N. Kirpal, and Justice S.P. Bharucha, in
the traditions of PIL set by their predecessors, Justice Krishna
Iyer and Justice P.N. Bhagwati, had an opportunity to:
• Contribute to ensure that the planning, implementation, and administration of similar large projects in
the future be obliged by a commitment of the state to the
social welfare of the poor and marginalized, and to the
preservation of the natural environment
• Ensure the required social and environmental
corrective actions in the SSP case, with the participation of
the NBA as a representative of the poor and marginalized
victims of the project.
But on 18 October 2000, the NBA petition was dismissed
and the court allowed the dam to be built to its full height
of 138 metres. (The height of the dam then stood at 88
metres.) There was, however, a split in the three-member
bench, with the majority judgement of Chief Justice Anand
and Justice Kirpal constituting the verdict in the case. Justice
Bharucha differed, but his was the minority judgement.
Given the facts and analysis put forward before the court,
his judgement was more in tune with the generally accepted
tradition of dealing with PIL, established by such judicial
authorities as Justices Krishna Iyer and P.N. Bhagwati.
Learnings from the PUDR Critique?
A reading of the PUDR critique (PUDR 2000) of the
Supreme Court judgement seems to suggest the following:
• There is no appreciation of the idea of relevant
‘stakeholders’ representation in the sub-groups that the
Narmada Control Authority (NCA) was obliged to set
up under various directives—the Resettlement and
Rehabilitation (R&R) sub-group (formed in response to a
Supreme Court directive to a petition filed by B.D. Sharma
in 1990), the Environment sub-group (formed as an essential
condition for Environmental clearance by the MoEF). This
seems to have exacerbated the impasse between the state and
project authorities, on the one hand, and the NBA, a
representative organization of the ‘victims’ of the project,
on the other.
• The R&R and Environment sub-groups are
unrepresentative when viewed in a stakeholder framework.
The sub-group on Relief and Rehabilitation (R&R subgroup) have the Secretary, Union Ministry of Welfare, as its
chairperson. The members are government officials and
some technical persons. Similarly, the Secretary, Union
Ministry of Environment and Forests, chair the sub-group
on Environment. Its members are government officials and
some technical persons.
• When it was proved that these ‘unrepresentative’ subgroups were not doing their job (monitoring rehabilitation
in the field; ensuring the implementation of environmental
safeguards) sincerely and efficaciously, the SC ordered the
setting up of state-level Grievance Redressal Authorities
(GRAs) to monitor rehabilitation. A retired judge of the
high courts chaired these, and, according to the minority
judgement, only these GRAs could be trusted. Yet, now the
GRAs have no veto power; they are merely available for
consultation by the ‘unrepresentative’ R&R sub-group.
• Even after more than two decades (the NWDT ‘settled’
the inter-states dispute in 1978), reasonable data to assess
the likely impact on flora and fauna is not yet available.
Much remains to be done by way of studies and by way of
action about the likelihood of excessive soil erosion from the
catchment leading to excessive siltation of the reservoirs.
Indeed, an apparent absence or inadequacy of data on some
important environmental aspects still persists. The MoEF
had abdicated its responsibility and left it to the Prime
Minister’s Office (PMO), to ‘clear’ the project on politically
expedient grounds. A conditional clearance was given on 24
June 1987 subject to (i) the planning and implementation
of environmental safeguards be carried out pari passu (at an
equal pace) with the progress of work on the project,
(ii) the environmental science and engineering studies would
be carried out as per the schedule, and (iii) the catchment
area treatment and the rehabilitation be planned so that
these will be implemented ahead of the reservoir filling.
None of these have been adhered to, as per the minority
judgement.
• The MoEF issued guidelines for EIA of river valley
projects in 1985. But the project was given a conditional
environmental clearance by the MoEF without the necessary
data with respect to the likely environmental impact being
examined and contrary to the guidelines of the MoEF itself,
as stated in the minority judgement.
• ‘Costs’ such as the loss of forests, the costs of catchment
area development, diversion of railway lines, and the ‘costs’
to the persons displaced by the SSP were marked as unknown
in a note that the MoEF sent to the PMO in December
1986. The MoEF admitted the impossibility of knowing the
‘costs’ of loss of habitat of other forms of life and the overall
loss of biological diversity. More important than the doctored
figures that usually get plugged into a social cost benefit
analysis (SCBA) is the fact that this method fails to provide
an assessment of the distribution of the various likely costs
and benefits to different economic classes of persons affected,
either positively or negatively.
• The Narmada Bachao Andolan (NBA) is pilloried for
wasting public money in presumably contributing to time
and cost overruns through its PIL. There is no recognition
of the fact that the NBA does represent the interests of the
poor among the displaced persons in struggling for their
constitutional rights. It seems to me that even some
representatives of the highest judicial body in the country
thus do not have any respect for the principle of pluralism.
This is a democratic recognition that there may be many
different kinds of interest groups, individuals, and civil
society organizations and government agencies who are
concerned and would like to share responsibility,
commensurate with the entitlement of a ‘voice’, in issues
related to the environment and the livelihoods of persons
affected.
• The (majority) SC judgement dissociated itself from
arbitrating on controversial public policy issues in this case,
even though it is generally accepted that the legal system
is the ultimate arbiter of conflict. Legislation on
environmental matters related to the project in the form of
the Environmental Protection Act was passed in 1994 and
environmental litigation under that Act could have been
allowed in view of the gross omissions by the NCA and the
MoEF under the earlier guidelines of 1985.
• Over the last decade, the market is being relied upon
more and more to direct and inform environmental goals,
say by trying to persuade consumers to value the products
of so-called environmentally responsible companies more,
ceteris paribus. The Narmada Control Authority (NCA)
could have ceased the opportunity to at least appear to be
environmentally responsible by reaching a compromise with
the NBA on freezing the height of the dam at the prevailing
(88 m) level and building separate canals to transport water
to parched Kutch and Saurashtra, with very restricted
withdrawals along the way.
• The SC judges could have asked for the environmental
issues surrounding the project to be dealt with more on the
basis of knowledge of environmental science and engineering
and of the social sciences. Instead, the majority judgement
took a public administration perspective. An attitude that
environmental issues can be resolved by the application of
science and developments in science and engineering may
have been more acceptable to both parties to the dispute,
especially since there seemed to be no other way of arriving
at (even an unstable) consensus.
• Given the proclivity of Justices Anand and Kirpal to
give a virtual clean chit to the project authority that R&R
was more or less proceeding according to the NWDT award
on the basis of unverified affidavits of the respondents,
rationality, logic, and scientific temper took a back seat. Of
course, the NBA’s affidavits too were not verified. But given
the bias of the Justices to believe one set of unverified
affidavits (the respondent’s affidavits) and reject another set
of equally unverified affidavits, how could one even expect
them to have adopted a way out of the imbroglio as suggested
in 10 above.
The public administration perspective used by the
Supreme Court in deciding on the case raises important
issues. In a liberal democratic society, or one which pretends
to be as such, the courts are rightly expected to provide
some semblance of protection of law to those who may be
outside the dominant coalition of the society. Their
independence and institutional strengthening is seen as a
key feature of such societies. This is particularly important
as the power and institutional structures in societies are
prone to collusion, nexus formations, and other
dysfunctionalities, which require balancing. The worst
sufferers of such dysfunctionalities and state failure are the
underprivileged, when their interests clash with that of
dominant coalition. To take a public administration
perspective in a case like that of NBA is either to admit that
state failure is impossible or that the perspective of dominant
coalition is shared by the court. While the former position
is ‘naive’, the latter is reflective of a lack of liberal outlook
and acceptance of plurality.
EIAS
AND
SIAS
The environmental and social impact analyses carried out
in the context of large dams and infrastructure projects has
been ritualized in a context where the politicians, bureaucrats,
large land owners, and private interests are likely to make
any such analyses subservient to their own objectives (see
Box 5.6.1, based on part of a study by the World Commission
on Dams). In this section, we focus on environmental impact
analysis (EIA) and social impact analysis (SIA) and explore
the political, legal, economic, and scientific and technological
institutions (S&T) and frameworks required for them to
achieve the aims of those analyses. We also assess whether
such an ‘idealized’ analysis is feasible and the issues and
impediments embedded in the political economy of the
existing state.
What Should a ‘Progressive’ EIA and SIA Be?
EIA in the context of large projects like dams is an activity
that is designed to identify and predict the impact of a large
dam project on the biological, geological, and physical
environment and on the health and well being of human
beings. The identification and prediction of these likely
impacts has to take account of the specific legal framework,
the practice of public policy, social welfare programs and
operational procedures on the ground. In a decent society,
an EIA also has to interpret and communicate the impacts
to all concerned, including the likely victims of the project,
in the form of information that can be understood by all.
It is this information which is supposed to be the basis of
logical and rational decisions, including amelioration of the
victims of the development process, the poor and exploited,
as well as other forms of life. What are the conditions under
which an EIA can achieve all of this?
An EIA should lead to an environmental impact statement
(EIS). The process of preparing an EIS necessarily involves
public hearings, where the effort should be to involve all
those who are likely to be affected by the project. The draft
EIS should be widely circulated so that the public and
‘public intellectuals’ have the opportunity to critically review
and comment upon it. The final version of the EIS should
be published and made available to the public, and should
include the comments, critical or otherwise, of all the
reviewers. It is at this stage that the EIS should be submitted
to the Ministry of Environment and Forests (MoEF) for a
decision, after which, only if the project is environmentally
approved, may work be initiated on the project. But a
provision is still open for PIL brought to the courts. Indeed,
carefully designed administrative, procedural, and
jurisdictional structures, preferably with a decentralization
of responsibility, and through an elaborate screening and
public hearings process, can minimize the probability of PIL
on environmental and social issues reaching the courts.
An EIA necessarily includes an SIA. Social, economic,
and demographic impacts, such as displacement of peasants
and tribal communities from the land and the forests, their
relocation elsewhere, the impact of the project on agriculture
in the region, migration, employment opportunities, health,
livelihoods, and inequality, may be manifested directly or
via the environmental impacts. Further, what happens to
land market values? There are aspects of development and
underdevelopment that simultaneously occur. The shifts in
local population and the labour force, the multiplier effects,
forward and in reverse, both of incomes and employment,
displacement and relocation problems, the demands on
housing, schools, water, sewerage, health and social welfare,
recreation, law and order, and social justice have to be
assessed. Changes in the intangible aspects of living such as
a sense of loss of place, the feeling of disintegration of
community, social disintegration, etc. may be equally, if not
more, important.
We must particularly analyse the changes in the class
differentiation of the peasantry that may occur over time
with the unequal distribution of the benefits of assured
irrigation in the command area. A progressive SIA may have
to take account of the likely compositional changes in the
above class differentiation of the peasantry as a result of
(differential) access to assured irrigation water. It will also
have to assess the likely impacts in the labour, land, and
credit markets as a result of the adoption of green revolution
techniques. In the Indian context, a ‘progressive’ EIA and
SIA will also have to be explicitly sensitive to the reality of
the institutionalized inequality of caste and gender. Under
Indian conditions on the ground, all this is of course easier
said than done. In an Indian setting, the institutionalized
oppressions of caste and patriarchy limit social and
professional mobility in particular ways. One’s social position
gets predetermined to a significant degree by the caste and
gender one belongs to. In the case of caste, one’s social status
itself becomes essentially hereditary. However, it is the rich
peasants and big landowners that are generally able to
influence the actual distribution of water or compensation
on the basis of land for land, and so on. But there would
also be location specific unequal distribution of irrigation
water depending on whether one’s fields are in the upper,
the middle or the tail reaches of the canals.
What may possibly happen to the various classes of
people, the displaced who were living and earning a livelihood
in the catchment and reservoir areas? That again will likely
depend on one’s existing class position. The rich peasants,
the big landowners, and the traders are likely to enjoy the
political patronage of one or the other of the main
parliamentary parties. They may arrange deals of land for
land, and so on, and in general, may be positively
compensated. But the poor peasants and landless wage
labourers may be the victims of the process of displacement.
An economist may retort that ‘landless labourers perhaps
may be the greatest gainers! If they were landless they could
not have lost anything. Agricultural production, ceteris
paribus, due to the assured irrigation input, goes up by leaps
and bounds, creating many job opportunities for such people,
also leading for some time to growth in the real wage rate.
Further, some more landless labourers would be better off
with migration to the irrigated areas’. The point we are
making may thus be missed. While capitalist development
coerces the poor peasants and landless labourers to respond
in ways that the economists may be able to anticipate, the
point here is that capital and the state decide the fate of
the poor without their consent.
EIA and SIA Go Together
At a general level, production is a process of transformation
of a determinate given ‘raw material’ (in the case of a dam
for irrigation, part of the river flow) into a determinate
‘product’ (an assured supply of irrigation water). This
transformation is effected by a determinate human ‘labour’
(intervention), using determinate means (capital goods,
technology, techniques, and organization). Fundamentally,
tangible production is a human–nature interaction, where
the former are conscious beings. Because of human
consciousness, the knowledge of the production process
exists in collective human imagination at the very
commencement of the process. Human beings directly
interact with the ‘raw material’, using capital goods,
technology, techniques, and organization to transform it
into the determinate product. But in doing so, in this
human–nature interaction, they effect a transformation of
nature and in the process social relations evolve too (Marx
1867, Childe 1942). It is for this reason that an EIA and
an SIA need to go together. They are methodologically
inseparable, if the desired result is to be achieved. The above
would also perhaps dovetail well into the ecosystems
approach.
Further Methodological and Ethical Issues
The above discussion has been pointing at methodological
issues and problems. Some of these are quite intractable, like
for instance, particular social and environmental impacts
may be assessed differently by different social groups. The
assignment of implicit weights to the various social and
natural environmental impacts may also reflect the class
biases of the power elite who take the major decisions
regarding large projects. The social benefit cost analysis
(SBCA) derives its theoretical framework from the philosophy
of utilitarianism. While ‘larger public good’ may be invoked
to support decision making, it entails dilemma associated
with redistribution of endowments (with all attendant
information problems) and non-negotiable (non-economic)
aspects of life. Utilitarianism, applied to the process of
development and underdevelopment, implies that traditional
moral rules can be broken if by doing so they produce a
balance of happiness over misery! Further, the methodology
is prone to biases of powerful stakeholders creeping in, if
those who apply it are in the services of capital or the State.
Political, Legal, Economic and S&T Institutions and
Structures Matter
Environment Impact Analysis (EIA) and Social Impact
Analysis (SIA) have to take account of the specific legal
framework, the practice of public policy, social welfare
programmes, and operational procedures on the ground.
The existing political, legal, economic and scientific and
technological institutions and structures will also shape the
quality of an EIA–SIA. We have to acknowledge the fact
that the power elite in control of the process of production
and mainstream politics in India have denied fundamental
justice, and not just economic entitlements, to poor people.
In general, one cannot expect the courts to be very different
in dealing with issues that affect the poor in a society that
accepts and expects disparities in political power and the
distribution of economic resources. The administrative
agencies seem to have certain in-built characteristics that in
turn have detrimental consequences for the poor who lack
the resources and education to pursue their claims effectively.
We social scientists often seem to get locked into analysing
the administrative, procedural, and jurisdictional structures
within and among government agencies. There is a whole
technocracy and bureaucracy composed of scientists,
engineers, technicians, lawyers, bureaucrats, and politicians
interacting with their counterparts in the private contractors
and financial institutions, foreign and Indian. The contractors
and financiers have their marketing, sales and public relations
executives, lobbyists, and fixers who have a specialized
knowledge about dealing with government bureaucrats and
technocrats, and the politicians, whether in New Delhi or
the state capitals. What we think is of essence is not so much
the framework within which decisions are taken but the
goals imposed by that framework. For the contractors, the
big landowners and rich peasants, it is to make as much
profit as possible and accumulate capital as rapidly as possible.
This suffuses the ideology and values of all the powerful and
wealthy ‘stakeholders’.
There is an immense complexity in the decision making
process of the Indian government at the centre and in the
states, with such a large number of personalities participating
in the making of decisions on large state-sponsored
development projects. The power elite simply functions
within a framework, which allows, and indeed encourages,
the plunder of the surplus generated. In such a framework,
this goal of the power elite—the big landowners, the rich
peasants, big industrialists, financiers and traders, the top
bureaucrats and politicians—gets operationalized in terms
of business interests in agriculture, industry, finance, and
trade. The top bureaucrats and politicians representing the
government cannot afford to implement policies and
programmes that will jeopardize business confidence. In the
1990s, the very success of public policies has come to be
judged by the probability that they will enhance business
prosperity and promote private investment. The mutuality
of interest between the political executive and business has
deepened. To us, it is not very surprising to find the Union
Minister of Home, L.K. Advani, while inaugurating the
restart of the construction of the Sardar Sarovar dam after
the NBA’s PIL was dismissed in the SC, sharing the dais
with Jaiprakash Gaur of JP Associates, the largest big dam
contractor in India. In such a context, it is difficult to
envisage that any kind of SIA or EIA, or the processes
followed, will be adequate to take care of the ‘unwarranted’
outcomes of development on the poorer sections of the
society.
CONCLUSION
In the Indian, and indeed, labour surplus, low productivity–
income, low land–person ratio, capitalist economies, the
risk of impoverishment from involuntary displacement due
to infrastructure projects like large dams is very high. If
these infrastructure projects claim to contribute to
‘sustainable development’, then, apart from the beneficiaries,
the government and the project authority ought to have an
ethical and legal commitment towards the rehabilitation
and development of the victims of these projects.
Conceptually and for practical purposes, natural
environmental and social environmental impacts belong
together in an assessment of any impacts of significant
change brought about by dam projects. Hence, EIA and
SIA go together. One can anticipate a complex web of cause
and effect dynamics and multiple order impacts on a
community and the natural environment that is triggered
by the decision to set up a large dam.
The real problem in the context of such large projects
seems to be more of institutionalizing EIA and SIA. The
practice of the power elite and the state—at the level of the
planning, implementation, and administration of large
projects, or even in the judicial system when these practices
are challenged by pubic-spirited organizations with PIL—
suggests that the processes are by and large antithetical to
the liberal values of pluralism, legalism, scientism, and
political equality. The latter is a mere symptom of a basic
malady that came to the fore once again in the 1960s—
incipient and open conflict between the rural poor and the
agrarian rich, between the industrial workers and the
industrial capitalists, and between the agrarian rich and the
industrial capitalists. While green revolution strategy
promoted by the Indian state may have helped avert
disruptions, it created new problems, some of them related
to dams that we have discussed here.
Are there any solutions that follow? Solutions to problems
that have systemic roots can possibly emerge over a long
haul in the course of a popular struggle for socialism, a
socialism that begins with democracy. The present path of
capitalist development—a grab-what-you-can-for-yourself
path of growth that is inimical to human beings and to all
other forms of life as well—is not the way to proceed if we
want a just and humane social order.
Box 5.6.1
Large Dams: India’s Experience1
India has over 4000 large dams as defined by the International Commission on Large Dams (ICOLD). Most of these were built
between 1970 and 1989. Around three-fourth of these are in the states of Maharashtra, Gujarat, and Madhya Pradesh. The main
purpose is generally irrigation, where the dam is a multi-purpose one.
Before we come to the social and environmental aspects in the World Commission on Dams (WCD) India case study, a brief
comment on the framework of laws, policies, institutions, and procedures2 and financial, economic, and distribution aspects of
dams.3 The Land Acquisition Act, dating back to the nineteenth century, allows the state to take over private land for ‘public purpose’.
It is very difficult in law to challenge the ‘public purpose’ claimed by the state. Then there is the Official Secrets Act, another
legacy of the colonial period, which allows government actions to be veiled in secrecy and denies access to relevant information
to the public. Ramaswamy R Iyer and the other authors to the WCD India case study point out that this ‘renders all talk of
‘participatory’ or ‘people-centred’ planning meaningless’.4 But critical appraisal of the Land Acquisition Act and the Official Secrets
Act by Ramaswamy R. Iyer is located in the liberal conceptual opposition of ‘state’ and ‘civil society’. Alternatively, however, if
one were to start with the diametrically opposite conception that the ‘state’ expresses the particular characteristics of ‘civil society’
and its class structure and relations, then one can possibly get beyond a liberal right critique of singling out state oppressions alone.
Pranab Banerjee, who authors the economic appraisal section, seems unfairly selective in his critique. Having chosen to go by
social benefit cost analysis (SBCA), he should have mentioned that the positive externalities of irrigation have then rightly to be
accounted for and the economic value of irrigation water (not at artificially low water rates) has to be brought in. Similarly, leakage
due to corruption, which has little to do with dams per se, say a standard 5–10 per cent cut on capital expenditure inflate the
capital costs. Having adopted the same framework of analysis as the power elite does, the WCD India analysts, statements seem
to be patently one-sided.5 If one chooses to go by mainstream analysis, then the problem is perhaps not that the choice of large
dams in a technical sense may have been wrong. A more relevant statement of the problem may then be the utter (revealed)
mismanagement by the Indian state of large dams, project displacement, redistribution, etc. Government processes of decisionmaking have made long gestation projects particularly vulnerable to failure.6 Also, the usual neo-classical ‘choice of technique’
framework views the choice of technique as a technical choice alone. In reality, the choice may also and more importantly, be a
social one, exercised by large landowners and rich peasants, contractors and industrialists, and state functionaries to extend their
control over economic processes, secure their appropriation and distribution of surpluses, and the control of state property.
1
2
3
4
5
This is a review of the Indian case study on large dams by Rangachari et al. (2000).
Ramaswamy R. Iyer, Chapter 3, Rangachari et al. (2000).
Pranab Banerjee, Chapter 4, Rangachari et al. (2000).
Ibid., p. 207.
See also B.D. Dhawan’s more thoroughgoing economic analysis over three decades, in his book Studies in Indian Irrigation (1999),
Commonwealth Publishers, New Delhi.
6 Morris, Sebastian (1987), ‘Process of Investment Decisions in the Public Sector: A Study of Delays and Cost Overruns’, mimeo., Institute
of Public Enterprise, Hyderabad.
ENVIRONMENTAL
IMPACTS7
The relevant questions dealt with are essentially two. Which of the social and environmental impacts were anticipated? For the
adverse impacts that were anticipated, what were the steps taken to minimize them and with what effect?
The findings are that large portions of the adverse environmental and social impacts were simply ignored. Till 1978, which
means we are considering some 2500 large dams that were initiated prior to that year, there was no formal requirement to assess
the environmental and social impact. However, two environmental impacts, one that affects the life of the dam, and the other,
which negatively impacts on the yields in agriculture, namely a high rate of siltation of the reservoir and severe waterlogging, were
of concern. In our view, this may be because the incremental cost of remedial measures was much lower compared to the incremental
benefits accruing from such measures. More importantly, such impacts that directly affect the pecuniary interests of agrarian and,
indeed, more generally agribusiness cannot possibly be totally disregarded by any ruling class coalition.
In 1978, all new dams were required to be assessed for environmental impacts and had to be cleared from an environmental
impact consideration angle prior to the start of construction. Despite this, the WCD India case study reports that the 1800 or
so dams taken up for construction since then continued to adversely affect the environment. The Department of Science and
Technology (DST) specified guidelines for the conduct of EIA. Environment Impact Analysis became a statutory requirement only
in 1994 with the modification of the rules of the Environment Protection Act. But by and large the same sketchy guidelines for
EIA continue even today, disregarding scientific progress since then (p. 42). Further, a lack of retrospective assessments seems to
suggest that there may be less scientific basis in the assumptions made in forecasting environmental impacts in today’s EIAs th an
if the actual environmental impacts of earlier dams were studied. These retrospective environmental studies would also have helped
in designing better mitigation measures for the present dam projects, as also in correcting the failures of the past at the ear lier
constructed dams.
Overall, Shekhar Singh and his team who author the EIA section of the WCD India case study fail to provide a penetrating
analysis as to why the kind of situation they describe prevails. Also, one is left wondering that if EIAs were indeed carried t hrough
and submitted on time, would the decisions and the outcomes have been any different from what actually happened, especially
in the absence of protest movements.
SOCIAL IMPACTS
The WCD India case study finds that many of the adverse social impacts of large dams are either not incorporated or very
inadequately reflected as costs in the calculation of the benefit–cost ratio or BCR. Rehabilitation of the displaced people is taken
into account since 1978. But here too it is only the financial burden of relocating and resettling the displaced people, more often
just the compensation given, that is taken account of in the financial analysis. With respect to rehabilitation the authors state
‘Rehabilitation of project-affected persons is generally treated as a marginal issue that does not deserve focussed attention…’
In this context, one must mention that while there is now at least an official recognition of the right to compensation for the
loss of individual property and livelihood, there is still no compensation for the loss of common property resources (CPRs).
Data cited in the case study, official data on those displaced, suggests that overall, people belonging to Scheduled Tribes (STs)
constitute around 47.1 per cent of those displaced. If we include Scheduled Castes (SCs) who constitute 14.5 per cent of those
displaced, then STs and SCs together constitute 61.6 per cent (around 62 per cent) of those displaced (See Tables 5.8 and 5.9,
Rangachari et al. ). It may be recalled that this group forms around 24.5 per cent of the Indian population. Further, the authors
confirm that big landowners are the main beneficiary of access to irrigation water, as well as the hypothesis of increasing inequality
(p. 214), to not only maintain current inequalities but often to exacerbate them. The impression given is that problems in dam
building and irrigation systems are problems created by the Indian State itself. A more penetrating analysis might perhaps suggest
that these problems have their origins in the way the Indian economy operates. But there is no doubt that these problems are proving
extremely costly for the Indian people.
7
Shekhar Singh et al., Chapter 5, Rangachari et al.
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6
REGULATORY AND CONTRACTUAL
FRAMEWORK
6.1 PRIVATE FINANCE TO PRIVATE ENTREPRENEURSHIP
Jayanth R. Varma
For the last few years, there has been much discussion and
agonizing about how to attract private finance to infrastructure. This paper argues that we have so far tried to
attract private finance without welcoming private
entrepreneurship. The government, while attempting to
withdraw from the financing of infrastructure, has sought
to retain its decision-making role in the selection, design,
and operation of infrastructure projects. This means that
even today capital markets have not been assigned much
of a role in allocating capital in the infrastructure sector.
There has not been much room for entrepreneurs willing
to take large risks in anticipation of large rewards. The net
effect is that while there have been sporadic successes in
attracting private finance to infrastructure projects, there
has been little success in transferring the risks of these
projects to the private sector. As long as the government
continues to assume the principal risks of the projects, the
only effect of the so-called private finance is to convert
what would have been an immediate borrowing requirement
of the government into an off-balance sheet liability. Thus
this form of private finance neither contributes to fiscal
stabilization nor promotes allocative efficiency. In fact,
when the government’s attempts to promote private finance
in infrastructure are ill designed or market distorting, the
net result might well be negative both for fiscal stabilization
and allocative efficiency. On the other hand, private
entrepreneurship in infrastructure could give large benefits
in terms of fiscal consolidation and allocative efficiency.
To achieve this result, the government needs to:
• adopt broad-brush non-distorting incentives; and
• desist from premature and excessively rigid sectoral
regulation.
• give the private sector substantial freedom (subject
only to very broad guidelines) to identify and design
profitable infrastructure projects;
Whatever legal form such a contract may take, it is clear
that in economic terms, the net result is no different from
the government borrowing to finance the project in the
There would remain a class of infrastructure projects
that the government may consider of strategic importance
but which entrepreneurs do not find profitable to implement.
These would require direct government support in the
form of an outright subsidy (a negative licence fee
established through competitive auction) or some form of
credit enhancement. But these should be the exception
rather than the rule.
MARKET DRIVEN RESOURCE ALLOCATION
Pitfalls of the Current Approach
Most of the attempts to attract private capital into
infrastructure have involved inviting private participation
in projects that have been identified and designed by the
government. For example, the government decides on a
road project, lays down the specifications, and calls for
bids from the private sector. Typically, in this approach,
the private sector bidder demands a traffic guarantee, or
even worse, a revenue guarantee in what is euphemistically
called an annuity model. At this stage, the private sector
bears very little of the demand side risks of the project.
Fiscal Deterioration
Regulatory and Contractual Framework 139
public sector. The only difference is that the government’s
liability in the so-called private sector infrastructure project
is off-balance sheet. It is not an immediate liability that
shows up as government debt, but is a contingent liability
to make good the revenue shortfalls under the infrastructure
project. Even if the government had borrowed and built
the project itself, it would have had to dip into the tax
revenues to service the debt only to the extent that the
revenues from the project fell short of the debt service
obligations. Private financing of infrastructure in this model
therefore offers an advantage to the government only if the
revenue guarantees that it provides are less than the debt
service obligations that would have arisen under straight
borrowing. But the reverse is certain to be the case.
Domestic investors regard government debt as risk free
and are therefore willing to accept low rates of interest.
The guarantees provided under infrastructure projects
involve a wide variety of legal, operational, and regulatory
risks for which any rational investor would demand a large
risk premium. Thus, private sector financing in this model
only substitutes low cost debt with high cost off-balancesheet borrowing.
If the objective of private financing of infrastructure is
the reduction of the fiscal deficit, it should be evident that
the current model does not achieve this at all. In fact,
substitution of high cost off-balance-sheet borrowing for
low cost debt will only increase the fiscal deficit in the long
run as this higher cost borrowing is serviced out of general
revenues. The headline numbers of fiscal deficit and
government debt may show improvement, but this improvement is wholly illusory and is a result of the faulty accounting
techniques that are used to measure these quantities.
Politicization of the Investment Decision
The flip side of this fiscal burden is that the government
has not surrendered its role in resource allocation. Projects
are chosen and designed not according to the rules of the
market economy, but according to the dictates of the
political and bureaucratic considerations that underlie
resource allocation by the state. Thus, the current model
fails to achieve the key objective of de-politicizing
infrastructure investment decisions and subjecting them to
the discipline of market economics. Public sector
infrastructure investment decisions are often guided by the
lobbying power of the various political constituencies that
influence the decision making process. They often have
very little to do with the actual demand scenarios and the
true demand–supply gaps in the economy. Unfortunately,
these grave deficiencies of the public sector decision making
process carry over into the current model of private
participation where the private sector has little or no role
in the resource allocation process.
Unregulated Monopolies
The process of tapping private finance tends to run ahead
of setting up an adequate system of regulation. In most
sectors, regulation was not considered necessary in the past
as the service providers were all in the public sector.
Private participation under a weak regulatory framework
carries with it the danger of creating unregulated monopolies
that are subject only to the contractual provisions governing
their participation in the infrastructure project. To the
extent that these contracts are incomplete or deficient,
there is scope for monopolistic behaviour.
What is worse is that by the time the sectoral regulator
starts functioning effectively, the pre-existing contracts
with private sector participants in infrastructure projects
could become a barrier to the creation of a fair and
effective regulatory regime. Even where an industry has the
potential to function in a near-competitive manner, the
pre-existing contracts may preclude the adoption of such
an industry structure because of the exclusive rights that
the incumbent enjoys.
REASONS
MODEL
FOR THE
EMERGENCE
OF THE
CURRENT
Given that the pitfalls of the current model of private
participation in infrastructure are obvious to any discerning
observer, it is clear that there must be some strong reasons
for its popularity.
Exclusive Government Privileges
Quite often when the private sector is invited to participate
in some infrastructural activities, many of the related
activities are reserved for the government. For example,
while private sector participation is being welcomed in
power generation, it is not permitted in the distribution
of power. A power plant is thus precluded from selling
power directly to the consumers, and must perforce rely
on a power purchase agreement with the monopoly state
owned distributor of power. The power generated is thus
insulated from the actual power demand and relies entirely
on take-or-pay contracts with the government owned
utilities.
To take another example, many infrastructure projects
are land intensive and rely on land acquisition by the state.
Under the antiquated land acquisition laws, the state pays
compensation far below fair value in the name of the public
interest. The alternative of the private sector buying its
land at market prices thus becomes unviable. It is not true
that compulsory land acquisition is necessary for even
location sensitive projects like roads and railways. The
railroad companies in the United States in the nineteenth
century demonstrated that cities and towns would pay large
amounts to the railroads to persuade them to lay the rails
through their cities. The appreciation of property prices
consequent on the completion of a railway or a road is
a powerful incentive for landowners to offer a part of their
property to the builder on payment of a reasonable
compensation.
In the telecom sector, government licensing policy has
created artificial restrictions on the number of players even
where there is no genuinely scarce resource (like the
frequency spectrum) to be allocated. This again serves to
limit the role of market oriented resource allocation and
divert entrepreneurial resources to the more profitable
pursuit of capturing regulatory rents.
Ideological Commitment
In many cases, the reluctance of the government to give
up control over the decision making process in favour of
the market is driven by the ideological commitment of
large sections of the political establishment to the principle
of public sector dominance of the commanding heights of
the economy. No doubt a large part of this ideological
commitment is self-serving as it maximizes the rents that
accrue to the political establishment, but at least a part of
this commitment is genuine. In either case, this commitment
can be expected to weaken in the face of mounting public
dissatisfaction with the pathetic state of government provided
infrastructure.
There is also an ideological aversion to ‘profiteering’.
In the highly regulated economy of the past, it was true
that large profits were rarely achieved by fair means.
There is therefore a tendency to regard large profits as
evidence that unethical or corrupt practices have been
adopted. It is difficult for large sections of the political
establishment to accept that in a competitive entrepreneurial
economy, large profits can be the reward for risk taking
or innovation. If a significant fraction of projects can fail
with large losses, the projects that do succeed must provide
sufficiently large profits to make it worthwhile for the
entrepreneur to take the risk of failed projects. In the
licence–permit raj, the risks of failure were low and
consequently the rewards of success did not have to be
as high. This is again an area where perceptions would
change gradually, as the reality of a competitive economy
becomes more apparent.
THE WAY FORWARD
From Government to Markets
The way forward is clearly for the state to withdraw from
its earlier role in identifying and designing infrastructure
projects. Ideally, an entrepreneur desiring to implement an
infrastructure project identified by him would not need too
many more regulatory and governmental approvals than he
would need to set up a normal manufacturing project. He
would make an assessment of demand, prices, and costs,
identify projects that appear profitable, and proceed to
implement them. He would have to negotiate with private
owners or local authorities for various resources needed
to implement the project and pay the going market rate
for them.
Just as there are various competing enterprises negotiating
right of way to lay fibre optic cables across the country
today, there could be competing enterprises trying to build
highways across the length and breadth of the country. Just
as competing railroads in nineteenth century America
quarrelled among themselves about right of way, about
interchange of equipment, about standardization of gauge,
and about standard time zones, these competing enterprises
may also have their various quarrels. As in nineteenth
century America, they would find ways to resolve these
disputes through negotiation, arbitration, or litigation. Box
6.1.1 provides a good example of these processes at work.
Similarly competing power generating companies would
be with each other to set up plants at optimal locations
based on demand opportunities and transmission and
generating costs. They would compete for business from
large consumers of power and would put in place the
transmission and distribution infrastructure to reach these
consumers. For this they would also compete for right of
way. Other entrepreneurs might try to set up the transmission facility on a common carrier model.
The role of the state in all of these cases would only
be to provide a transparent and neutral regulatory framework
within which all these entrepreneurs would operate. For
example, the government may well want to lay down safety
standards for roads and also impose common carrier
obligations on them. Entrepreneurs guided by the profit
motive could well be relied upon to decide whether the
road should be six-lane or eight-lane as also what precise
route it should take.
For all this to happen, the government will have to give
up many of the controls and exclusive privileges that it has
established for itself. There is no reason for the state to
do what the market can do as well or better. The political
establishment would have to reconcile itself to location
decisions being made by market forces rather than on the
basis of which location is closer to the hometown of an
influential politician. Whether it is willing to do this is an
open question.
We are so accustomed to the land being acquired by
the state for infrastructure projects that we tend to assume
that it cannot be done by private negotiations. Boxes 6.1.2
Box 6.1.1
Standard Times in Nineteenth Century United States
The ability of competing enterprises to achieve standardization by private initiative without the help of government interference
is best exemplified by the adoption of Standard Times in the United States in the nineteenth century. Stover (1961) tells the
story: ‘As the railroads spanned the nation and became a national network after the civil war, they ran their trains with a crazyquilt pattern of dozens of several mean local sun times. When it was noon in Chicago, it was 11:27 am in Omaha, 11:50 in
St. Louis, 12:09 pm in Louisville, 12:17 in Toledo, and 12:31 in Pittsburgh. In fact in Pittsburgh there were six different times
for the departure and arrival of stations. The train station in Buffalo had three clocks, each with a different railroad time.
. . . It was William F. Allen (1846–1915), managing editor of the Official Guide of the Railways and secretary of the Central
Time Convention who finally convinced the lines that they should adopt a standard time. His plans, as conceived in 1881, were
accepted in October 1883 to go into effect at noon on Sunday, November 18, 1993. . . Public adoption of the new railroad
time was general, although one editor did complain that he would rather run his clock on ‘God’s time—nor Vanderbilt’s’. Just
before the change, the Attorney General righteously declared that no government department need use the new time until
authorised by Congress. The same gentleman, according to a doubtlessly apocryphal story, was astonished when he missed a late
afternoon train on the 18th by eight minutes and twenty seconds. Congress officially adopted standard time thirty-five years
later in 1918’. [pp. 157–8]
and 6.1.3 on US railroads and US oil pipelines respectively
provide examples from nineteenth century United States
to show how private negotiation actually worked.
Broad-brush Incentives
The entrepreneurial model of infrastructure development
would also require the state to restructure the system of
incentives that have been created for the infrastructure
sector. To the extent to which the nation faces a shortage
of infrastructure and to the extent that these projects have
large positive externalities that are not easily appropriated
by the developers, there may be a case for government
incentives. The need for such incentives should not be
overstated. Markets are quite good at finding solutions for
many problems of externalities that appear insoluble in the
abstract. Nevertheless, there may indeed be a justification
for some incentives. The important point is to ensure that
these incentives are as non-discriminatory and non-distorting
as possible. This would usually require that the incentives
be ‘broad brush’ in nature, applying in a transparent and
non-discretionary manner to a wide range of projects in
the same sector. Many examples of existing incentives that
are highly market distorting in nature are given below.
These are the kinds of incentives that ought to be avoided.
Flexible Regulatory Structure
A distinction must be made between the regulatory structure
appropriate for mature industries in mature economies
Box 6.1.2
Right of Way for US Railroads
Cleveland and Powell (1909) describe how the US railroads obtained their right of way and the land for their stations from
the individual landholders either free or at moderate prices: ‘. . . the railroads of this country have very generally obtained releases
for right of way by donation. . . . Many of the landowners along the route of the Boston and Worcester united to agreement
to release the company from all claims for damages or compensation for the use of their land. Others sold their property at a
moderate price. The Ohio and Indiana also generally obtained its right of way through donations. The same was generally true
of the Sadusky and Mansfied and many other routes of the Middle West. The fact that so many of the people along the route
of the New York and Erie owned stock in the company not only made general the free cession of right of way and lands for
station purposes, but it also created a sentiment which kept down the prices of materials to reasonable figures. Landholders on
the route of the Georgia railroad generally gave the right of way, and also in many instances, timber for the superstructure. [ p.
199–200]’. Cleveland and Powell (1909) also describe how towns often paid the railroad to route the railway through them:
‘Towns situated at some distance from a line of railroad have not infrequently been required to furnish liberal subsidies to the
railroads as a bonus before a desired connection or extension would be furnished. In 1856 the people of Mansfield, Ohio applied
to the Atlantic and Great Western for terms upon which the road would be extended through their town. In return the directors
prescribed a subscription of $100,000 and a right of way and station sites at fair prices payable in stock. Under these conditions,
the road was built. . . . The Northern Pacific in 1880, in response to a request for an extension into Superior, promised to build
to that town for one-third of the ‘lands, premises and real estate’ in the city, together with a right of way. Hard as these terms
were, ‘the town was railroad hungry’ and the offer was accepted [p. 203].
Box 6.1.3
Oil Pipelines in Nineteenth Century United States
The manner in which independent pipelines were laid in the United States provides a very good example of the ability of the
free market to secure right of way under the most adverse conditions imaginable. To begin with, people are naturally worried
about the hazards of leakage, fire, and explosions associated with oil pipelines. These fears were much greater in the early days
when safety standards had not yet been well established. Second and more important, these pipelines were built in the face of
the fierce and determined opposition of the most powerful and ruthless business monopoly of the time—Rockefeller’s Standard
Oil.
Tarbell (1904) provides a graphic account of the successful struggle of the United States Pipeline Company: ‘Mr. Emery of
the United States Pipeline Company] sent his men into the field to get the right of way. They had made a good beginning
before the project was known, but as soon as it was rumoured there appeared promptly on the route surveyed, a number of
men known to be Standard employees. They too wanted a right of way, the same as Emery wanted. They bought strips of land
across his route, they bought up mortgages on farms where rights had already been acquired, and, mortgage in hand, compelled
farmers to give them rights. It was an incessant harassing by men who never used the rights acquired—who did not want them
save to hinder the independent project.’
Despite all these efforts, Emery succeeded in laying most of the pipeline. However, Emery’s route involved crossing the Erie
railroad, and Emery had obtained permission for this from the president of that railroad before beginning the construction of
his pipeline. Emery had laid the pipes on either side of the railroad and the time came to join the pipes: ‘Hardly had [Emery’s
men] arrived before there descended on them a force of seventy five railroad men armed for war . . . The pipeline men camped
near by for three months, but they never attempted to join the pipes. Mr. Emery had concluded . . . that the Erie officials
. . . had found that it would be unwise to disturb their relationship with the Standard, and while his men were keeping attention
fixed on that point he was executing a flank movement securing a right of way from a point seventy miles back.’ The United
States Pipe Line became a reality despite the determined efforts of the most powerful industrial empire of its time, in an
environment where in the absence of anti-trust laws, monopolies were free to do very much as they pleased. How much easier
it would be today for modern day infrastructure entrepreneurs who have the benefit of competition laws in their battle with
incumbent monopolists.
and nascent industries in developing economies. In the
former case, the regulatory structure is based on the
industry structure that has evolved through market forces
and seeks to regulate the monopolies that have emerged
in this process. Except at points of time when disruptive
technologies change this equilibrium, the regulatory
structure can be relatively stable. However, in the case of
nascent industries in developing economies, the equilibrium
industry structure is not clear. Premature regulation can
freeze in place inefficient industry structures and
inappropriate technologies and remove the incentive for
innovation and entrepreneurship. This point is elaborated
further later in this paper.
Instances of Market Distorting Incentives
Currently, the government provides a wide variety of
incentives to encourage private sector participation in
infrastructure. A large number of these are market distorting
in nature as may be seen from the following examples:
Discretionary Tax Incentives: The infrastructure sector
receives a wide variety of tax incentives. The government
allows some entities mainly in the public sector to issue
tax-free bonds. For example, the Indian Railway Finance
Corporation (IRFC) has issued several trances of tax-free
bonds. The difficulties with this tax incentive are manifold.
First, it is available principally to the public sector. Second,
it is highly discretionary and there is no transparent and
objective criterion by which this incentive is extended to
different entities. Third, since it is an incentive to the
investor rather than to the entity itself, it applies differentially
to different investors depending on their tax status and tax
bracket. For example, mutual funds and small investors
may not be benefited at all. Thus, these bonds tend to be
sold to high net worth individuals and corporates as tax
saving devices. To a great extent, this kind of incentive
weakens the ability of capital markets to allocate resources
optimally.
Corporate and institutional lenders receive a tax break
on interest income received by them from infrastructure
companies under Section 10(23G) of the Income Tax Act.
This provision has the great advantage of being largely nondiscriminatory as it operates on a transparent definition
of infrastructure companies (this definition is discussed in
the next paragraph while dealing with the tax holiday under
Section 80-IA of the Income Tax Act). However, it is highly
discriminatory as regards the lender since the benefit is
by and large restricted to corporate entities. Moreover, this
benefit has been largely diluted by the government’s
interpretation that the tax exemption applies only on the
profit (interest spread) earned by the lender and not on
the gross interest receipts.
Infrastructure companies receive a tax holiday under
Section 80-IA of the Income Tax Act. This is the closest
that we have to a non-distorting broad-brush incentive.
It uses a broad and transparent definition of infrastructure
companies. The tax break is granted to the infrastructure
enterprise itself and is thus non-discriminatory as between
different kinds of lenders. The entire profits from the
infrastructure business are exempt for a period of ten
years. Moreover, to deal with long gestation projects
where there may be no profits in the initial years, the
company can choose to avail of this tax holiday during
any period of ten consecutive years in the first fifteen
years. The tax holiday is available to the following
infrastructure sectors:
• A road including toll road, a bridge, or a rail system;
• A highway project including housing or other
activities being an integral part of the highway project;
• A water supply project, water treatment system,
irrigation project, sanitation and sewerage system, or solid
waste management system;
• A port, airport, inland waterway, or inland port;
• Telecommunication services1 whether basic or
cellular, including radio paging, domestic satellite service,
network of trunking, broadband network, and internet
services;
• Industrial park or special economic zone2; and
• Generation, transmission, and distribution of power3.
Discretionary Access to Foreign Borrowing: It is axiomatic
that in a country with exchange control restrictions on the
capital account, the Fisher Open condition does not hold
in general. The Fisher Open condition (also known as
uncovered interest parity) asserts that, in a regime of free
capital flows, the interest rate differential between two
countries merely reflects the expected change in the exchange
rates between them. There is no advantage to be gained
by borrowing in a foreign currency with a low interest rate
since that currency is expected to appreciate and the
savings in interest cost would be offset by exchange losses.
In a country like India that imposes restrictions on
capital flow, this condition is not expected to hold at all.
In fact to the extent that India is a capital scarce country,
the ex-ante costs of foreign borrowing may be lower than
that of domestic borrowing, even after adjusting for expected
exchange rate changes. This means that access to foreign
1 The tax holiday is not available to companies that start
providing telecom services after 31 March 2003.
2 The tax holiday is not available to companies that develop
industrial parks or special economic zones after 31 March 2006.
3 The tax holiday is not available to companies that start
generation, transmission, or distribution of power after 31 March
2003.
borrowing can be a powerful incentive for infrastructure
projects. Since many infrastructure projects lack the credit
standing needed to access foreign capital directly, guarantees
by domestic financial institutions for foreign borrowing
also act as very powerful incentives.
Again the permission to tap foreign borrowing and the
provision of guarantees by domestic financial institutions
for this purpose are both governed by highly non-transparent
case-by-case approval procedures.
Discretionary Access to Restricted Savings Pools: Pension
funds, provident funds, charitable trusts, and several other
institutions that control vast amounts of investible funds
are subject to government regulations that limit their
investments to approved trust securities. One would expect
the definition of trust security to be based on the principle
of investor protection so that contractual savings and other
similar savings pools are protected from imprudent
investments. In reality, however, the definition of trust
security has been an intensely political one in which
considerations of investor protection have only a marginal
role to play. Bonds issued by public sector bodies have
often received trust security status regardless of their
creditworthiness. Moreover, since the definition of trust
security is left to individual states, there has been a marked
tendency to favour securities issued by state government
undertakings of the same status.
Reform of these regulations that replace arbitrary
judgement of a government functionary by objective
standards of creditworthiness or credit rating are essential
both to protect the investors concerned and to allow the
unimpeded play of market forces in resource allocation in
the economy.
Closure of Existing Infrastructure to Make New Project
Viable: One of the incentives being sought by some
infrastructure developers is that existing facilities that could
compete with the proposed new project should be shut
down to make the project viable. A good example is the
Bangalore airport project where the developers have been
arguing that the existing airport should be closed down
when the new airport becomes operational. It is not at all
unusual for old airports to be closed down when new
airports become operational. But when this is done, these
costs are internalized. For example, if the same company
owns both the old and new airports, then while evaluating
the new airport, the company would factor in the foregone
revenues from the old airport in the cash flow computations
for the new airport. If they were owned by different
companies, the old airport might still be closed on terms
mutually agreed between the two. Any payments made to
the owner of the old airport would again form part of the
project costs for the new airport. It is also possible that
the two companies might decide to compete with each
other. There is nothing unfair about such competition any
more than there is anything unfair about a new modern
factory competing with an old factory whose plant has been
fully depreciated.
Similar issues are cropping up in many other sectors.
For example, expressway builders would like the existing
non-tolled highways to be closed once the new tolled
expressway becomes operational. What complicates the
matter is that since the old airport and the old highway
are in the public sector, they might not operate on purely
commercial lines. For example, the public sector highway
does not charge tolls while the privately built expressway
would. This might make the internalization of closure costs
more complex. One simple solution would be to privatize
the existing facility along with or prior to the private
participation in the new project. In fact, it has become
increasingly clear in recent years that the unwillingness of
the state to privatize existing facilities while simultaneously
attracting private participation in new projects causes a
great deal of inefficiency and needless complexity.
In any case, it should be clear that the closure of
existing facilities without explicitly internalizing the costs
of such closure in some manner would lead to faulty
resource allocation and sub-optimal utilization of existing
resources.
Anti-competitive Contracts That Make Subsequent Deregulation
Difficult: In its eagerness to attract private participation
in infrastructure, the government has often offered
contractual inducements that impede subsequent privatization and deregulation of the sector as a whole. The
power sector is a good example of this where the initial
power purchase agreements with take or pay clauses
constitute a major obstacle to the eventual creation of a
competitive market for power. Such a competitive market
would involve power producers selling directly to consumers
or to competing distribution companies. New power plants
could be built on this model and existing public sector
power plants could be privatized on this basis. The difficulty
would be with the existing private plants with their power
purchase agreements. Even if all other activities of the
State Electricity Boards were privatized, they would still
have to exist to honour the old power purchase agreements!
The lesson is that while attracting private participation
in infrastructure, care must be taken to ensure that the
contractual terms are fully consistent with the competitive
free market regime that would be the end result of all the
reforms. If the existing regulatory structure does not permit
this, then the answer is to carry out necessary reforms first
and then invite private participation on a basis that is
sustainable in the long run.
EXCESSIVE
AND
PREMATURE REGULATION
Experience of Developed Markets
In the twentieth century, it became fashionable to argue
that some industries are natural monopolies and must be
subjected to government regulation to protect the
consumers. The regulatory regime in the United States
received a big boost during the New Deal of the 1930s.
The United Kingdom set up a large number of sectoral
regulators along with the privatization of several stateowned infrastructure undertakings in the 1970s and 1980s.
Countries that started privatizing thereafter have often
followed the same path.
In recent years, however, there has been considerable
criticism of the role and functioning of these regulations
(see, for example, Martin 1971). The power crisis in
California has drawn attention to the antiquated regulatory
structures that impede investment in the power sector in
the United States (Robb and Sugalski 2001; Taylor and
VanDoren 2001). For example, the investment legend,
Warren Buffet, announced that he would invest several
billion dollars in the sector if the Public Utility Holding
Companies Act (Puhca) were repealed (Edmonds 2001).
In the United Kingdom also, there has been mounting
dissatisfaction with the functioning of the regulators. The
independent Better Regulation Task Force submitted a
report strongly critical of the sectoral regulators in the UK
(Better Regulation Task Force 2001; Haskins 2001). The
task force made three key points:
• Competition has not developed as much as might
have been expected and as a result, the regulations have
become too complex. This complexity is confusing and
easy to exploit.
• There are concerns that the regulatory processes
discourage investment. Sectors like energy and
telecommunications had high levels of investment at the
time of privatization and the bias against investment did
not matter. Prices tumbled, costs reduced dramatically,
shareholders prospered, and everyone was happy. But
telecommunications for example now requires a new wave
of heavy investment and nobody seems satisfied with the
regulations.
• ‘[R]egulatory bureaucracies flourish in the industries,
within the regulators’ offices and in the sponsoring
departments. The complexity encourages game-playing and
leaves consumers confused and suspicious.’ (Haskins 2001).
However, the Better Regulation Task Force does not
have much to offer in the form of a solution. It does
suggest that some of the functions of the regulators should
be taken over by the competition authorities. Lurking
behind this suggestion is the idea that the utilities are not
that very different from the other industries and that the
same competition law that prevents monopolistic abuses
in other industries might be sufficient to do the job in the
infrastructure sector as well. This is surely an idea that
needs to be pursued.
More importantly, the report fails to recognize the key
problem that the lack of competition that it deplores is
probably the result of the regulatory structure that
discourages investment. It is hard to see how any new
competitor would emerge on the scene if it has no incentives
to make the large investments needed to challenge the
incumbent. If the putative challenger believes that the
regulator would restrict his profits, then he would see too
little rewards for waging a competitive battle that succeeds
in dislodging the incumbent through lower costs or better
service. He would probably look to other industries to
apply his talents.
On the whole, the report is pessimistic about what can
be done: Most important of all, the culture of bureaucracy
and game-playing that remains endemic in the management
and regulation of these industries can be changed only if
we reduce the power of the utility regulators without
damaging the rights of consumers. That will not be easily
achieved. [Haskins 2001]
Effects of Premature Regulation
Much of the criticism that the Better Regulation Task Force
has directed against the UK regulators is equally valid in
the Indian context. What is of the utmost importance in
the context of India and other emerging markets is the
finding that regulation has discouraged investment. It is
investment that we are seeking to promote and if regulation
has prevented adequate investment even in a mature market
with a well-developed capital market, there is cause for
worry.
In fact, there is reason to believe that early regulation
would have an even more pernicious effect in an emerging
market like ours. We are not dealing with mature industries
in mature economies where stable industry structures and
established technologies make for a relatively static regulatory
perspective. By contrast, we are dealing with a situation
of considerable flux as both the technology and the industry
structure is evolving. Furthermore, we are not dealing with
well-established incumbent giants that have achieved
sufficient scale and financial standing to withstand a fair
amount of regulatory pressure. On the contrary, the fledgling
infrastructure companies of our country today may find
the capital markets closed to them if the regulators start
breathing down their neck.
Some of the effects that premature regulation can have
in this fluid context are discussed below.
Freezes Poor Technological Choices: In the early stages of
infrastructure development, the optimal technological
choices are not clear and there is a process of trial and
error that goes on. At this stage, a regulator could easily
impose a variety of constraints that effectively freeze an
initial technological choice that turns out to be inefficient.
Incumbents who have invested in the wrong technology
would lobby with the regulator to prohibit the use of a new
technology that is disruptive. The ban on internet telephony
in India is a good example of what incumbents can achieve
in a friendly regulatory regime.
At a deeper level, the point is not whether the regulator
gets its decision right or not. The point is that regulators
start arbitrating on technology choices that ought to be left
to the free play of market forces. For example, there has
been a fierce battle in the Indian telecom industry on
whether wireless communication should be allowed in the
local loop. The entire debate has centred on whether the
government/regulator should permit this technology. To
my mind, this whole debate is about the wrong question.
The question that we should be asking is how did we end
up with a regulatory regime where this technology choice
became a decision to be taken by the regulator rather than
the free market. Rather than debate the merits of WiLL
(Wireless in Local Loop) technology, we should be trying
to dismantle the rigid system that made this a regulatory
question.
Discourages Entrepreneurs Willing to Internalize Risk: At
early stages of development of an industry, the demand
risks and technology risks are much greater than in a
mature industry. An entrepreneur wishing to enter at this
stage needs mechanisms to contain those risks. The natural
thing to do is to internalize the risks as much as possible
and to internalize the externalities as much as possible to
maximize returns and minimize risks. Quite often, the
entrepreneur would want to integrate vertically and extend
his operations horizontally. The vertical integration would
internalize some of the demand side risks and facilitate
their management. The horizontal extension to related
projects, products, and services would make it possible to
internalize the positive externalities of the core projects by
appropriating as much of the benefits as possible. The
regulatory framework tends to frown on such ideas because
of its focus on narrow projects. With a few exceptions like
real estate development alongside highway projects, it does
not appear that internalization of risks and benefits has
been given much importance in the design of infrastructure
projects. In telecom particularly, the tendency to issue
narrow licences tied to specific technologies has limited
the ability of players to provide a complete package of
services to a common market. A recent proposal to permit
various telecom companies to offer internet telephony but
prohibit internet service providers (ISPs) from offering this
facility is an extreme example of this kind of thinking.
Facilitates Regulatory Capture: Regulatory capture is an
ever-present threat in any regulatory regime. The risk is,
in my view, greater in an evolving industry where the
regulator tends to assume a developmental role as well. It
is easy for the incumbents to persuade the regulators that
various anti-competitive practices that they may adopt are
necessary from a systemic point of view to ensure the
healthy growth and development of the industry as a whole.
In an evolving industry structure, it is not easy for the
regulator to make informed decisions on many of these
issues. Matters become more difficult when technological
uncertainties complicate the decision making even further.
Tends to Create Monopolies and Oligopolies: Regulation has
the unfortunate tendency to create monopolies and
oligopolies in markets that might be potentially competitive.
Paradoxically, the resulting non-competitive industry structure
becomes the most potent argument for the continuance of
the regulator. We have already seen this process at work
in the conclusion of the Better Regulation Task Force in
the UK discussed earlier in this paper. The task force ended
up concluding that the regulators could be reformed only
by reducing their powers substantially, but this could not
be done since consumers had to be protected in an
environment where competition had not developed to the
expected extent. The irony of this is that it is the regulators
themselves who are responsible for the lack of competition.
The report itself pointed out that regulation had discouraged
investment, but failed to recognize that since any new
entrant would have to make large investments, to discourage
investment is to discourage entry. The point is that regulators
create barriers to entry, thereby helping to create a market
structure that is non-competitive. By this process, the
regulators perpetuate themselves.
PRO-COMPETITIVE REGULATION
In this light, I would argue that the key regulatory objective
in any evolving industry in an emerging economy should
be the creation of a competitive industry structure in the
long run. Once this has been achieved, the competition
law would be the principal regulatory framework for that
industry.
Morris (2000) has summed up the appropriate regulatory
stance exceedingly well, and I would merely like to repeat
his conclusion:
• ‘When growth and technological change is rapid, as
it is in the case of telecom (defined broadly), there is little
role for the traditional regulatory stance. More than price
regulation, what is important is to keep entry costs low
and not frown upon consolidations that are cost reducing.’
• ‘In other sectors with slower growth but with the
potential for much faster growth than the rest of the
economy, it may still be possible to hold back regulation.’
• ‘In less developed countries (LDCs) with as yet little
coverage of people, the focus should shift from prices to
growth of the service.’
• ‘In sectors with massive undercoverage and a large
number of “outsiders” who would typically pay very high
prices. . . [a]llowing many kinds of players with little or
no territorial or ownership restrictions . . . has a
functionality that arises out of increased coverage.’ Morris
thinks that in such situations, price deregulation would be
a useful transitional phase in which surpluses are invested
in the service to produce rapid expansions. Thereafter,
traditional price regulation could be adopted.
Essentially, it appears from the above analysis that there
are two competing dynamic equilibrium situations. The
first dynamic equilibrium is characterized by high
regulation, low investment, and a non-competitive industry
structure. This is the mature utility industry conforming
to the US or UK type of regulation. The second dynamic
equilibrium is characterized by low regulation, high investment, and an industry structure that is highly contestable,
if not actually competitive. This is the more important and
more desirable equilibrium from the point of view of an
emerging economy trying to attract investment into
infrastructure.
STRATEGIC INFRASTRUCTURE PROJECTS
It is possible that there would remain a set of infrastructure
projects that do not attract entrepreneurial interest, but
are believed to be of strategic national importance. This
situation may arise because of very large externalities that
the project developers are unable to internalize. Some
infrastructure projects may also have benefits that are not
purely economic in nature. A strategic road network for
example may have benefits in terms of national integration,
military uses, and redistributive effects that go far beyond
its direct economic payoff. It is conceivable that the state
may want to promote such a project even though it does
not attract private sector interest without additional
government support.
However, even in these cases, it does not follow that the
current model of risk transfer to the government is a good
solution. Two other options are available. The first is to build
the project entirely in the public sector. For projects whose
benefits are primarily strategic and whose direct economic
payoffs are relatively small, this might indeed be the best
solution. In cases, where the direct economic payoffs are
substantial and strategic considerations make a relatively
small contribution to the viability of the project, private
sector participation is possible with some government
support. The important point here is that this support should
be provided in a non-distorting and transparent manner.
Earlier (IIR 2001), I argued that negative licence fees
represent the most transparent and efficient way of
supporting infrastructure financing in a mature capital
market. I also argued that credit enhancement could also
have a role to play in a country with underdeveloped debt
markets. I summarize these arguments briefly here.
Negative Licence Fee
If an infrastructure project has a high social rate of return,
but an unacceptable private rate of return, the socially
desirable level of investment can be achieved by a transfer
payment from the state to the private sector. This is a
standard proposition in the economic theory relating to
externalities. The theory would also say that the transfer
payment should not exceed the amount of the externality
itself (the difference between the social and private returns
to the project). If this is violated, then projects which earn
an unacceptable social rate of return may be undertaken.
The negative licence fee arrived at through a bidding
process can potentially achieve this transfer payment. The
auction process must include a reservation price (or upset
price) to set a ceiling on the transfer payment and ensure
that it does not exceed the externality.
Credit Enhancement
There is a fairly large literature that shows that the privately
financed infrastructure of the nineteenth century in fact
made substantial use of public funds. For example, the
United Kingdom was the only large country that did not
support railway construction with public funds in that century.
In a country like the United States, the federal, state, and
local governments provided financial support in various
forms. They subscribed to some of the railways’ bonds, they
guaranteed the interest on some bonds, and they provided
the collateral for many bonds through their land grants (see
for example, Eichengreen 1994; Dobbin 1994).
All these forms of credit enhancement made infrastructure bonds more easily marketable to domestic and
foreign investors. Yet, except in the case of colonial India
(discussed in greater detail in Varma 2000), the government
support was nowhere near complete.
In the nineteenth century, financial markets in most of
the North American and European countries were still in
the process of development. It is significant that the country
with the best financial markets and institutions (the United
Kingdom) did not find it necessary to provide any financial
support at all.4 Thus the public support reflects the state
of the financial sector even more than the unique
characteristics of infrastructure projects.
This analysis suggests that the principal argument in
favour of credit enhancement as a tool for promoting
infrastructure development in India is our relatively
underdeveloped bond markets. Government support in the
form of credit enhancement and related techniques can
facilitate the process of developing the debt market by
creating a critical mass of borrowers. For example, if the
state were to offer to subscribe to one bond for every two
bonds that are placed with the public, developers would
have a huge incentive to raise bonds on a large scale. If
the government were to provide a partial guarantee, then
the fillip to the market would be even greater. A partial
guarantee may mean for example:
• A Brady-bond5 style guarantee of the principal with
or without a rolling interest guarantee.
• An interest guarantee covering only the gestation
period
• A guarantee covering only a percentage of the holdings
of an investor with or without a monetary cap.
It is possible that these techniques need be used only
for a few large high profile projects in the initial period.
Thereafter, if the debt market gathers steam, subsequent
projects may well be able to stand on their own feet without
much state support.
It is important from a moral hazard perspective to keep
the guarantee limited in scope. If the guarantee covers the
bulk of the present value of the debt service obligations,
the bondholders have little incentive to monitor the project
and to make a careful assessment of its creditworthiness.
For the capital markets to perform their resource allocation
function fairly well, it is necessary that bondholders face
sufficient residual risk to take their monitoring role seriously.
And as I have emphasized earlier, it is even more important
that equity holders bear practically all the demand side
risks, technological risks, and operational risks of the project.
Political Considerations
The cynic would doubtless argue that once the principle
of project specific government support is accepted, political
considerations, rather than economic merit, would guide
4 ‘The United Kingdom is the only important country whose
railways have been developed practically without public aid’, (Dunn
1913).
5 Brady bonds named after the then US Treasury Secretary were
created in the 1980s as part of the restructuring of Latin American
sovereign debt. The principal value of these bonds was backed by
zero coupon US Treasury bonds, so that the principal was effectively
guaranteed by the US government. In some cases, a part of the
interest was also guaranteed by a rolling guarantee.
the choice of projects for which this support is provided.
This is to a great extent unavoidable and inherent in the
very notion of strategic importance. However, the provision
of this support in a transparent manner would make these
political decisions explicit and more easily subject to
political accountability.
Needless to say, the whole model of infrastructural
entrepreneurship is founded on the belief that a large number
of infrastructure projects would not need government support
and would be governed by market economics. The political
process would hopefully be confined to a small minority of
infrastructure projects whose strategic importance requires
that they be built with government support when the private
sector is not sufficiently forthcoming.
CONCLUSION
After a few years of struggling with somewhat half-hearted
efforts to attract private finance into infrastructure, the
time has now come to move forward more aggressively.
The government must now prepare to relinquish its exclusive
role in decision making in the infrastructure and allow
much of these decisions to be made by the free play of
market forces. This would open the way for private
entrepreneurship in infrastructure. The private sector would
then bear the risks and reap the rewards of infrastructure
projects. The design and location of these projects would
follow economic logic rather than the dictates of political
considerations. I have argued that the private sector would
come forward to build most of the infrastructure that India
needs without the government having to bear the risks. Yet
a small number of strategic infrastructure projects, that the
state considers important, but the private sector does not
consider attractive may remain. It is only for these few
projects that the state needs to step in either by undertaking
the project with public funds or by providing subsidies or
credit enhancement.
6.2 THE GUJARAT GAS BILL AND ITS GENESIS
Atanu Chakraborty
ANTECEDENTS
Studies on the demand projections of gas6 reveal that in
Gujarat alone, by the year 2007 the demand is likely to
be 44 million metric square cubic meter per day
(MMSCMD). The dismantling of the Administered Price
Mechanism (APM) would allow market prices for gas and
its substitute fuels. This would increase the demand for
gas in many applications since gas is expected to be
cheaper per unit of energy than competing fuels like fuel
oil, and possibly coal. It is also clean and easy to use.
Significant amounts of gas are traded internationally through
long term (price) contracts. Some of these contracts are
linked to oil prices, and to baskets of fuels. The spot
market for gas is also beginning to develop.
The sector can be divided into: exploration or
regassification, that is the supplier end; gas transmission,
that is the gas trunk lines; and distribution. Distribution
would include the spur lines going to a large customer,
besides the retail gas distribution network. The last two
parts of the business constitute the gas infrastructure, and
are capital intensive. Gujarat has been one of the largest
users of gas and has the highest registered demand in the
country. The need to develop the sector and its structure
was felt in 1998.
6
Natural gas, regassified liquified natural gas or natural gas
piped from wells.
Since gas infrastructure involves large investments and
a large part of the financial resources had to be raised from
the market, it was imperative to put in place a framework
that would bring the private sector in. The framework also
had to allow the risks to be appropriately segregated, to
enable subsequent correct attribution and sharing of the
risk. Gujarat had taken up port privatization in an ambitious
way in 1995. LNG became a favoured cargo for the port
operators, which meant that downstream investment in gas
using industries was likely. Hence, there was a need to put
in place the gas infrastructure7. Furthermore, the fertilizer
and power plants in the state were starved of gas as the
HBJ line carried a large quantum of the available gas up
north. The number of gas suppliers was bound to increase
as the monopoly of GAIL was to end.
The Challenge
The Gujarat Infrastructure Development Board and the
Gujarat State Petroleum Company initiated the legal
framework for the sector. Some of the considerations and
needs that were recognized in the framework were as
follows: (a) The resultant gas infrastructure had to be
neutral between both suppliers as well the user. This meant
that the sector had to segregated. (b) It ought to provide
equal access to all users and suppliers. (c) The transportation
charges have to be equitable and regulated, since the gas
transmission systems have characteristics of a natural
monopoly. The entry barriers are high, and contestability
is out of question. (d) The need to avoid the waste in
duplicate pipelines that competing suppliers could build in,
if a common carrier system were not to develop. (e) A
regulatory framework for the transmission system and
distribution systems was necessary. (f ) A framework for
the contracts to be entered between various players in the
sector was to be evolved. (g) Development of the other gas
market products such as spots, swaps would have to be
facilitated etc.
Developing the framework for a sector like gas was not
easy. There were no ready parallels available from the
developed economies such as USA or UK. In these
countries, the gas industry had developed much before the
regulatory systems were put in place. Not many successful
examples were available from other developing countries
either, as state owned companies tended to dominate the
sector. Such companies were typically vertically integrated
across exploration, transmission, and distribution. It was
essential to contextualize these developments to a nascent
market such as Gujarat. In India too, the near monopoly
of the state owned GAIL, had to be contended with.
The Issue of Jurisdiction
The very first question that came up related to the jurisdiction
of the state government in regulating the sector. The
constitutional provisions on this issue were very clear. Item
25 in the states list of activities under the Constitution8
clearly stated ‘gas and gas works’. Nevertheless, there were
doubts as to how other entries, including the central list,
under the Constitution would impinge upon it. The central
government was unsure whether the Gujarat government
could go ahead with the Gas Act. This was despite the fact
that another legislation relating to gas existed on the statute
books. Also there was a clear judgment from the Supreme
Court on the issue of jurisdiction over gas. Several leading
legal luminaries in the country scrutinized the issue and
found that the state government indeed had the jurisdiction
to legislate on the gas transmission and distribution, on
the strength of the entry item 25 mentioned above.
FEATURES
OF THE
Within the state government, the Gujarat State Petroleum
Corporation (GSPC), along with the Gujarat Infrastructure
Development Board (GIDB), initiated and piloted the
development of the legislation to create an unbundled
sector. The government set up a separate gas transmission
company, in which GSPC is a minority shareholder. Within
the government, there was a large measure of support, but
the proposed government legislation had go through of
scrutiny at multiple levels. The issue was new and there
were no ready models or precedents to go by in the country.
Much energy and time was spent by officers and others
in making the draft Bill and ironing out all the details.
The transmission line connects and separates the user
and the supplier of gas. Essentially, it creates an open
access common carrier form. This means that every supplier
can use the transmission line, and the line would
simultaneously carry gas for more than one supplier or
buyer. Since, the transmission is on the basis of energy
delivered at the end points, it really does not matter
whether the characteristics of the gas sent into the line by
each of the suppliers varies (within certain limits). Volumes
pumped in and drawn could differ somewhat as the
accounting is in energy terms. This principle ensures a free
movement of gas in the transmission line. The transmission
entity is entirely independent, having no interests in gas
purchase, production, or trade. As such the market for gas
buying and selling is rendered competitive. Some of the
key features of the Gujarat (Regulation of Transmission,
Supply and Distribution) Bill, 20019 are as follows:
• It envisions setting up of a three member regulatory
authority for the gas sector. Some of the key functions of
the regulator are: regulate the charges of transmission; to
set and enforce operational standards of safety and
environment in transmission and distribution of gas; to
adjudicate in disputes between various players such as a
specified company, a supplier, or a distribution licencee;
to lay down and enforce the principles of common carrier
mode of working.
Specified Company
GAS ACT
As mentioned earlier, models from developing and developed
countries were studied. The likely stakeholders from the
market were involved. Stiff opposition emerged from certain
quarters to this scheme, as they perceived the Act to be
a threat to their business plans. One must also mention
that during the discussions it transpired that a large number
of worries expressed were merely initial impressions, and
the opposition to the Act melted on sustained dialogue.
R-LNG Supplier
Gas Transport Agreement
User
Gas Seller
Sales Agreement
Regulator
Fig. 6.2.1 Gujarat Gas Act: The Actors and Relationship.
• The Act limits the companies that can participate
in the transmission of gas, and they would be called
‘Specified Companies’. Initially this activity was sought to
be kept in the public sector, as not many private gas
transmission entities would have come forward. But, as the
private sector showed interest, Section 23(1) of the Act10
which provided for more than one company to participate
in the transmission of gas on the ‘Common Carrier ‘ basis
was brought in. The charges for the same, were subject
to regulation.
• The law now prohibits others (than those licensed)
to transmit gas. It would thus facilitate the orderly
development of the network, regulation, as well as
investment in the gas grid.
• A clear distinction has been made between
transmission and distribution. Transmission is defined as
the movement of gas at a high pressure, while distribution
consists of activities further from the ‘city gate’ where the
pressures would be low and would not exceed 6 kg per
sq. cm.
• The distribution of the gas, that is taking it off from
the transmission line and retailing, is also licensed as per
Section 25 (1) of the act. The Commissioner of Gas
established under this Act would be the licensing authority.
• To ensure a transparent selection of the licensee as
well set the commercial and operational terms upfront, the
procedure would be as per the Gujarat Infrastructure
Development Act, 199911.
• The Act also provides for adjudication of disputes
between various players. Section 30 of the Act envisages
a tribunal to hear appeals against the orders of the authority
as well as against any order of revocation of licence.
• While the act protects the interests of the existing
entities in the transmission of gas, it brings excess capacities
available with them under regulation. Any future additions
by them in any case would come within the ambit of this
law.
While the Act was being deliberated upon, the state
government set up a company, the Gujarat State Petronet
Ltd. (GSPL), to carry out the business of transmission. It
is a company that is envisaged as a venture of users and
suppliers of gas and thus able to represent the interests of
all the stakeholders .Of course, there are existing players
such as GAIL and Gujarat Gas Company, but, they will
have to alter their business model to fit in to the requirement
of meeting the ‘Common Carrier’ principle. GSPL has
already rolled out part of the gas grid in the southern part
of the state. See Fig. 6.2.1 for a schematic representation
of the players as envisaged in the Gas Act.
Contextualization
There had been some criticism of this law, not on the
fundamental requirement of having one, but of some of
its provisions. While as mentioned earlier, some criticisms
were based on mere apprehensions, it is still worth sampling
the main ones:
• The regulator is too weak. It is dependent upon the
government
• Bringing a state sector company in transmission is
not in keeping with the winds of time.
If one looks at the Act more closely, both concerns
would seem to be not so well founded. Removal of a
member of the Commission is fairly difficult, and the Act
lays out a comprehensive procedure for this. Also there
are certain prohibitions on members of the Authority in
taking up, after his/her retirement/tenure, assignments
which are connected to the gas sector. Transmission being
a natural monopoly had to be structured carefully and it
was that consideration that lead the state to set up a venture
where all the stakeholders are represented. It is not the
usual government company, but one that has formal
participation of stakeholders. In any case, the Act provides
for more than one company to be the ‘specified company’.
Every law is born out of the conditions of society, and
draws much from the previous experience that the lawyers
and opinion makers have with institutions. The Gujarat
Gas Act is one such law that in contextualizing sound
economic and institutional principles, hopes to take the
sector forward.
6.3 CORRUPTION AND GOVERNANCE: INSIGHTS FROM THE LITERATURE
Ajay Pandey
‘Up to the time when a huge corruption scandal, popularly
labelled “tangentopoli” (Bribe City), brought down the
political establishment that had ruled Italy for several
decades, that country had reported one of the largest
share of capital spending in GDP among the OECD
countries. After the scandal broke out and several
prominent individuals were sent to jail, or even committed
suicide, capital spending fell sharply. The fall seems to
have been caused by a reduction in the number of capital
projects being undertaken and, perhaps more importantly,
by a sharp fall in the costs of the projects still undertaken.
Information released by Transparency International reports
that, within the space of two or three years, in the city
of Milan, the city where the scandal broke out in first
place, the cost of city rail links fell by 52 percent, the cost
of one kilometre of subway fell by 57 percent, and the
budget for the new airport terminal was reduced by 59
per cent to reflect the lower construction costs’.
Tanzi and Davoodi 1998
The anecdotal evidence of increase in costs of providing
infrastructure in Italy due to corruption, as pointed out
by Transparency International and cited above, underscores
the importance of corruption as an important determinant
of governance within infrastructure sectors. Though
corruption, or use of public office for private gains, is
not the only governance issue in infrastructure sectors,
it acquires prominence in the context as the state (and
therefore, public office) invariably comes into play in
policy formulation, implementation, and at times in
regulation of these sectors even though they may have
been privatized. Corruption, and its consequences as well
as determinants, has attracted the attention of several
economists and others over the last 40–50 years, as it
has often been seen as a distinguishing feature of
developing countries, in terms of both intensity and
extensiveness.12 This paper reviews the literature on
corruption to draw out the issues and implications relevant
to infrastructure sectors in the context of a developing
economy (See Box 6.3.1).
ECONOMIC ANALYSIS
EVIDENCE
OF
CORRUPTION
AND
The initial arguments put forth in the literature were
predominantly in favour of corruption, as corruption,
particularly petty bureaucratic one, was seen as ameliorating
the economic ills or effects caused by sub-optimal policies
and bureaucratic inefficiency,13 that is, red tape. Leff
(1964) and Huntington (1968) argued that when a state
errs in terms of policy decisions (and lowers social welfare)
or when it is inefficient, the optimal level of corruption
in the society is strictly positive. These two arguments are
also known as ‘second best’ and ‘efficiency wage/speed
money’ arguments in support of efficiency enhancing
corruption. In addition, some authors have viewed
corruption as a ‘Coasean bargaining’ process, through
which the bribe taker and bribe giver negotiate their way
to an efficient outcome. Later, many authors have critiqued
12 See Bardhan (1997), for a comprehensive review of the
impact of corruption on economic development. Also, see Shleifer
and Vishny (1993).
13 In the specific case of bribery with waiting, see the review and
analysis in Chapter 2 and Section 6.6.
these arguments and have pointed out at least three major
reasons as to why corruption may never be efficiency
enhancing. These are: (a) endogenous characteristics of
performance parameters of the corrupt official, that is, the
bribe taker himself decides on the quality and quantity of
goods and services to be supplied; (b) illegal and, therefore,
secretive nature of corruption, which distorts the decisions
of the bribe taker as he tries to maximize his payoffs while
minimizing the probability of detection and penalty; and
(c) poor enforceability of obligations contracted for through
corruption. The literature also has analysed the effects of
centralized vs. decentralized corruption in an economy and
the determinant of its existence and persistence. This
section starts with the conceptualization of corruption in
the literature and some distinctions invoked, and details
the arguments used by both apologists as well as radicals
on corruption. Lastly, it points out some evidence, which
does point out the negative consequences of corruption on
economy.
Forms of Corruption
Corruption, in common usage, means different things in
different contexts, ranging from ‘illegal’ and/or ‘immoral’
acts to ‘misuse of office for private gains’. It is only in the
limited sense of misuse of public office (which allows the
incumbent to sell property rights over a public resource
or allows him the right to buy from private sector) for
private gains, corruption is amenable for economic analysis.
Political corruption, when the gains are in the form of
political capital or for building/nurturing the constituencies
of the public official, is not suited for similar treatment.
Accordingly, much of what is written by economists (and
therefore, in this paper) is limited to corruption where the
payoffs line the pocket of the corrupt public official himself.
Sometimes, the term ‘political corruption’ has also been
used for grand, as opposed to petty, corruption (Tanzi and
Davoodi 1998). Grand corruption can be seen as a
manifestation of high and centralized corruption, where
the public officials at the very top collect payoffs. In the
case of petty corruption, the collection of bribes is
decentralized and the top of the government is seen as
relatively less corrupt.
Another useful distinction made by Shleifer and Vishny
(1993) is corruption with theft, as opposed to, corruption
without theft. Corruption with theft takes place when the
bribe taker pockets the entire proceeds of the transaction
without parting with anything for the government. A customs
official, who charges less than the official custom rate for
allowing passage of the goods is an example of corruption
with theft, and so is the case when a train conductor allows
someone to travel in a higher class compartment, while
holding lower class ticket, after accepting a bribe. Unlike
Box 6.3.1
Why Governance Matters: A World Bank Perspective
. . . causes of financial crises and poverty are one and the same . . . (If countries) do not have good governance, if they do not
confront the issue of corruption, if they do not have a complete legal system which protects human rights, property rights and
contracts . . . their development is fundamentally flawed and will not last. 1
(James D. Wolfensohn)
Governance has become an important focal point of debate, discussion, and concern among bilateral aid-donors, aid-recipient
countries, and international development agencies such as the World Bank. 2 It is generally recognized as an important determinant
of a country’s long-term economic growth and development. 3 The Bank, in its well-known report Governance and Development
(1991) defined governance as ‘the manner in which power is exercised in the management of a country’s economic and social
resources’. In its update, Governance: The World Bank’s Experience (1994), the Bank viewed governance more broadly and asserted
that ‘Good governance is epitomized by predictable, open, and enlightened policymaking (that is, transparent processes); a
bureaucracy imbued with a professional ethos; an executive arm of government accountable for its actions; and a strong civil
society participating in public affairs; and all behaving under the rule of law.’
The above view of the Bank is shared by most donor countries and major development organizations (such as UNDP, other
agencies of the UN, regional development banks, European Union, OECD, WTO, professional and private organizations, and
non-governmental organizations (NGOs)). More importantly, the Bank’s governance framework has influenced and shaped the
development programmes of various developing nations of the world during the past decade. The framework is not only relevant
to the core functions of governments (such as public expenditure management, tax administration, public enterprise and civil
service reform, legal reform), but also incorporates governance concerns in specific sectors such as education, health, and
infrastructure.
This Box highlights the key factors in the World Bank’s approach to governance as they have evolved, especially in the social
and infrastructure sectors.4
GOVERNANCE
AND
DEVELOPMENT ASSISTANCE
In its earliest years, the World Bank focused primarily on providing technocratic solutions to development related problems,
assuming that sound policies and well-designed projects will yield maximum social benefits when they are implemented by
development-oriented governments. In the 1980s, the Bank realized that development projects may not succeed when the policy
frameworks of governments are seriously faulty. A little later, in the 1990s, the Bank also began to realize that development policies
may themselves fail if the governance structure in a country is weak and public institutions work poorly.
Since the publication of its World Development Report (1997), the World Bank has proclaimed that reforming public institutions
(or, the public sector) and improving governance is key to all successful development and poverty-reduction work (as the Bank’s
president, James Wolfensohn, asserts in the quote above). According to the latest Bank view, good governance matters for povertyreduction as it improves the overall quality of basic social and infrastructural services while making them more accessible to the poor.
During the past few decades, the World Bank has promoted good governance in developing countries by reviewing their
internal accounting and audit systems, budgeting mechanisms, and rules governing the civil service and judiciary. However, during
recent years, the Bank has begun to emphasize various other mechanisms which developing societies can use to facilitate reform
of their public institutions, particularly in the social and infrastructure sectors. For instance, encouraging citizen (local community)
participation or ‘voice’ in decision making and allowing private and public sector firms to compete in providing public services
can reduce incentives for corruption and hence improve transparency and accountability in government.
The World Bank has also applied the mechanisms of ‘voice’ and competition in its anti-corruption efforts, following its 1997
strategy to help developing countries fight corruption in their public institutions.5 The Bank has assisted specific countries in
designing and implementing surveys of citizens, private firms, and public officials, which help strengthen the involvement of
civil society in supervision of public officials and ensuring greater transparency in public decision making and service delive ry.
1
Reforming Public Institutions and Strengthening Governance: A World Bank Strategy, November 2000, The World Bank, Washington, D.C.,
p. 1.
2
3
See P. Kulshreshtha, (1993), ‘Governance Issues at CG Meetings: 1990–Present, An Analysis’, mimeo.
Many empirical studies have confirmed that governance influences economic growth. See, for instance, P. Mauro (1995), ‘Corruption and
Growth’, Quarterly Journal of Economics, Vol. 110, No. 3, 681–712. Also, a series of cross-country studies have found empirical evidence of
a strong causal relationship between better governance and better development outcomes such as D. Kaufmann, A. Kraay and P. Zoido-Lobaton
(1999), ‘Governance Matters’, Policy Research Working Paper No. 2196, The World Bank, Washington, D.C.
4 For a comprehensive account, see Reforming Public Institutions and Strengthening Governance: A World Bank Strategy, November 2000, The
World Bank, Washington, D.C.
5 See Helping Countries Combat Corruption: Progress at the World Bank Since 1997, June 2000.
Governance concerns also affect the aid-disbursement decisions of the World Bank as well as other development agencies and
bilateral donors.6 For instance, the Bank has started to incorporate governance concerns such as corruption or lack of transparency
and accountability in its assessments of country or project lending risk. The Bank has also considered taking additional steps to
safeguard accountability in the use of its funds by recipient governments with a poor governance record in the past. In fact,
almost all Bank projects approved in recent years have a strong governance component and have attempted to reform the public
institutions in the recipient country. The significance attached by the Bank to governance issues is also evident by the fact t hat
about one-fourth of the Bank’s total aid-disbursement during 1997–9, which amounts to approximately $5–7 billion per annum,
has been spent on institution-building efforts. 7
MIXED SUCCESS
Despite increased spending on governance reform in the 1990s, the World Bank has not always succeeded in improving
governance via its development projects in core areas of government as well as in specific sectors. Some important lessons that
emerge from the Bank’s experience with institutional reform are as follows. Firstly, development projects that are ‘technocratic’
in nature and insensitive to the institutional realities in a developing country are less likely to succeed in strengthening governance.
In particular, if the Bank does not consult with important stakeholders or groups whose support is crucial to mobilizing ideas
for reform, institutional change becomes very less likely.
Secondly, in the past the Bank has often depended upon models of ‘best-practice’ which may not fit all developing countries
equally well. Although broad goals of good governance such as transparency, accountability, equity, and efficiency are common,
the specific means that can be employed to achieve these goals may vary across countries. A deep understanding of the institutional
realities of a country is essential before deciding upon the strategies and means for reform. Hence a ‘one-size-fit-all’ approach to
governance and institutional development would tend to be inferior and lack effectiveness. Thirdly, weaknesses in Bank’s lending
instruments and deficient staff and expertise on governance at the Bank can hamper long-term efforts to promote institutional
reform.
Lastly, traditional project lending and governance reforms are often in conflict with each other. This is because development
projects typically target a specific action to be executed rather than attempt to change the larger institutional set-up in a developing
country. Hence, achievement of project-specific objectives often comes at the expense of, and can even undermine, institutionbuilding efforts.8 However, it is important to note that in countries where governance structures are very poor, pushing project
lending may be the only viable way to create and sustain economic growth.
In the area of public service delivery, the Bank has also had limited success due to a variety of reasons similar to those abov e.
Firstly, during the past few decades, the Bank devoted much attention to improving the capacity of public monopolies and other
public organizations to deliver social and infrastructural services, rather than looking at available options for institutional reform.
The mechanisms of decentralization or ‘voice’ and competition were practically ignored by the Bank for a long time, even though
they were available. Secondly, the Bank has failed to avoid the trap of ‘best-practice’ models and to account for institutional
complexities in the public service sector because of a poor understanding of institutional realities in this sector.
6 However, most bilateral aid-donors accept that aid-conditionality, i.e. making development assistance to a recipient conditional upon
improvements in governance, can be effective only if it accords with the broad policies of the recipient country government and is agreed upon
mutually. See ‘The Role of Donors and IFIs in Curbing Corruption’, Global Forum on Fighting Corruption, The Hague, 28–31 May 2001.
7 See World Bank (2000).
8 This is specifically true in projects controlled by donor countries. For instance, donors often provide salary supplements to local project
employees which leads to diversion of superior skilled labour from important core areas of government. Also, availability of loans under an aid
agreement can lead to lower budget discipline and distort government priorities for development across sectors. Finally, different donors may have
different procedural requirements, which increases administrative burden and hampers the development of simple and efficient administrative
systems in the recipient country.
these examples, corruption without theft takes place when
extra money is asked for issuing a ration card or a passport.
Corruption with theft is a useful construct, however, only
when the government has set the price of a public resource.
Under such conditions, the distinction changes the marginal
cost of supplying goods and services for the bribe taker.
Efficiency Enhancing Corruption: The Arguments
Corruption as ‘Speed Money’ or ‘Efficiency Wage’: Corruption,
when the bribes are given to speed up the decisions or
to cut through the red tape, is seen as efficiency enhancing
by some authors. Huntington (1968: p. 386), viewing
corruption as a lubricant in the wheels of bureaucracy,
states: ‘In terms of economic growth, the only thing worse
than a society with a rigid, over-centralised, dishonest
bureaucracy is one with a rigid, over-centralized, honest
bureaucracy.’ More formally, Lui (1985) models the
corruption or bribery in a setting of queue formed for
provision of a public service. In his model, the corrupt
official is able to practise price discrimination based on
the opportunity cost of the clients in the queue, and the
size of the bribe is linked to this opportunity cost (bribe
is decided by the bribe giver). The equilibrium strategy
in his model minimizes the waiting costs associated with
the queue and thereby increases efficiency in the service.
Intuitively, the presence of bribe in this case acts as ‘piece
rate’ paid to the official serving the queue, increasing his
efficiency. Moreover, since the rate itself is paid on the
basis of opportunity cost of waiting time, it allows the
official to serve those clients first who put maximum value
to their waiting time. Iniquitous though it may be, it thus
improves welfare and allocational efficiency.
Corruption as a ‘Second Best’ Solution to Policy Induced
Distortions: Besides viewing the potential of corruption
as a way to cut through red tape and bureaucratic
inefficiency, it is also seen as ‘second best’ solution to preexisting policy induced distortions. In such cases, the state
imposed distortionary policies are nullified by the
corruption facilitated blackmarketing, smuggling, etc. The
nullifying economic activities circumventing irrational policy
and administrative decisions with the help of corruption
can improve allocational efficiency and welfare, even if
some resources are wasted in the process.
Corruption as Efficiency Enhancing ‘Coasean Bargaining’
Process: Corruption as ‘Coasean bargaining’ process may
increase efficiency by improving the welfare of an economic
agent, if the public official has discretion to lower the
welfare of that agent, either by imposition of penalties or
denial of a public resource. The effect is stronger when
the decision or action of the public official can harm the
individual more than he gains from the decision. For
example, if a public official, by taking a particular decision,
gains Rs 100 as payoff and if the decision results in loss
of Rs 200 to an individual, the individual may bribe any
amount up to Rs 200 to the public official to get the
decision changed. This would improve his own welfare as
well as that of the public official.
Corruption and Efficiency: Critique
Compelling though these arguments are, the effects of
corruption on efficiency are not so straightforward if the
real life issues related to information asymmetry between
the bribe taker and bribe giver, endogenous characteristics
of red tape, lack of enforcement/secrecy associated with
corruption, as well as the decentralized nature of corruption
are incorporated in the analysis.
Endogenous Characteristics of Red Tape and the ‘Speed Money’
and ‘Second Best’ Arguments: Myrdal (1968), quoting the
1964 Santhanam Committee Report14, argues that corrupt
14
Government of India appointed the committee for prevention
of corruption.
officials instead of speeding up the administrative work
may increase the delays in order to maximize the bribes.
Corrupt officials may create more red tape in order to
screen clients in order to maximize their payoffs (Banerjee
1997). The problem is essentially due to the endogenous
nature of red tape or the process as well as criteria used
in allocating public resources in bureaucracies. Conceptualizing the relationship between public officials and public
as that of agents (public official) engaged by the principals
(public or a benevolent government), as has been done in
the literature, the moral hazard [expropriation of principal(s)
by the agent(s)] problems arise in the first place due to
information asymmetry. In addition, the complications in
this case are due to the free rider problem faced by a large
number of principals, making it extremely difficult for
them to write the terms of contract at which the agents
are going to work for them, giving in turn considerable
discretion to the agents to offer those contracts, that are
in their own interest. Not only do the processes and
criteria used by the public officials have the potential to
be opaque, endogenous, and self-serving, the quality and
quantity of public service would also be unobservable and
unenforceable. Only in very special cases, such as Lui’s
model discussed earlier, corruption may be efficiency
enhancing. If the public officials have disutility of effort
(a typical principal–agent characterization) and very weak
accountability, the end result will be sub-optimal. As Andvig
(1991) points out, the queues in allocation mechanisms are
more complex than the queuing models used in the literature
to analyse the effect of corruption in efficiency. The results
on these models may not be robust to new offers of bribe
made by new entrants to the queue and there is no
compulsion on the part of the corrupt official to stick to
the deal of maintaining priority in the queue if the
information is imperfectly observable to the clients.
Similar to the effect of the endogenous nature of red
tape on ‘speed money’ efficiency, the policy induced
distortions which corruption can ameliorate in the ‘second
best’ argument are endogenous to the bureaucracies.
The bureaucracy, particularly an over-centralized one
(decentralized ones may find it difficult to do it as effectively
owing to difficulty in co-ordinating its members), may
induce such distortions in the policy framework to maximize
its own payoffs.
Effect of Secrecy and Lack of Enforcement Associated with
Corruption: Even in the context of an economy with
worst bureaucracy, corruption is illegal. Considerable
inefficiency can result from the distortions created by
corrupt officials to prevent detection (Shleifer and Vishny
1993). A corrupt official will induce distortions in the
resource allocation to prevent detection, or to hide
corruption, even if otherwise corruption is neutral to
allocational efficiency. Using the example of competitive
bidding of bribes for a government procurement contract
under imperfect information, Beck and Maher (1986) have
shown that the lowest cost firm offers the highest bribe
and gets the contract. The only effect of bribery is that
producer surplus is cornered by the corrupt official. However,
as Shleifer and Vishny (1993) have pointed out, the corrupt
official is likely to distort the procurement contract itself
in a manner that competitive bidding is avoided (as it
increases the possibility of detection) by altering
technological, technical specifications and qualifying
requirements of bidders. This may result in the creation
of inappropriate and/or low quality public assets. Similarly,
due to the lack of enforceability of any commitment made
in a transaction involving a bribe (but for the ‘reputation’
effect, for which usually there is no incentive as it is rarely
a determinant of jurisdiction given to the official), the
effectiveness of corruption as a Coasean bargaining process
is very weak. In the example given earlier, having realized
that a decision can hurt someone more than personal gains
from the decision, the corrupt official can threaten and
blackmail the individual to bargain for more and more
bribe, resulting in a collapse of the equilibrium. This
explains why bargaining or bribing one’s way through,
when the other side (say, police, tax officials) has the power
to harm, is usually avoided. Only those agencies and parts
of bureaucracies that have less potential to harm and can
grant favours are mainly solicited for bargaining through
bribes. Shleifer and Vishny have also pointed out that the
type of penalties imposed on corruption also affects
efficiency. If the penalty is the same on detection (does
not vary with bribe), then the corrupt official will lower
output (to avoid detection) and will demand a higher bribe.
However, if it varies with the size of the bribe then he
will increase output and lower the bribe size.
An even more serious manifestation of the inefficiency
of corruption takes place when corruption is decentralized
and when each official acts as an independent monopolist
to maximize his own payoff. For an economic activity, if
multiple clearances are required, then each of the officials
will act as an independent monopolist. Decentralization of
corruption, in this context, simply means that multiple
members of the bureaucracy act independently in the
context of decision making and have independent jurisdictions. The multiplicity of decision makers and not the
level of state, where the locus of decision making lies, is
relevant to the concept of decentralized corruption.
Extending the well-known consequence of independent
monopolists, when the product demands are interdependent, Shleifer and Vishny (1993) show that the aggregate
bribes asked for by such independent officials will reduce
the activity as compared to when there is a single profitmaximizing corrupt official. Though decentralized
bureaucracy is worse than centralized bureaucracy for
efficiency, purely in terms of economic analysis, it is
politically more sustainable in a fractious society (Shleifer
and Vishny 1993; Mauro 1995).
Summing up, it is clear that if the bureaucracy would
not move otherwise and would act perversely (presumably,
due to inability of principals to get their acts together),
corruption may have some beneficial impact by aligning
the interest of bureaucracy with public. However, when
the same argument is pushed further (unaccountability of
the agents and therefore, corrupt bureaucracy), it is likely
that the actions and decisions of bureaucracy are more
likely to be in its own interest and corruption-reinforcing,
to the detriment of others.
Decentralized Corruption and Efficiency: The previous
arguments for and against corruption as efficiency enhancing
mechanisms can be summarized by thinking of a corrupt
official as a monopolist supplying goods and services or
selling property rights over public resources. To the extent
corruption allows him extraction of consumer (public)
surplus as a discriminating monopolist, it is neutral to
social welfare. As a consequence, at times it may also
increase the output, thereby increasing efficiency. If the
corrupt official creates more screening devices to
discriminate clients and restricts output due to information
asymmetry and/or secrecy (which is usually the case),
corruption becomes inefficient. The presence of endogenous
characteristics of the policies, rules, processes, performance
evaluation, and decision making criteria within a
bureaucracy with little accountability towards the public
may increase the distortions even further.
Besides the effect of corruption on economic efficiency,
several authors have analysed and commented upon the
relative size of rents (as compared to bribes) that bribery
is supposed to procure for the bribe givers, the effect of
corruption on dynamic efficiency (growth), factors
explaining persistence of corruption and differences
observed across countries, and policy issues to mitigate the
incidence of corruption and its consequences. Given the
nature of corruption, the empirical research is limited to
a few cross-country studies, which we review later.
Corruption and Economic Growth: Other Issues and
Evidence
Institutional Framework and Relative Size of Rents vs.
Bribes: In an institutional framework, where co-ordination
among corrupt officials is required in order to facilitate
procurement of economic rents for bribe givers, the difficulty
in co-ordination may make bribes relatively insignificant
compared to the rents, a phenomenon known as ‘Tullock’s
Paradox’ after Tullock (1980). In settings where no such
problems exist due to the existence of a single decision
maker, Krueger (1974) shows that competitive bidding by
rent-seekers dissipate rent. Even in the face of co-ordination
problems, the bribe takers may be able to extract higher
bribes when they are well organized (Rose-Ackermann
1978). Though democracy presumably reduces the
corruption by increasing the co-ordination problem for the
decision makers and legislators, it may fail to eliminate
rent-seeking behaviour. Institutions such as civil services
clubs, disciplined party factions, etc. within a democracy,
on the other hand, facilitate higher bribes for their members
by reducing the co-ordination problem.
Corruption and Growth Process: Dynamically, corruption
can affect growth negatively as it acts as a deterrent to risk
taking (Bardhan 1997). Unlike taxes which allow deduction
of losses of the past against profits, the effect of bribes
and corruption is asymmetrical. The growth process gets
affected when the public resources are diverted from
infrastructure projects, having positive externalities, to line
the pockets of corrupt officials (or their private
consumption). Murphy, Shleifer and Vishny (1993) show
that rent-seeking activities often have increasing returns,
and consequently returns to entrepreneurship and
innovations often fall in comparison with the rent-seeking
activities, impacting growth. Tanzi and Davoodi (1998)
point out that a higher level of grand corruption is likely
to bias public expenditure towards capital, as opposed to
operating (revenue) expenditures, resulting in low quality
of infrastructure stock.
Persistence of Corruption and Differences Across Countries: In
addition to cultural differences and differences in tolerance
of (and even perceptions of ) corruption across societies,
one major explanation offered for the relative differences
in corruption across societies, is the possibility of frequencydependent multiple equilibria15 (Cadot 1987; Andvig 1991).
In Andvig’s simple model, a society can easily move towards
relatively corruption-free or corruption-ridden status
depending on the fraction (frequency) of honest (or
dishonest) officials. It pays to be honest when most of the
others are honest and vice-versa. The model by Andvig and
Moene (1990) shows how profitability of corruption is
linked to its frequency and that a temporary shift may lead
to permanent changes in corruption. An increase in the
frequency of corruption lowers the cost of corruption to
15 Existence of multiple possible equilibria of honest vs. corrupt
public officials. Intuitively, this means that whether it is optimal to
be honest in equilibrium depends upon whether others are honest
or not. A multiple of such equilibria are possible, each dependent
on the frequency or proportion of honest people. The subsequent
text makes this point clearer.
the corrupt official (lower detection and penalty) and
increases the demand for corrupt services (by reducing
search costs for bribers). Tirole (1996) explains the
persistence of corruption through bad collective reputation
of previous generations. Younger generations inherit this
reputation, eliminating the incentive to be honest. Shleifer
and Vishny (1993) point out that corruption with theft is
more likely to be self-reinforcing as the bribers do not have
any incentive to report the corruption.
Reducing Corruption: Policy Issues: Corruption arises, in
the first place, due to monopoly power vested with the
public official to allocate public resources. The more
extensive the jurisdiction of public officials is and the more
is the dependence of the private sector on public resources,
the greater is the possibility of corruption. Privatization
and deregulation, as Klitgaard (1988) notes, reduces the
corruption in the affected jurisdictions. Multiple officials
with competing and/or overlapping jurisdictions (RoseAckerman 1978,1994) reduce the monopoly power of
bureaucrats and/or increase the difficulty of co-ordination.
Reducing the size of government (its functions) reduces the
jurisdiction of the bureaucracy. Better monitoring,
accounting and disclosures (making accountability possible)
can reduce the incidences of corruption with theft, which
is self-preserving (Shleifer and Vishny 1993). Incentive
payments to officials may also improve efficiency, particularly
when accompanied by better accountability (Klitgaard 1988).
The legal framework towards corruption, particularly
penalties, may itself improve the incidences and
consequences of corruption (Shleifer and Vishny 1993).
The literature on fiscal decentralization (in the sense of
moving the locus of decision making closer to the client
group) has arguments both for and against its effect on
lowering corruption. Wade (1997) attributes corruption in
the Indian irrigation bureaucracy to its over-centralized,
top–down structure. Brueckner (1999), as quoted by Fisman
and Gatti (1999), however, argues that corruption is more
likely in local governments. Just as a centralized bureaucracy
is more likely to divert the resources to the non-poor, who
are willing to pay, local governments are also vulnerable
to ‘capture’ by local wealthy/powerful clients or groups
(Bardhan and Mookherjee 1998), quoted by Fisman and
Gatti 1999). In the context of fiscal decentralization, it has
been argued that if the spending decisions are decentralized
while revenue generation remains with the higher level of
government, the corruption and local rent-capture may be
exacerbated (Fisman and Gatti 1999).
Empirical Evidence: Given the nature of corruption, there
has been limited empirical research on its causes and
consequences. However, anecdotes, allegations, case studies,
and reports in the academic as well as popular press appear
rather frequently. There are few cross-country studies that
have looked at the effect of corruption on the attributes
of economic performance of the cross-section. Mauro
(1995) used an index compiled by Business International
for 68 countries to measure the extent of corruption.
Analysing cross-sectional data, he found that corruption is
strongly negatively correlated with the investment rate,
regardless of red tape. He concludes that corruption lowers
economic growth by lowering the total and private sector
investments. In addition to the Business International index,
Tanzi and Davoodi (1998) used the International Country
Risk Guide index, compiled by Political Risk Services, Inc.,
as a measure of corruption across countries. Using datasets
of attributes of public expenditure across countries, they
find that high corruption is positively associated with high
public (capital) expenditure, low governmental revenue,
high ratio of wages and salaries to total current expenditure,
and poor quality of infrastructure. Fisman and Gatti (1999),
using the latter index, find a negative association between
decentralization and corruption. Working with the state
level data, they also point out that decentralization is more
effective in reducing corruption when revenue responsibility
is also local (less federal transfers).
To sum up, the negative effect of corruption on economic
growth is widely recognized and empirically supported
(albeit, in a limited sense). The institutional arrangements,
extent of political decentralization (accompanied by revenue
generation responsibility), privatization, deregulation,
monitoring, disclosures, etc. are argued as ways to lessen
the corruption or distortions caused by it.
INFRASTRUCTURE SECTORS
AND
CORRUPTION
Corruption manifests itself in the context of infrastructure
by increasing the cost of infrastructure goods and services,
even if they are provided by an otherwise efficient entity.
This vitiates the economic, financial, and political viability
of infrastructure projects in the context of economies
increasingly willing to privatize infrastructure sectors. In
the context of state provided infrastructure goods and
services, corruption usually leads to widespread thefts,
particularly when it is difficult to measure and monitor the
output or when it is difficult to make officials accountable.
The high incidence of theft of power or water in India
are illustrative cases. Corruption also induces capital
expenditure bias in decision making, thereby lowering the
quality of the existing stock of assets in infrastructure
sectors as fewer resources are allocated towards operating
and maintenance expenditures (Tanzi and Davoodi 1998).
In a similar vein, the softer infrastructure sectors (such as
health and education) tend to attract lower allocations, due
to fewer opportunities for corruption (Shleifer and Vishny
1993). On the other hand, infrastructure sectors involving
large outlays are more susceptible to grand corruption.
Even within the context of privatized infrastructure sectors,
corruption by public officials can affect the private entity
while framing policies and deciding on terms of entry and
operation. This may include awarding of licences (if the
entry is restricted), decisions related to the technology,
decisions related to allocation of risks, conditionalities,
and clearances required, etc. Later, the corruption may
affect them through the dependence of continued operations
on public officials or on the entities controlled by them,
in their regulatory role or even as a buyer/seller of the
output/input.
Here, we focus on five main issues related to
infrastructure sectors and corruption. These are:
(a) decentralisation; (b) stability of policy framework and
effectiveness of ‘Coasean bargaining’; (c) unbundling and
corruption with theft; (d) multiplicity of independent
regulators; and (e) independence of regulator/auditors. We
have not discussed some of the themes such as deregulation,
reducing administrative jurisdictions (size of the
government), disclosures etc., which are important, but
their effect on corruption in general as well in the context
of infrastructure sectors is obvious.
Infrastructure Projects: Decentralization and Corruption
Even in the case of private provisioning of infrastructure
services, the issue of decentralization is important.
Centralized licensing, planning, and execution of such
projects have their own pitfalls, if motivated by the private
payoffs to the decision makers. The qualifying requirements
and the process followed in awarding licences can be easily
designed to minimize competition in bidding. Usually,
enactment of such barriers also entails increasing the
capital outlay requirements, as the scope of the project can
be enhanced even when it is economical to unbundle it
or capital-intensive technology is mandated even when
other economically efficient technologies exist. The impact
of these distortions, created to maximize payoffs to the
decision makers, is ultimately borne by the users and
economy. This is not to argue that there are no possible
benefits from centralized infrastructure planning and
implementation. When there are substantial economies of
scale in execution and/or operation or optimal utilization
of the projects, there is a good case for such centralization.
However, the experiment of decentralized provisioning of
primary and adult education in Madhya Pradesh shows
that in certain cases (when the geographical externalities
are non-existent), the locus of control at the decentralized
level may result in benefits outweighing the costs of suboptimal design and execution. The effect is, however, likely
to be satisfactory if the interests of stakeholders are aligned.
Outside grants, if any, should be linked with the performance
and revenues, so that the cost of corruption is internalized
at the local level. Much of what has been said is true for
even public services provided by local governments. As
argued by Tiebout (1956), decentralization can induce
competition as the inhabitants can vote by their feet (move
out of a jurisdiction). This is true, however, only if the
framework for decentralization does not permit porkbarrel politics (promise and/or delivery of ‘pork’ to the
constituency by the politicians).
Even in the case of centrally planned and executed
projects or infrastructure services centrally provided, there
is a case for giving time-bound jurisdiction to local
governments for the local dimensions of the project though
it may not have any effect on corruption. For example,
the exact course of a road or rail location of facilities, etc.
can be easily decided by the local governments, even if they
cannot veto the project and/or its specifications. As we
have discussed earlier, overlapping but not independent
jurisdictions tend to reduce corruption.
Stability of Policy Framework and Effectiveness of
‘Coasean Bargaining’
While reviewing the literature, we have seen that one of
the arguments for corruption is that it allows the briber
and bribee to improve their respective welfare through
Coasean bargaining. The effectiveness of such bargaining,
as has been argued, depends upon whether the outcomes
bargained for are binding (Shleifer and Vishny 1997). In
a corrupt democracy, politicians may use (or threaten to
use) major or even minor changes in the policy framework
to force the client (an operating entity) once again to the
bargaining table. Stability of policies in the infrastructure
sectors has been considered desirable as it reduces the
risks for the entities and their financiers, thereby resulting
in higher investments and/or lower costs. Besides the
desirability of stability in policy framework from this
perspective, it is also desirable as it reduces the possibility
of arbitrarily high costs imposed on a private infrastructure
entity. Stability in policy keeps the costs of corruption
within bound in the case of a privatized but regulated
sector. It is no coincidence that less corrupt countries also
tend to have more stable policies and policy frameworks,
and it comes as no surprise that the policy changes seem
to be more frequent when the private sector is involved
than when the infrastructure services are provided by the
state. The costs of too frequent policy changes are low
investments and high cost infrastructure.
Unbundling to Reduce Corruption with Theft
The economic arguments for unbundling of infrastructure
services mainly come from the viewpoint of efficiency, as
unbundling allows competition wherever possible, as in
case of generation and distribution in power sector as
opposed to vertically integrated monopolies (created because
of natural monopoly, transmission (wires) business).
Moreover, unbundling and pricing of services allows more
effective signals for consumption as well as investments.
In addition, unbundling in the context of vertically integrated
businesses can also be helpful in reducing corruption with
theft and better accountability. I recall my childhood
memories of lay people advocating the splitting up of
vertically integrated electric utility (a state electric supply
board, typical of the notoriously inefficient State Electricity
Boards (SEBs) not on account of economic efficiency
arguments, but because it would reduce corruption. They
made two arguments: (a) it will help in accounting for
thefts or losses as there will be metering done between the
different entities so created, and (b) it will reduce the
compulsions for corruption as the jobs will be nontransferable across the entities. To elaborate the latter
argument, as the maximum side payments were in
distribution, everyone wanted to be posted in distribution
(even the effort required on the job is less), because of
which they had to pay maximum bribes for such postings.
Having acquired the posting, they had to recover the same
through bribes and permitted thefts. Moreover, those left
out continuously tried to get such postings. The decision
makers, in order to maximize payoffs over their discretion
of transfer, also kept on rotating people to such postings,
accentuating corruption and theft even further,
simultaneously eliminating any incentive for ‘reputation
building’ by the posted official. This has entrenched
corruption. Though not applicable in all contexts, the
arguments are still valid. Unbundling can also help by
decentralizing the bureaucracy (an incentive for ‘reputation
building’), by specialization of skills, and by better
monitoring (mutually reinforcing arguments)16.
Multiplicity of Independent Regulators
Unlike the producer or seller of infrastructure services,
when jurisdiction of public official is to act as a specialist
regulator of the firm engaged in providing services,
specialization gives rise to decentralized corruption, as
pointed out earlier. Acting as independent (over their
jurisdiction) monopolists, these independent multiple
regulators (corrupt officials) regulating a firm can choke
off investments more than a single corrupt regulator. Multiple
clearances required for infrastructure projects increase
administrative costs as well as potential costs of corruption.
The accountability suffers due to diffusion of responsibility
16
The most challenging unbundling of all would be that of the
bureaucracy [Ed.].
and efficiency suffers due to inadequate treatment of
externalities. Ideally, regulatory jurisdictions over infrastructure projects, as the analysis suggests, should be combined and vested with a single regulator with a well-defined
domain. Specialization, if required, should be developed
or outsourced by the regulator.
In the Indian context, the power sector suffers from
similar problems as it is in Concurrent list of the Constitution. For any private sector player, the state government
matters more, and hence the state bureaucracy has to be
satisfied. The central government/national initiatives for
specific private sector investments or reforms may therefore
not yield results, unless states were to internalize the cost
of being the independent monopolist regulator.
Independence of Regulators
Besides centralization of the regulatory function, another
important element of reducing the corruption and associated
costs is to have regulators who are independent in the sense
that they are not part of the state and represent neither
producers nor consumers (in a meaningful sense). Even in
the case of an independent regulator, though the possibility
and instances of ‘regulatory capture’ exists, separation
from the state facilitates policy making to be more stable.
This, by itself, is a desirable characteristic. Separation
from the state increases the monitoring of regulator (by
the State as well as by others) and makes it easier to ensure
disclosures of decision, transparency of process, as well as
insistence on regulatory rationale. Being independent of
the state, regulators are likely to be more effectively
scrutinized by the courts. The government or the state on
the other hand can easily avoid this scrutiny, particularly
in economic matters, by enacting or changing laws with
the help of the legislature and by invoking the ‘public
interest’ argument. The independence of the regulator
requires a careful enabling framework, wherein the only
scrutiny is by courts and not by any other part of the state.
Similarly, the personnel associated with the regulator must
not be a part of a civil service club, producers’ employees,
or potential employees (often, ex-regulators are found in
employment with producers) and the process should make
co-ordination for corruption difficult.
In the Indian context, all the five dimensions discussed
in this paper are weak as far as governance in infrastructure
projects is concerned. Multiplicity of regulators, lack of
stable policies, little and irrational unbundling, inappropriate
decentralization, and absence of independent regulators
are institutional features that make for widespread
corruption and increase associated costs. Policy makers
and public debate need to address these issues if we are
to improve governance in the infrastructure sectors.
6.4 ACCRUAL ACCOUNTING FOR INFRASTRUCTURE ASSETS: A REVIEW
Mahendra Gujarathi • Samir K. Barua
Large investments in infrastructure assets by governments
are indicative of the contribution of such assets to the
viability and effectiveness of governments, and of the
public needs they serve. In the USA, for example, an
estimated $150 billion is annually spent every year by the
government for construction, improvement, and
rehabilitation of physical infrastructure assets such as roads,
bridges, dams, tunnels, water, and sewerage systems. Yet,
until recently, little attention had been given in the
governmental financial statements to the valuation, the
measurement of depreciation, and the disclosure of the
condition of infrastructure assets. As a result, financial
reporting practices for infrastructure assets have been
diverse and there is currently no consensus on an accounting
technique for infrastructure assets (Rowles 1991).
There have been sporadic attempts to deal with the
issues associated with financial reporting for infrastructure
assets. Standard setters in several countries, including the
UK, Australia, and New Zealand, have recently issued
pronouncements on accounting for infrastructure assets to
address the problem of widely diverse financial reporting
practices by the state and local governments (SLGs). The
Canadian Institute of Chartered Accountants (CICA) has
launched a study on how to account for infrastructure in
public sector financial statements. Even a small country
such as Mongolia has introduced a draft legislation requiring
government accounting to be done on an accrual basis.
While the public sector reforms have a longer history in
these countries than in the US, the 1999 issuance of
Governmental Accounting Standards Board Statement No.
34 (GASB 34) in the US has attracted world attention to
the issue of infrastructure accounting. GASB 34 has been
dubbed as the most significant change in the history of
governmental financial reporting. It reflects a significant
departure from the budgetary compliance type of financial
reporting to one that uses economic and business criteria
for reporting the operations and financial condition of
local and state governments. Its departure from the
budgetary compliance type of financial reporting to accrual
accounting has been quite controversial.
In most countries in the world, accounting standards for
public sector entities in general, and infrastructure assets in
particular, have either not been developed or are in the very
early stages of development. The International Federation
of Accountants (IFAC) has initiated a project to set accounting
standards for governments. A core set of accounting standards
for governments—called International Public Sector
Accounting Standards (IPSASs)—have been issued by IFAC.
South Africa is the first country that formally announced
in August 2001 that it intended to use the IPSASs for
development of public sector Generally Recognized
Accounting Practice for its national government. Ian Ball,
the ex-Chair of the Public Sector Committee of IFAC, was
quoted in the Chartered Accountants Journal of New
Zealand (June 2000) that IPSASs will gain authority because
(a) IFAC has a significant international reputation and
(b) as countries recognize the improvements in the quality
of reporting, they will incorporate such standards in their
local laws. However, there are others who believe that
GASB 34 and IPSASs represent an artificial implantation
of business reporting standards on the governmental sector,
and hence holds little promise of enhancing decision
usefulness of governmental financial statements. Whether
the costs of implementing such standards are worth the
expected benefits is another important concern expressed.
This paper summarizes the developments in infrastructure
accounting internationally (using the GASB 34 as an
example), critically examines the theoretical soundness and
practical difficulties in implementing the current standards,
and conjectures about the prospects of adoption of accrualbased infrastructure accounting by governmental entities,
particularly in the developing countries. The exposition in
the paper would be of interest to the countries considering
issuance of infrastructure accounting standards, or adoption
of the IPSASs into their local laws.
ACCOUNTING STANDARDS
FOR INFRASTRUCTURE
Prior to the issuance of GASB 34, SLGs had the option
of reporting infrastructure assets in any fashion as long as
it was consistently done and disclosed. This was perhaps
the result of a judgment by the standard setters that the
costs of establishing and maintaining cost records for such
assets might exceed the benefits from such data. State and
local governments in most of the countries currently report
expenditures on infrastructure assets in the year incurred.
Therefore, infrastructure assets do not appear in the
statement of financial position on a continuing basis. Such
accounting is consistent with the position of some
authors (Mautz 1981, 1988, for example) who argued that
infrastructure investments do not conform to the traditional
definitions of assets.
However, the view that infrastructure expenditures
indeed constitute assets is gaining increasing support in
the US and elsewhere. The Public Sector Committee of
the IFAC concluded that it is now generally accepted that
infrastructure expenditures represent assets. GASB 34 also
requires the use of full accrual accounting for all government
activities and the reporting of the value of infrastructure
assets in the balance sheet. GASB 34 concluded that
infrastructure asset reporting was ‘essential to provide
information for assessing financial position and changes
in financial position, and for reporting the cost of programs
and functions’.
GASB 34 requires all the infrastructure assets acquired,
renovated, restored, or improved after the effective date
of GASB 34 to be reported in the statement of financial
position. The requirements of GASB 34 come into effect
from the fiscal year 2002 for large SLGs (with annual
revenues of $100 million or more), 2003 for medium
SLGs (revenues between $10 million to $100 million), and
2004 for small SLGs (revenues less than $10 million).
Additionally, significant infrastructure assets that have been
acquired or significantly reconstructed since 1981are also
required to be reported in the statement of financial
position by the large and medium SLGs although they
would have additional four years for such retroactive
reporting.
As per GASB 34, the amount at which infrastructure
assets should be reported is the historical cost. Historical
costs represent the total cost, inclusive of capitalized interest
and ancillary charges incurred to put the asset into its
intended location and condition for use. However, since
most of the infrastructure assets were constructed under
the cash accounting regime, historical costs are usually not
available. In such cases, therefore, the historical costs are
to be estimated by calculating the current replacement
value for a similar asset, and deflating the same by applying
price-level indices to the year of acquisition.
After initial capitalization, infrastructure assets are to
be depreciated by allocating their net cost (that is, cost less
the salvage value) over the estimated useful lives in a
systematic and rational manner. The depreciation expense
must be recorded, allocated to functions, and reported in
the statement of activities of SLGs. Any established method
of depreciation is acceptable and composite methods can
be used when depreciating groups of assets with different
service lives.
Several infrastructure assets, however, such as bridges
and roads can be used for a very long period if properly
maintained. Hoover Dam, for example, is expected to last
2000 years! Spreading the construction costs over such a
long period makes the depreciation expense in each year
to be immaterial. In recognition of the effect of preventive
maintenance on the lengthening of the useful life of the
infrastructure assets, GASB 34 allows SLGs to follow a
modified approach. Under the modified approach, a
governmental entity does not need to report depreciation
expense for eligible infrastructure assets if (a) it manages
the eligible infrastructure assets using an asset management
system that possesses certain characteristics, and (b) it can
document that the eligible infrastructure assets are being
preserved approximately at or above a condition level set
by the government. The entity must perform condition
assessments every three years. In addition, it must provide
annual information about the estimated amount needed to
maintain the established condition level and the amounts
actually incurred for the past five years.
The modified approach resembles the method known
as ‘renewals accounting’ in other countries such as New
Zealand. Walker et al. (2000) define it as a ‘method of
accounting for fixed assets that are intended to be
maintained indefinitely whereby depreciation charges are
replaced with charges in an amount that provides an
allowance for renewals equal to the present value of the
renewal expenditure needed over a reasonable planning
period to bring the fixed assets up to a defined standard
of service and repair to maintain them at that standard’.
Renewals accounting is accepted in some, but not all,
jurisdictions for external financial reporting. In New
Zealand, for example, where accounting standards for
infrastructure is in existence for over a decade, the renewal
accounting method permitted by GASB 34 is not acceptable.
The Steering Committee on National Performance
Monitoring of Government Trading Enterprises in New
Zealand rejected renewals accounting, asserting that ‘it
does not result in the provision of information that is
relevant to the assessment of GTE performance and financial
position’. The N.S.W. Local Government Asset Accounting
Manual rejected renewals accounting as an acceptable
alternative to depreciation method arguing that the service
potential for most assets is, for practical purposes, used
up or lost and thus has to be replaced (Walker et al. 2000).
RATIONALE AND SOUNDNESS
PROVISIONS
OF THE
GASB 34
The reporting requirements of GASB 34 are intended to
improve the accountability for public investments in
infrastructure by enabling the users to determine whether
current year revenues were sufficient to cover the cost of
current year services, and to determine whether the
government’s financial position improved or deteriorated
as a result of the year’s operations. This will enable investors
and bond rating agencies to assess the governments’ ability
to repay their debts and support their service obligations.
Another benefit relates to the intergenerational equity.
Most of the infrastructure projects are funded through loan
finance. However, the projects last for a long time after
the loan is repaid. If the costs of infrastructure investments
are to be borne by the generations benefiting from them,
it is necessary to take into account whole-of-life expenditure
on asset maintenance, not just the amount of loan
instalments paid.
Yet another advantage of reporting infrastructure assets
is that it will provide a basis for securitization of these
assets (Dornan 2000). The identification and valuation
requirements of GASB 34 will enable SLGs to securitize
their infrastructure assets for issuing bonds to pay for the
costs of implementing asset management systems, and
rehabilitating infrastructure assets.
ACCRUAL ACCOUNTING: A SQUARE PEG
ROUND HOLE?
IN A
Application of accrual accounting for infrastructure assets
of SLGs appears deceptively logical at the outset because
of the accounting practices followed for such assets by the
business sector. However, there is a fundamental difference
between private property owned by business entities and
community assets owned by SLGs. In the case of private
property, the owner has the right to exclude others from
use except in return for value received. In the case of
community property, each individual in the community
has a right not to be excluded, and the SLG has a duty
to make the asset available and accessible to the public.
Therefore, as noted by Sunder (1999), there are legitimate
economic reasons to expect that the control systems that
work effectively in private-good organizations will not
necessarily function well in public-good organizations.
Internationally, infrastructure accounting for governmental entities is largely based on the experience of private
sector entities with such accounting. The International
Public Sector Accounting Standards (IPSASs) are an
adaptation of the standards issued for the private sector
by the International Accounting Standards Committee
(IASC). The preface to the IPSASs makes this clear: ‘As
most IPSASs are based on IASs, the IASC’s Framework
for the Preparation and Presentation of Financial Statements
is a relevant reference for the users of IPSASs’. However,
Pallot (1997) surveyed the characteristics of public sector
infrastructure and concluded that the nature of most
infrastructure lies outside the private sector experience.
The concept of depreciation on infrastructure assets is
of limited relevance for SLGs. Sunder (1999) noted that
depreciation serves three important purposes for business
organizations. First, it helps estimate the full cost of
production that can be used for pricing decisions. Secondly,
it helps compute the residual surplus (that is, net income)
by providing an opportunity cost of the services provided
by fixed assets. Finally, it is an important inducement
device for the managers to make production–investment
decisions that are in alignment with the interests of the
stockholders. Since managerial compensation is directly or
indirectly (through stock options) dependent on net income,
the managers would not invest too much in assets because
the depreciation thereof would reduce the net income, and
they would not invest too little either because of its likely
adverse effect on revenue generation.
None of the reasons above apply to governmental
organizations. Inclusion of depreciation (and other fixed
costs) to arrive at full cost can result in sub-optimal
production decisions, especially in the short run. Secondly,
computation of full costs has limited utility for SLGs
because many public goods are not sold to customers at
a price. In fact, in the case of SLGs, productive activity
is intended to provide a service that will either be given
free or intentionally offered at a price below the cost. Even
for the priced services of the SLGs, allocation of depreciation
costs to different services or departments is difficult. Thirdly,
there is no residual claimant (stockholder) in such
organizations, and therefore computation of residual surplus
serves little purpose, if any. Indeed, as noted in GASB 1,
‘the governmental fund measurement focus is on
determination of financial position rather than upon net
income determination’. Finally, governing bodies, not the
hired managers, make the investment decisions in the
governmental organizations. The emphasis on accountability
and stewardship role played by governmental officials is
in diametric contrast to private sector entities where
stockholders elect a board of directors to monitor operating
and financial activities.
To preserve the operating capability of governmental
entities and to help them make sound pricing and production
decisions, depreciation needs to be recorded using the
current replacement costs of infrastructure assets, not their
historical costs. The determination of replacement costs
for SLGs is problematic. Many of the assets held by local
and state governments are either unique, or the organization
has such a dominant position in the market that its actions
largely determine the exchange value of the asset. In either
case, no meaningful valuation can be placed on these
assets. The reliability of such valuations would be
questionable and the cost, complexity, and effort involved
in obtaining and reporting them would be very high.
This leaves only two economic purposes of calculating
and reporting depreciation in the governmental sector:
computing the full cost of the governmental sector and
facilitating production decisions of the public sector
managers. Let us examine these further. Pricing and
production decisions based on historical costs—which, in
the case of infrastructure assets, could be several decades
or even centuries old—can only be expected to be
uneconomic. The use of historical costs frustrates the
objective of preserving the operating capability of
governmental entities.
Preparer Difficulties in Implementing Accrual
Accounting for Infrastructure
The recordkeeping involved in applying traditional fixed
asset accounting and reporting to infrastructure assets is
deemed formidable by many governments. Determination
of their replacement costs, which will serve some economic
purposes, is problematic and unreliable, as noted above.
The replacement cost valuation does not justify the cost,
complexity, and effort involved in determining the
replacement costs.
Taking the inventory of assets and their initial valuation
could be a challenge. GASB 34 responded to this concern
by allowing an extended adoption window. All governments
have a minimum of two years to adopt GASB 34, and
smaller governments have been given two more years to
begin following the provisions of the statement. Also, SLGs
have four additional years for reporting existing
infrastructure assets (acquired since 1981) and SLGs are
exempted from such retroactive reporting. Only those
assets acquired or constructed after the implementation
date would need to follow the provisions of GASB 34 for
such governments.
For infrastructure built under a cooperative agreement
with another government (foe example, regional authority
or two-state authority), the allocation to each government
is likely to be complex and contentious.
The prospects of securitization might appear appealing
to SLGs at the outset. However, many of the existing
infrastructure assets—those acquired before 1981—are
not required to be reported in the statement of financial
position and hence would not provide the securitization
benefit. Even for the assets reported in the financial
statements of SLGs, one needs to note that most
infrastructure assets are very large, indivisible, heterogeneous, and difficult to transfer. Finally, the historical
cost of such assets presented in the financial statements
will be of little use in deciding the market price of the
securities represented by such assets.
User Benefits from Accrual Accounting
While the accrual accounting for infrastructure might be
beneficial to the creditors and bond rating agencies, its
utility for other users appears quite limited.
Whether SLG will indeed make a transition to accrual
accounting is uncertain. There is no enforcing authority
for the GASB standards analogous to SEC (Securities
Exchange Commission) for the FASB (Financial Accounting
Standards Board) standards. Therefore, compliance with
GASB 34 or with IPSASs is voluntary. Previous attempts
to make financial reporting of SLGs more akin to that of
private sector businesses have not yielded much success
in the US. GASB 11 that addressed measurement focus
and basis of accounting for governmental financial
statements was indefinitely postponed by the issuance of
GASB 17. As a result, no government implemented GASB
11 and the GASB reopened its financial reporting project
that culminated in GASB 34.
Governments are only required to capitalize infrastructure
assets acquired—or on which significant costs were
incurred—since 1981. Only the major infrastructure fixed
assets are required to be capitalized retroactively. And they
have two more years to do it. Depending on when the
entities make the transition to the provisions of GASB,
and the options chosen for transition, the comparability
of governmental financial statements will be impaired for
several years of the phase-in period. Given that historical
costs are used, SLGs or citizens cannot use such data to
demand rate adjustments.
A Preferred Option: Additional Non-financial
Disclosures
Whereas switching to accrual accounting is suggested as
a panacea to serve the needs of users, it is not one indeed.
Appropriate and adequate accounting for state and local
governmental units involves a far more complex set of
interrelationships, to be reported to a more diverse set of
users with a greater variety of interests and needs, than
exists in business accounting and reporting (Mautz 1981).
Financial statements based on accrual accounting are still
limited to data that are both historical and financial. Such
data is often not responsive to the decision maker who
also need forward-looking and non-financial information.
Experience indicates that financial data must be
supplemented by non-monetary quantitative and qualitative
information to aid decision-usefulness of the users. Van
Daniker and Kwiatkowski (1986) noted that for eight out
of the nine issues about which users seek information,
engineering information was preferred ahead of other
forms such as historical cost, replacement cost, budget to
actual comparison, and financial plans. Such information
sheds additional light on what is necessary to maintain or
upgrade system functionality, identifies the potential risk
of systems failure, and states the assumptions upon which
these assessments are based.
The condition of the infrastructure managed by the
governments is a key indicator of their operational performance. Given concerns about the disruptions caused in
recent years by system failure, it may be possible for
descriptions of infrastructure condition to refer to the
extent to which systems incorporate redundancy or other
safeguards against such risks. Users of reports on infrastructure are likely to be concerned most about the physical
condition of those assets, and proposed or projected cash
flows associated with their use, repair, or modification as
well as qualitative information concerning assumptions
made about system functionality requirements. As noted
by Keenan (1997), providing the information about deferred
maintenance as supplementary disclosures gives a more
complete picture of the government’s financial position
and performance.
Another important issue is to whether, and how, to
report the loss, if any, in the future service potential of
infrastructure assets. The dire consequences for communities of failing to maintain infrastructure adequately
is an argument for providing users with information about
changes in the physical condition of these assets, or about
their level of deferred maintenance.
Arguably, presenting the physical condition of the
infrastructure assets in a user-friendly format will be a
challenge to SLGs. Some heartening progress is, however,
being made in this direction. While comparable and
consistent methods to disclose qualitative information such
as engineering details are not easy to specify, frameworks
have been developed (Walker et al. 2000, for example) for
presenting, in summary form, key engineering information
about two of the major categories (sewerage systems and
water supply) of infrastructure for SLGs.
CONCLUSIONS
SLGs throughout the world are wrestling with the issue of
appropriate accounting and reporting of infrastructure
assets. In many cases, standard setters have embraced
accrual accounting for infrastructure assets as a part of the
larger efforts to institute better accountability regimes and
improved governance in the public sector. While such an
approach appears sound at the outset, it is fraught with
several conceptual weaknesses, and significant implementation difficulties for the SLGs.
Whether the infrastructure is adequately maintained is
not apparent from the disclosures currently provided in the
governmental financial statements. Walker et al. (2000)
suggest that a tally of investment in the infrastructure and
of the amounts required to keep it operational would be
critical for the policy makers within government to be fully
informed.
While infrastructure accounting for SLGs is a recent
development in the US, the experience in New Zealand
is instructive. A number of its councils started valuing
infrastructure assets and reporting them in the statement
of financial position as early as 1991. However, Pallot
(1997) observes that nearly seven years later, there remains
a diversity of practice in accounting for infrastructure
assets. There are more questions than answers in the field
of infrastructure accounting, despite the recent issuance
of accounting standards. While accrual accounting appears
to have significant costs and limited incremen-tal benefits,
additional non-financial disclosures have the potential to
enhance the usefulness to decision makers.
6.5 CRISES IN THE THE GOVERNANCE OF FINANCIAL INFRASTRUCTURE
Samir K. Barua
At the beginning of industrialization in the developing
countries, financial markets were inadequate to meet the
demands placed on them. This justified some form of
government intervention. However, extensive directed credit
programmes at subsidized interest rates proved an inefficient
way of overcoming market failures and redistribution of
income. Macroeconomic instability, combined with credit
and interest rate controls, made matters worse. In July
1991, India, faced with the possibility of having to renege
on its international financial commitments, had to urgently
airlift 20 tonnes of gold to London to save its prestige in
the global financial arena. The crisis of 1991 gave birth
to the structural adjustment and economic liberalization
programme of the 1990s to restore macroeconomic stability,
both on the internal and the external fronts. The performance
of the Indian economy since the crisis has been
characterized by growth and increased levels of inflow of
foreign capital.
The Indian experience is yet another example of the
thesis of ‘challenge-and-response’ proposed by the famous
historian, Arnold Toynbee (1956), to explain the genesis and
growth of civilizations. Toynbee observes that ‘a society
. . . is confronted in the course of its life by a succession
of problems’ and that ‘the presentation of each problem is
a challenge to undergo an ordeal’. Civilizations either emerged
stronger or perished depending on how successfully they
responded to these challenges. Economic reforms too are
invariably triggered by grave economic crises and the degree
of success with which the crises are overcome determines
the subsequent performance of an economy. A decade after
the reforms began in India there is reasonable evidence that
there have been gains from the reforms. These gains have
been realized despite hiccups in the reforms process over
the years due to misguided political arithmetic.
Perhaps the biggest success story of reforms has been
the progress made in the financial sector. This has been
possible because of the creation and modernization of the
financial infrastructure. Since this phrase may have various
interpretations, it needs to be defined more precisely. The
word infrastructure typically conjures up images of roads,
bridges, ports, power plants, and dams—all large physical
structures. Financial infrastructure, however, consists of
intangible entities such as securities markets, foreign
exchange markets, financial institutions, investment
institutions, mutual funds, investment banks, commercial
banks, and non-banking finance companies. In addition,
it also includes the regulators in the financial sector such
as the Reserve Bank of India (RBI), the Securities and
Exchange Board of India (SEBI), and the Ministry of
Finance of the Government of India. Governance of financial
infrastructure, therefore, involves governance of the
operations of these entities. This is the sense in which
financial infrastructure has been interpreted in this paper.
FINANCIAL INFRASTRUCTURE: A BRIEF REVIEW
The financial infrastructure of the country was very much
centralized and archaic, till the reforms began in 1991. Its
governance was divided between the Reserve Bank of India
and the Ministry of Finance, the former governing the
banking sector, non-banking finance companies, and the
debt and foreign exchange market and the latter governing
the financial institutions, investment institutions, and the
stock markets. The limited freedom of decision making
given to the entities implied that there were no explicit
penalties for inefficient utilization of infrastructure.
However, the deficiencies of the insular nature of financial
infrastructure were realized after the 1991 financial crisis
and the 1992 securities scam. These crises led to significant
additions to the financial infrastructure in the 1990s. The
reforms resulted in:
• Setting up of the Securities and Exchange Board of
India (SEBI) in 1992 to oversee the operations of securities
markets
• Setting up of private mutual funds to channelize
savings into securities markets
• Setting up of a modern stock exchange, the National
Stock Exchange, with screen-based trading and computerized
settlement system
• Setting up of primary dealers and subsequent creation
of a network of dealers in government securities to activate
the government securities market
• Setting up of a network of dealers in foreign currency
• Setting up of National Securities Depository Limited
(NSDL) and subsequently Central Depository for Securities
Limited (CDSL) for electronic recordkeeping of holding
and transfer of securities and creation of a network of
depository participants
• Setting up of a large number of private banks to
introduce competition in the banking sector
• Constitution of Disinvestment Commission and
subsequently Department of Disinvestment to manage
privatization of Public Sector Undertakings (PSUs)
• Modernization of stock exchanges through the
introduction of computerized trading and settlement system
in all the major exchanges and dematerialization of securities
• Expansion of network of brokers dealing in securities
through use of satellite for on-line trading in stock exchanges
from all parts of the country
• Modernization of the settlement system for
government securities through computerization of operations
of the Public Debt Office (PDO) of the RBI.
The creation of these and similar facilities required
changes in the rules and regulations that governed operations
of various segments of the financial sector. Unfortunately,
the process followed for framing the right set of regulations
has by and large been quite unscientific and ad hoc, with
little prior application of mind. That has generally resulted
in continual changes in the regulatory structure, thereby
reducing the benefits derived from the infrastructure created.
As would be apparent later, many issues in governance of
the financial infrastructure arise from poor regulations.
Some of the regulations were framed without taking into
account the cost of prudential supervision required for
observance of the regulations. Since penalties arising from
non-observance of regulations still tend to be mild, and
easily challengeable in the courts of law, there have been
several instances of breach of regulations. As a result, the
financial sector has witnessed several scams/crises since
the onset of liberalization in 1991. Three major crises have
been analysed in the paper. The analysis provides the basis
for enunciating the key issues in governance of financial
infrastructure and the measures required for improvement.
The Three Crises
The financial sector has experienced several scams/crises
in the last decade. Since it would be infeasible as well as
repetitive to discuss all of them, it was decided to focus
attention on three scams/crises that together provide a
basis for covering most of the issues in governance of the
financial sector. Two of these crises occurred recently,
while the third occurred almost at the beginning of the
reforms process. The three scams/crises chosen for detailed
analysis and discussion are the following: (i) the securities
scam of 1992; (ii) the Madhavpura Mercantile Cooperative
Bank (MMCB) Scam of 2001; and (iii) the US-64 crisis
of 2001.
The above three events are described and discussed in
detail, identifying the fault lines that precipitated the events.
The events are then analysed to crystallize the issues that
arise from the point of view of governance of financial
sector. The issues discussed are brought together for a
comprehensive examination in the last section to spell out
the steps required to improve governance of the financial
sector in the country.
THE SECURITIES SCAM
OF
1992
The 1992 securities scam was in essence a diversion of
funds from the banking sector, in particular from the interbank market in government securities to the stock market.
The main motivation for the diversion was the significantly
higher cost of finance in the stock market as compared
to the cost of finance in the formal money market (the
inter-bank market). While the returns in the money market
at that time hovered around 18–20 per cent, the returns
from financing of carry-forward positions in the stock
market (that is, badla financing) were around 35–40 per
cent. The difference was much higher than what could be
justified on the grounds of higher risk in the informal
market. The reason for the excessive returns prevailing in
the badla market was the artificial segmentation of the
formal and the informal money markets. The stage was
therefore set for anyone who could find a way of breaching
the ‘Chinese’ wall that separated the two markets and
arbitrage between the two. The scam was essentially a
breach of this wall.
The Macro Environment
It is necessary to recall the macroeconomic environment
prevailing in 1991–2 to understand the setting for the
scam. The process of economic liberalization had started
in earnest after the jolt the nation received from the
transfer of 20 tonnes of gold into the vaults of Bank of
England as guarantee against urgent short term borrowing
from the Bank of Japan to ward off defaulting on international
financial commitments. The first task of the new government
that came into power in the summer of 1991 was to
strengthen the external sector. This sector therefore witnessed
major reforms. The immediate fallout of the balance of
payments crisis was the use of Public Sector Enterprises
(PSEs), particularly the oil sector PSEs, to raise resources
in the international markets. While this brought in the
much-needed dollars to the country, the measure burdened
the PSEs with huge interest costs arising from excess cash
holding. The government therefore designed a Portfolio
Management Scheme (PMS) under which the PSEs were
allowed to park the excess cash with nationalized banks
to earn decent returns to meet the interest costs. The banks
in turn asked for and obtained relaxation in the norms for
investment to deal with the sudden rise in their liquidity.
The banks also started competing for these funds by
offering higher returns. They therefore had to find ways
of deploying the fund to earn returns higher than what they
had offered to the PSEs. Such returns were not available
in the formal money market where banks traditionally
deploy excess cash. This is when the brokers who were
operating in both the formal and the informal markets
became very useful to find an innovative way of deploying
funds from the formal money market to the informal
money market to earn higher returns. The stock market
was booming—in less than a year, from May 1991 to
February 1992, the stock market index (BSE-30 or the
SENSEX) had risen from a level of below 1000 to about
4500. The steep rise in the index resulted in an exponential
growth in the demand for funds required for supporting
the long positions in the market. Investors were willing to
pay high interest rates for these short-term funds since the
rise in prices of shares more than compensated the cost
of funds. This cultivation of brokers by the banking sector
is what finally culminated in the securities scam.
The Modus Operandi
The mechanism for transfer of funds from the formal to
the informal market was the ready forward (RF) deal,
which in essence is a secured short-term loan from one
bank to another. Ready forward deals are known as repo
(repurchase option) transactions in other countries. These
are used by the banking sector to manage short-term
liquidity. In fact, the RF deal is not a loan at all. The
borrowing bank (Bank 2) sells (government) securities to
the lending bank (Bank 1) while simultaneously agreeing
to buy the securities back at a slightly higher price at the
end of the agreed period. The difference in the buy and
sale prices is the cost of short-term borrowing. The
transaction essentially serves the short-term needs of both
banks—while Bank 2 needs cash, Bank 1 is looking for
deployment of excess cash for the period. In addition to
facilitating management of cash, the RF deals provide the
much-needed liquidity to the government securities markets.
It is clear that if the above process is strictly followed, then
the RF deals could not have been used for diversion of
funds. The following modifications in the process were
introduced imperceptibly to perpetrate the scam:
• As the importance of brokers rose with the introduction of PMS, the settlement process in the government
securities market became broker intermediated, that is,
the delivery and payments started getting routed through
the brokers instead of being done directly between
transacting banks;
• Soon after the above procedure got established, the
brokers were able to persuade the banks to credit the
monies routed through them to their accounts for a few
days, though the account payee cheques were drawn in
favour of banks;
• While the above two steps just transformed the loan
to the borrowing bank to loan to the intermediating broker,
the loan still remained a secured loan. Very soon, however,
the brokers were able to persuade the lending bank to
dispense with security for the loan or to accept worthless
pieces of paper as security.
It would be instructive to understand why these
aberrations could be introduced in the processes since they
have a significant bearing on issues in governance.
Banks are required to invest a significant portion of
their deposits in designated securities to ensure adequate
liquidity of assets. These are known as SLR (Statutory
Liquidity Ratio) securities. These securities are essentially
government securities that yield low returns. The regulation,
however, exempted funds borrowed by a bank from SLR
requirements. There was, therefore, huge incentive for a
bank to do business using borrowed funds through repo
transactions. In such an environment, the brokers came
in handy, as they provided an opaque process, where the
identity of the counter-party (a bank) was not even revealed
or known. Slowly, as the size of the repo market grew, the
brokers started taking positions in their own account. The
process of settlement in the government securities market
started resembling the process of settlement in the stock
markets, where both the payment and delivery of securities
are broker intermediated.
Usually, an account payee cheque is deposited only in
the name of the payee mentioned on the cheque. However,
exceptions were being made even before the scam occurred
because the system of clearing of cheques was faster for
inter-bank transfers. Privileged customers were routinely
allowed to credit account payee cheques drawn in favour
of their banks into their own accounts to cut down the
clearing time by upto two days. Therefore, corporate
customers typically obtained a cheque in the name of their
bankers rather than in their own names, thereby reducing
the interest lost for the clearing period. The brokers were
quietly accorded a similar facility by the banks, as they
had in any case become major business partners of the
banks.
The third aberration of eliminating the security itself
was the most crucial. The following three approaches were
adopted to achieve this:
• Some banks were persuaded to part with cash without
receiving securities, with brokers paying interest at a rate
higher than the rate prevailing on the RF deals. The bank
management may have been tempted to adopt this route
to bolster the bottomline. As long as the scam lasted, the
banks benefited from higher returns on their lending.
• The second route was replacing the securities with
fake Bank Receipts (BRs). The BRs had come into existence
in the market to avoid actual transfer and re-transfer of
the securities underlying the RF deals, due to the inefficient
functioning of the RBI’s Public Debt Office (PDO), that
acts as the registrar and the transfer agent for government
securities. Legally, the transfers required submission of
Subsidiary General Ledger (SGL) forms to the PDO to
effect the changes in ownership of securities. The lethargy
of the PDO led to the ‘market practice’ of using BRs as
evidence of transactions. The BRs could simply be torn
and thrown away at the expiry of the RF deal period by
the lenders, thereby eliminating the need for actual transfer
and re-transfer of securities through the inefficient process.
• The third route was to forge the securities themselves.
The PSU bonds, typically, were represented by just the
allotment letters. Outright forgery, however, accounted for
only a small part of the total funds misappropriated.
Of the three, use of fake BRs was the most rampant.
The brokers used fake BRs, signed by colluding bankers,
to obtain unsecured loans from banks.
The Governance Issues
The scam was made possible due a complete breakdown
in the governance systems within the commercial banks
as well as the RBI. The governance system in the commercial
banks essentially relies on the following two mechanisms
for prevention of frauds:
Separation of Functions: The three different aspects of
transactions in securities, namely, dealing, custody, and
accounting are carried out by separate departments. Dealing
involves the decision to buy and sell; custody involves
receiving and delivering securities; and accounting involves
maintenance of the investment accounts of the bank and
reconciliation with the SGL account of the bank maintained
by the PDO of the RBI. Underlying the separation of
functions is the notion of double or multiple custody,
which ensures that if a fraud is to be committed, two or
more persons would have to collude. The need for such
collusion considerably reduces the chances of frauds.
Counterparty Limits: Whenever an RF deal was done on
the basis of BRs, the lending bank had to contend with
the possibility that the BRs might not be backed by adequate
securities. In effect, the bank could therefore be giving an
unsecured loan. The Banks therefore operated with credit
limits (counterparty limits), based on the creditworthiness
of the borrowing bank. The total exposure to the borrower,
at any time, was limited to this amount.
The scam revealed that either these basic principles of
governance did not exist or were ignored by several banks.
The governance system at the PDO required
reconciliation at the aggregate level and at the disaggregated
level (for each bank) of the SGL securities of each type.
This simple control mechanism was not being operated
efficiently by the PDO. Even if the SGL form sent by the
seller bounced due to inadequate inventory of securities,
the information to the buyer was intimated leisurely—
through a letter sent by ordinary mail. It was not uncommon
for transacting parties to receive confirmation or otherwise
of the transaction from the PDO after three weeks from
the date of transaction. The buyer in the meantime, acting
in good faith, may have sold the securities purchased. The
laid-back attitude of the PDO implied that at any point
in time there would be a large volume of unreconciled
transactions. This uncertainty was exploited to the hilt.
The RBI is also expected to carry out on-site inspections
and audit the investment accounts of banks. These were
not quite comprehensive and the RBI did not act decisively
against irregularities discovered either during such
inspection or in the SGL accounting.
Other Aspects of the Scam
There were several other aspects of the scam that have a
bearing on governance of financial sector. During the
period from September 1991 to June 1992, the government
raised the coupon rate on fresh borrowing three times. On
each occasion, the rate was raised by 0.50 per cent,
thereby raising the rate from 11.50 per cent to 13 per cent
over the period. A hike in rate for fresh loans leads to a
fall in the prices of old loans so as to bring the yields on
the old loans in line with the new rate. Anyone with
advance information about the rate hikes could benefit
immensely by short selling long dated securities (that suffer
the maximum decline in values) just before the hikes and
buying them back immediately after the rate hike. While
it will be impossible to prove conclusively that some
players in the market had advance information on the rate
hikes, there are reasons to believe that this information
was selectively made available to a few players who made
a killing on the basis of the information.
Window dressing of banks’ financial performance was
also rampant in those days. Banks were permitted to carry
their investments in securities at cost. This led to the use
of a subterfuge, whereby a bank could generate profits
literally from thin air. The mechanism for achieving this
is best conveyed through an illustration.
Let us say Bank ABC holds two securities X and Y, each
purchased at Rs 100. Because of a rise in the interest rates,
suppose the securities are selling in the market at Rs 97
and Rs 99 respectively. The bank sells security X to a
broker at Rs 102 and buys security Y from the same broker
at Rs 104, receiving and paying thereby Rs 5 more than
the prevailing prices. This ensures that neither the bank
nor the broker incurs a loss on the two transactions taken
together. As a result of the transaction, however, the bank
would be able to show an accounting profit of Rs 2 on
sale of security X—since X is sold at a price of Rs 102
and it was bought at a price of Rs 100. The higher price
paid for security Y is inconsequential since that shows up
on the books at cost.
Such window dressing had become quite common. The
brokers were useful as they were willing to accommodate
such ‘spurious’ deals. While the broker typically did not
make any money on such transactions, he put himself in
the good books of the bank’s management and was in a
position to extract favours from the management in variety
of other ways, such as obtaining unsecured loans.
MMCB SCAM
Madhavpura Mercantile Co-operative Bank (MMCB) is
an urban co-operative bank. Such banks are essentially
local banks set up on the co-operative principles. They are
expected to cater essentially to the financial needs of the
members. There are over 2000 co-operative banks in the
country, with a deposit base of over Rs 70,000 crores.
Maharashtra and Gujarat together have more than 50 per
cent of the banks in number and about 75 per cent of the
deposit base, reflecting the strength of the co-operative
movement in the two states. The other two states that too
have a vibrant co-operative banking sector are Karnataka
and Andhra. The co-operative banks are an extremely
important part of the financial infrastructure of the cooperative sector in the country.
Mechanics of the Scam
The MMCB scam is yet another instance of diversion of
funds from the banking sector to the stock market à la
the securities scam of 1992. MMCB started financing the
stock market operations of Ketan Parekh, the latest (now
fallen) Big Bull of the Indian stock markets. The modus
operandi of financing Ketan Parekh was through a simple
subterfuge that is best understood through the following
illustration.
You open one current account in the name of company
P in bank A and another current account in the name of
company Q in bank B. Now, present a pay-order (issued
by bank A) of company P to bank B and have it purchased
by bank B and credited instantly to the account of company
Q. It takes a few days—and the period can be lengthened,
if required, by greasing the palms of the concerned officials
in the bank—before the pay-order is presented by bank
B to bank A. You keep track and on the day of presentation,
you present a pay-order (issued by bank B) of company
Q to bank A and have it immediately purchased by bank
A. The cycle can be repeated again and again, and you
would enjoy few days’ credit every time. All you need is
accommodation from bank A to write the first pay-order
for you without adequate or any balance in the account
of company P. You write cheques against the money provided
by bank B when it purchases the pay-order from bank A.
Neither of the banks actually loses out since you would
be paying them the fee for discounting the pay-orders and
giving you immediate credit. However, a fraud is committed
when the pay-order is issued by bank A, without adequate
balance. Bank B has merely been imprudent in allowing
cheques to be issued without first collecting the amount
against the pay-order purchased from bank A. However,
bank B, may be excused if you happen to be Ketan Parekh,
the demi-god of stock markets, who has been a good client
of the bank for years! A pay-order of a mere Rs 137 crores
is a pittance, given the scale of his operations. Banking
after all is business based on relationship and trust carefully
built over a long period.
The Need for the Scam
The settlement procedure at the stock exchanges needs to
be understood to appreciate the raison d’être for the above
set of transactions. The stock exchanges have what are
known as pay-in and pay-out dates for each settlement
cycle. The pay-in date precedes the pay-out date by two
days. On the pay-in day, the buyer has to make the
payment for the purchases made and on the pay-out date
the sellers receive the monies due to them. An operator
therefore needs working capital, for two days, even if the
aggregate monetary value of his sales is greater than the
aggregate value of his purchases. Using the above method,
what Ketan Parekh did was to generate this working capital
required for his market operations. However, he needed
two banks to do the subterfuge—MMCB (which would be
bank A in the example above) that was willing to commit
the fraud and Bank of India (which would be bank B in
the example) that was willing to be lenient and had the
requisite resources to fund his requirements.
The Governance Failure
The issue that has exercised the passions of lakhs of
depositors is the monumental negligence on the part of the
regulators of co-operative banks—the State and the Central
Registrar of Co-operatives and the RBI. Each regulator
successfully got out of trouble by blaming the scam on the
‘dual control’ of the co-operative banks. A closer examination
however reveals that signs of wrongdoings were available
to both the regulators well before the scam of such
magnitude came to light. In its inspection report of 1998,
the RBI had pointed out irregularities in the management
of operations of MMCB. And yet, because of the political
patronage enjoyed by the management of the bank, no
corrective action was initiated by either of the regulators,
each secure in the knowledge that in case of an eventual
fraud, they would be able to get away by blaming it on
‘dual control’! There is little doubt that the scam was the
outcome of negligent and perhaps deliberate regulatory
bungling. After all, which agency would like to take up
cudgels against the might of political interference?
US-64 CRISIS
As the name makes it amply clear, Unit Scheme-64 (US64) was created in 1964. The scheme was conceived by
the government to mobilize savings from the household
sector for the industrial sector of the economy. The
management of the scheme was entrusted to the Unit Trust
of India (UTI), an autonomous investment institution
created through an act of parliament. Over the years, UTI
became a well-respected and important part of the financial
infrastructure of the country. Though UTI created several
schemes subsequently for the purpose of channelizing
savings, no scheme even came close to the level of success
that was achieved by US-64. The scheme, and through it
UTI itself, became synonymous with how public institutions
can successfully serve the needs of millions of Indians—
in this case, by providing decent returns on their hard
earned savings.
Absence of Supervision
The high profile of UTI was used by the management of
UTI to successfully counter the repeated attempts by the
Securities and Exchange Board of India (SEBI), to bring
UTI under the purview of its supervision. SEBI was
established in 1992 to supervise the functioning of stock
exchanges and the associated intermediaries, including
mutual funds. Though UTI essentially functions as a mutual
fund, it took refuge in the fact that it was created well
before SEBI was established and that it was created through
an Act of Parliament to stay out of the clutches of SEBI.
Operating Policies and Crisis
Since UTI is not covered by the regulations that govern
the mutual fund industry, it is not bound by the disclosure
requirements of the industry. As a result, even today, the
Net Asset Value (NAV) (the market value of the assets) of
the units of US-64 is not known with certainty. One of
the key reasons for the success of US-64 has been the
liquidity of the units. Till the imposition of the ban (from
2 July 2001), UTI provided continuous two-way quotes,
for sale and repurchase of units, without any restriction
on the number of units tendered or demanded. The sale
and repurchase prices were revised every month, essentially
to account for the dividend payable on the units in July
every year. Since the scheme was outside the purview of
mutual fund regulations, UTI was free to set the sale and
repurchase prices of units at levels that were unrelated to
the NAV. This unscientific pricing policy is what led to
the crisis facing the scheme today (August 2001).
The easiest way to understand the crisis is through a
simple illustration.
Let us assume that US-64 has a corpus of just 2 units
of Rs 10 each. One unit is held by Mr A and the other
unit by Mr B. The repurchase and sale prices for each unit
are say Rs 13 and Rs 13.25, respectively. Now suppose,
Mr B sells his unit to UTI at Rs 13, then the corpus of
the scheme would decline to Rs 7. After that, if Mr A too
tenders his unit, then UTI would have no money to
repurchase his unit at the declared price of Rs 13, since
the fund available would be only Rs 7. Every repurchase
at inflated prices thus adds to the losses of those who
remain invested in the scheme. The losses do not occur
only if the number of units sold exceeds the number of
units repurchased.
The ongoing crisis was triggered by the decline in the
value of equities after the discovery of the scam involving
the MMCB (Madhavpura Mercantile Cooperative Bank)
and other banks. As a result of the decline in equity prices,
the NAV of US-64 declined well below the repurchase
price. This generated an intense redemption pressure on
the scheme, and every repurchase at a price well above
the NAV compromised the financial viability of the scheme
further. Unable to stop the avalanche of redemptions, the
UTI Board announced, in June 2001, suspension of
repurchase and sale of units for an indefinite period. The
ban affected an estimated 20 million retail investors as the
liquidity of their investments disappeared overnight.
The nationwide uproar found an echo in the Parliament
where the proceedings of the house were held up for several
days on the issue. There were allegations galore of how the
interests of investors had been compromised by UTI because
of political and bureaucratic influences on its investment
decisions. One of the celebrated cases that resulted in the
forced resignation of the chairman and two executive
directors of UTI, and start of an investigation by the
Central Bureau of Investigations (CBI), is the investment
made by UTI in the equity of Cyberspace Limited. The
head-office of this company is located at Lucknow and was
allegedly inaugurated by the prime minister himself.
The finance minister categorically denied having any
knowledge of the impending crisis and the precipitate
decision of the board. A new chairman was appointed
hastily and the UTI board was directed by the government
to work out a mechanism to ensure liquidity of US-64.
Response to the Crisis
After considerable deliberations, the UTI board proposed
a scheme, whereby, beginning 1 August 2001, UTI would
provide the facility of repurchase of upto 3000 units of
US-64 from each folder. Starting with Rs 10 for the month
of August 2001, the repurchase price for a unit would
increase by 10 paise every month, till it reaches Rs 12 by
May 2003. In addition, the UTI board has decided to
make US-64 NAV based scheme, that is, align the repurchase
and sale prices with the NAV, from January 2002. The
seriousness of the situation is evident from the line of
credit for about Rs 3000 crores that UTI had to seek from
a consortium of banks (led by the State Bank of India) to
meet the likely redemption pressure on US-64 and pay
dividends on its other schemes.
The proposal is a recipe for bankrupting the US-64 even
further. Since the current NAV of the units is well below
Rs 10 (market’s assessment is that the NAV is about Rs
8.50), every unit purchased at the announced prices would
result in erosion in the corpus of the fund (as explained
in the illustration). The proposal would thus inflict heavy
losses on the hapless unit-holders who are ‘forced’ to stay
with the scheme since they hold more than 3000 units.
The proposal sets US-64 on the path to certain doom and
bankruptcy since under the prevailing situation there is
unlikely to be any fresh inflows into the scheme. The
limitations of the proposal are as follows:
• It robs Peter (the unit-holders who are forced to stay
invested in the scheme) to pay Paul (the exiting unitholders).
• It is unfair to 20 million retail unit-holders vis-à-vis
the corporate unit-holders who exited in the nick of time—
just before the ban was imposed on repurchases—because
of (alleged) access to inside information.
• Even if legally UTI is well within its rights to revise
the repurchase price downwards by over 30 per cent
overnight, the move is morally bankrupt.
• The lock-in forced on units beyond 3000 in each
folder violates the understanding conveyed over 36 years—
that UTI would always stand ready to repurchase the units.
• The insurance companies that are bailing out UTI
by buying large parcels of equity portfolio of US-64 are
engaged in ‘cherry picking’, that is, picking up the best
stocks, thereby leaving the portfolio of US-64 poorer in
quality. Since repurchase prices would continue to be
above the NAV, every repurchase would bleed the scheme
(there would be cash-outflow from the corpus).
The saying ‘those who do not learn from history are
condemned to repeat it’ is applicable to the crisis facing
UTI today. The crisis of 2001 is a repeat of the crisis that
occurred in 1998 when the NAV of US-64 units declined
well below the repurchase and sale prices of units. On that
occasion, the government bailed out UTI through an
infusion of Rs 3300 crores. It is evident that UTI did not
learn from that experience and the problem has recurred.
Looking back, UTI failed to use an excellent opportunity
to completely restructure the portfolio of US-64 and make
the sale and repurchase prices of the scheme NAV based
when the SENSEX crossed the 6000 mark in February
2000. Aligning the repurchase and sale prices now with
NAV would be blatantly unfair to the millions of small
investors who have been loyal to the scheme and bought
the units at prices well above the NAV. The solution
possibly lies in the government coming to the rescue of
the trust yet again.
The Larger Concerns
In the prevailing circumstances, there is a distinct possibility
of a psychological backlash from investors. Any hint of
further unfavourable developments for the economy or UTI
could trigger a run on UTI for redemption. Besides, since
it is clear that some time or the other in the near future,
UTI will have to liquidate its equity portfolio, to pay
interest, and repay the funds being provided by the banks,
there would be selling pressure in the market at every rise.
The equity markets would, therefore, stay depressed. It
would, therefore, be hardly surprising if the first NAV that
is announced by UTI in early 2002 (as promised by the
Board) turns out to be quite low—say Rs 5 per unit. Such
an announcement would most certainly knock the bottom
out of the equity markets. Thus the equity market today
is on a precipice—in an unstable equilibrium. The slightest
hint of trouble would send it tumbling downhill. The country
cannot afford such a situation. The uncertainty could lead
to a sudden, massive withdrawal of funds by foreign
institutional investors (FIIs). It would also have a significant
negative impact on the ambitious programme of divesting
government’s stakes in PSEs and the ability of firms to raise
resources from the market. The government should be
seriously concerned about these possibilities and take steps
to avoid such eventualities.
Governance Issues
The crisis raises several concerns about the manner in
which public financial and investment institutions that are
key constituents of the financial sector are managed in the
country. The incestuous relationship between the corporate
sector and these institutions raises suspicions about the
quality of decisionmaking and corporate governance in
these institutions. For example, in the case of UTI, while
Reliance had invested several hundred crores in the units
of US-64, the UTI had ‘obliged’ by buying large quantities
of shares of the Reliance group companies. As reported
in the press, these shares have typically accounted for over
15 per cent of the equity portfolio of US-64 scheme. Such
quid pro quo was evident when UTI acquired a large parcel
of Reliance shares (worth about Rs 1000 crores) some
years ago at a very high price. Given such close liaison
between UTI and the large corporations, there is little
reason not to suspect that at least some corporations may
have been quietly tipped off about the impending suspension
of redemption. They exited before it was too late, leaving
the 20 million retail investors to take the losses arising
from mismanagement of the scheme!
The forced resignation of the top management of UTI
for purchase of shares of a small, unknown company,
Cyberspace Limited, at inflated prices is a clear pointer
to the fact that many of the investment decisions made
were not in the interests of the unit-holders. The absence
of denial by the government lends credence to the allegation
that the head-office of Cyberspace, located at Lucknow,
was inaugurated by the Prime Minister. There are also
persistent allegations, that have again not been denied
unequivocally by the government, that shares of many
companies have been purchased by UTI due to political
pressures and interference from officials from the Ministry
of Finance and even the PMO (Prime Minister’s Office).
These are clear evidences of exceptionally poor corporate
governance practices in the management of the financial
It is amazing how the institutions never have to pay any
price in India for such clear breach of trust or down right
skullduggery. Removal of Mr Subramanyam, Chairman of
UTI, is hardly an adequate response to the fiasco. There
is a need for honest investigation to unearth the role played
by bureaucrats and politicians in the utter mismanagement
of funds entrusted to UTI by the common man. The fiasco
has after all affected 8–10 per cent of the country’s
population. There is an urgent need for complete
restructuring of the framework for governance of the
financial sector in the country. The opportunity should be
used by the nation to demand a thorough professionalization
of the functioning of not only UTI but all publicly funded
financial institutions.
LESSONS
FROM THE
SCAMS
It is quite clear from the exposition in the preceding
sections that the scams/crises were the result of both
erroneous operating policies as well as ineffective governance
structures. The broader issue is whether the right lessons
were learnt from these and whether measures were initiated
to revamp the operations and the governance of the financial
infrastructure to ensure its effective functioning.
Market Integration
One of the most important lessons from the scam of 1992
is that artificial insulation of closely related markets from
each other is counterproductive in the long run. Money
always seeks out the highest possible return, after due
adjustment for risks and liquidity. However, even almost
a decade after the scam, artificial barriers still exist between
the money market and the stock markets, between the
market for corporate securities and the market for
government securities, and between the formal and the
informal money markets. As a result, the market
infrastructure remains ineffective in guiding investment
choices and there are still pay-offs if funds could be
surreptitiously diverted from one market to another. It was
hardly surprising, therefore, that the MMCB scam occurred
in 2001, again involving diversion of funds from the
banking sector to the stock market. The fiat issued by RBI
to commercial banks to reduce their exposure to equity
markets after the MMCB scam is a retrograde step as it
accentuates the segmentation of markets. The need of the
hour is more effective prudential supervision and not a ban
on legitimate financial activity.
Over-regulation
Analysis reveals that very often scams/crises result from
over-regulation. The regulations of the money market in
1992 were such that legitimate and essential transactions
could not be put through openly, but had to be disguised
and camouflaged. The role of the brokers and some of the
banks as market makers was not recognized and they could
perform these functions only by subterfuge. The payment
and clearance systems were so antiquated that ‘alternate
systems’ had to be created for speedy transfer of funds and
securities. The net result of all these was total lack of
transparency in the operations of the money market.
Irregularities of all kinds were so common that no
suspicions were aroused even by highly irregular transactions.
One could even argue that some of the control systems
in the banks broke down because they were deliberately
allowed to weaken by both the commercial banks and the
RBI so as to facilitate normal transactions in violation of
the RBI’s own guidelines. While several steps have been
taken by the government to reduce the regulatory burden
of the market, the money markets continue to be excessively
regulated by the RBI.
Dual/Multiple Control
The old adage ‘everyone’s responsibility is nobody’s
responsibility’ is what resulted in the MMCB scam. The
urban cooperative banks are currently regulated by three
authorities: the central government, the state governments
(through the central and state registrars of cooperatives),
and the RBI. Instead of strengthening governance, such
multiplicity of regulators for an entity in fact undermines
prudential supervision. That is exactly what happened in
the case of MMCB. Each regulator expected the other
regulators to keep an eye on the operations of the bank.
The irony is that, if reports appearing in the newspapers
are to be believed, the RBI is planning to propose the
creation of a fourth regulator, an apex supervisory body,
consisting of representatives from the central and the state
governments, the RBI itself, and outside experts, for
governance of cooperative banks. It is obvious that either
we do not learn from our mistakes or such governance
structures are deliberately created so that the regulators can
explain away lapses in supervision by blaming each other
when the scams do occur.
Integrated Prudential Supervision
By their very nature, financial markets are highly interrelated. Crisis in one market, therefore, always creates
ripples of disturbances in the other markets. If different
regulators have jurisdiction over different markets, then
it is necessary for the regulators to evolve a well-coordinated
regulatory structure for effective prudential supervision. In
India, at least four regulators—RBI, SEBI, DCA
(Department of Companies Affairs), and the Ministry of
Finance—govern different aspects of functioning of financial
markets. The financial crises that have occurred in India
in the last decade, including the three discussed in this
paper, clearly show that the required degree of harmony
among regulators for effective supervision has not been
achieved. There is also a simmering turf war between the
regulators, particularly between SEBI and RBI. This has
immensely harmed the functioning and development of the
financial market infrastructure in the country. There is an
urgent need for improvement in the governance structure
either through better co-ordination or through a unification
of regulation under one super-regulator.
several other roles. It is banker to the central and state
governments, it is merchant banker to the governments—
helping governments to raise resources from the market,
it is a major player (operator) in both the primary and the
secondary debt markets and the foreign exchange market,
and it is the custodian, registrar, and transfer agent for
government securities. It is a promoter of and a major
shareholder in several entities in the financial sector. For
example, it recently promoted Infrastructure Development
Financial Company (IDFC) to give a boost to development
of infrastructure in the country. It holds majority stakes in
the largest commercial bank in the country, the State Bank
of India (SBI) and National Housing Bank (NHB—another
institution promoted by RBI). The multiplicity of roles and
responsibilities dilutes the efficacy with which RBI can play
the role of an impartial regulator and adjudicator of disputes.
The partiality shown by RBI to NHB and SBI while
investigating the 1992 scam drew considerable criticism
and undermined its authority as a regulator. A similar
approach to dealing with the MMCB crisis is also visible
in 2001. A regulator commands moral authority over the
regulated only if it is not only fair but is also perceived to
be fair. Therefore, for effective governance a regulator must
shed all roles that have the potential for creating a conflict
of interest while performing its regulatory function.
Regulators on the Boards of the Regulated
Both SEBI and RBI have nominees on the governing
boards of stock exchanges. The RBI has its nominees on
the governing boards of commercial banks, primary dealers,
and several other entities in the financial markets. Their
presence in the governing boards creates a strange situation
when these entities are found to have acted in violation
of the prevailing regulations. The regulators themselves
become morally responsible for the violations of the
regulations since they have their representatives on the
boards of these entities. In the present day and age, it
should be easily possible to use appropriate statistical
analysis along with information and communication
technologies to monitor the operations of the regulated
entities, from regulatory perspective, on a real time basis,
if required, without representation on the boards of the
regulated entities.
Multiple Role for the Regulator
Government’s Response
The Reserve Bank of India is one of the two major regulators
of financial infrastructure in India. It has jurisdiction over
a diverse set of facilities such as commercial banks, nonbanking finance companies, cooperative banks, debt markets,
foreign exchange markets, and several other financial
institutions. In addition to being a regulator, RBI plays
The ultimate responsibility for proper functioning of the
financial sector in the country rests with the government.
It is, therefore, necessary to examine the role played by
the government in establishing credible governance
structures. An analysis of government’s response shows
that the government has invariably panicked when faced
Box 6.5.1
SEBI Report: A Damp Squib
It took SEBI over six long months to finalize its second ‘interim’ report on the securities scam of 2001. The report runs into
(as per the press) impressive four volumes and 1500 pages. As of now, the report is not available in the public domain. However,
excerpts from the report have been released selectively to counter the bad publicity SEBI has been receiving from the conclusion
reached by a survey conducted by FICCI that investors have lost confidence in SEBI.
The report makes little progress over the first interim report that was brought out soon after the crisis struck the markets in
early March. It simply reconfirms what is already known. The three distinct strategies that were being adopted by the ‘bulls’
to support their long positions in the market were: (a) use of funds siphoned off from the banking sector, that has been flush
with funds, for a long time; (b) transferring positions from one market to another, taking advantage of the asynchronous settlement
cycles, and thereby avoiding having to take delivery of shares; (c) convincing the management of the companies whose shares
were being bought to finance the purchases.
There would have been no crisis had the markets kept going North, as was widely expected, after the presentation of the
budget. However, that was not to be. The ‘bears’ in the market knew that the ‘bulls’ were sitting on a pin-head. They were
extended to a point where even a slight downturn in the market could snap them. The onset of downturn in the world markets
and the ‘tehelka’ episode could not have been timed better for the bears, and not surprisingly the market caved-in.
The timing of the release of the report by SEBI is uncanny—after the end of the monsoon session of the parliament. This
was done to ensure that the opposition did not have another weapon to hammer the already embattled Finance Minister. The
release also coincides with the ‘kiss and make up’ attitude the government is suddenly advocating (remember the reported
statement of the FM in the context of the scam that ‘there would be no witch hunt’ after the recent meet at the PM’s residence
to discuss measures to revive the economy!).
Based on the excerpts made available to the media, the inanity of SEBI’s findings is breathtaking! While there were perhaps
technical violations of some of the regulations, the reported value of sale by the ‘bear cartel’ is simply not large enough to have
caused a collapse of the market. The values of transactions assessed in the report of one of the main entities being investigated
for the fall in prices is about Rs 20 crores per day. In the case of another, the value of sales assessed after obtaining privileged
information is a mere Rs 3.9 crores. At a time when the combined volumes of transactions at the NSE and the BSE were running
at about Rs 7000 crores per day, it is unbelievable that the above volumes could have caused the slide in values that actually
occurred.
The report documents in great detail the manner in which prices of scrips of a few companies were relentlessly manipulated
through circular and dummy deals in the market. The participants in such exercises were not just brokers but several overseas
corporate bodies or OCBs and at least one FII. Unfortunately, while the report would make an excellent bed-side reading, the
evidence lacks the rigour required to nail the perpetrators of the manipulations in the court of law. As the lawyer of Ketan Parekh
is reported to have said, the only violation that his client can be found legally guilty of is the Rs 137 crore pay-order scam
involving the Bank of India.
The report raises concerns of two kinds. The first pertains to prudential supervision by SEBI of markets. Influencing prices
through circular and dummy deals is one of the most important market manipulations that SEBI is expected to monitor and
control. What was it doing when these were actually taking place in the market? It is clear that SEBI failed in its supervisory
role on this count. In some sense, the report is an indictment of SEBI itself!
The second concern pertains to the fact that the evidence gathered by SEBI does not build a case against the guilty that
cannot be challenged legally. It therefore appears that even on this occasion the guilty will finally go unpunished. What is the
value of a reprimand to an entity, no matter how severe, if the entity is permitted to continue its business as before? The report
raises the oft-stated shortcoming of our regulators. They are essentially toothless tigers, which can only growl, but cannot bite.
Or, am I missing the point altogether? Aren’t all investigations in this great nation of ours an exercise in obfuscation of evidence
so that the guilty go unpunished after appropriate deals have been struck and payments made in the right quarters? One will
have to wait to answer this question. If the final report of SEBI is as innocuous as the second interim report, then the answer
would surely be YES.
Source: Economic Times, 11 September 2001.
with crises in the financial sector and initiated multipronged investigations involving several agencies such as
SEBI, RBI, CBI (Central Bureau of Investigations), DCA
(Department of Companies Affairs), Enforcement
Directorate, Directorate of Revenue and Intelligence, and
the IT (Income Tax) department. The 1992 response was
repeated, under pressure from the opposition parties, and
a Joint Parliamentary Committee (JPC) has also been set
up to investigate the scam of 2001. The multiplicity of
investigating agencies typically leads to chaos and delays
in investigations. The government also set up a special
court in 1992 to speed up resolution of court cases connected
with the 1992 scam. Despite that, nine years since the
occurrence of the scam, most of the cases are still to be
decided by the courts.
The speed with which the crisis arising from rogue
trading in the financial markets by a dealer of Barings plc
was dealt with by the Singapore government provides a
sharp contrast to the Indian government’s inability to deal
with crises in the financial sector in India. In less than a
week the crisis was resolved, with an organized take-over
of Barings plc and jail sentence for Nick Leeson, the rogue
trader. Similarly, the decisive intervention by the US Federal
Reservor in 1998 ensured orderly winding down of the
troubled hedge fund LTCM (Long Term Capital
Management) and defused a potentially global crisis in the
financial markets. The impact of the crisis on financial
markets was effectively contained. In India, however, such
crises invariably significantly impair the financial
infrastructure for long periods. The financial markets were
badly crippled for several years by the ‘tainted’ shares
created by the scam of 1992. And now even before the
aftershocks from the 1992 scam could subside, the financial
markets have been hit by another scam. There is little
reason to believe that the aftereffects from the recent scam
would be any less severe than the one that occurred in 1992.
basic inter-connected nature of operations of different
segments.
• If multiplicity of regulators makes it impossible to
achieve such harmonization, then there is a case for
unification of regulation under one regulatory authority
that would have jurisdiction over the entire financial sector.
• The regulatory agencies today are assigned the task
of both supervision and regulation and development of the
financial infrastructure. There is a need to separate the two
functions.
• There is an urgent need to strengthen the prudential
supervision through extensive use of appropriate statistical
tools for data analysis to anticipate and defuse a developing
crisis. With the advancement in the information and
communication technologies, such analyses can be carried
out even on a real time basis, if required.
• There is an urgent need to establish a speedier
process for dealing with frauds committed in the operation
of the financial infrastructure. If required, the government
should setup a separate entity with legal powers to deal with
white-collar crimes.
• There is a need for professionalization of the
management of the financial infrastructure as well as
extensive involvement of professionals in the governance
of the infrastructure created. As in other spheres, the
bureaucratic and political interventions must cease in the
operation and regulation of financial infrastructure.
SUMMARY
A credible and effective governance structure is the key
to efficient functioning of financial infrastructure. Without
this, achieving sustained growth in the creation of real
infrastructure and high economic growth would remain a
pipe dream for the nation.
While several individuals and a few organizations bore
the brunt of penal action arising from the scams, the
regulators have typically escaped without having to pay a
price. The euphemistic phrase ‘system failure’ is invariably
used to describe regulatory failures and hide glaring shortcomings in the governance structure. The article reproduced
in Box 6.5.1 highlights the shortcomings of investigations
of scams and the break down of governance of the financial
There have been significant additions to the financial
infrastructure in the country in the last decade. As a result,
the facilities available, on paper, in the financial sector, are
almost comparable to those available in the developed
countries. These facilities, however, are unable to deliver
the goods because of the faulty governance structure for
their operations. Based on the analysis of the three scams/
crises presented above, the measures required to strengthen
the framework for governance are summarized below.
• There is an urgent need to harmonize the regulations
for different segments of the financial sector to reflect the
6.6 IS BRIBERY WELFARE-PROMOTING?
During the past several decades, governments in India and
in many other developing and transitional economies
distributed essential commodities such as food and fuel
among the population at low prices and on a first-come-
first-served basis (rationing-by-waiting). Elaborate bureaucratic procedures as well as recurring delays on the part
of bureaucrats only added to people’s woes, leading to
greater uncertainty and longer periods of waiting. The
presence of large waiting times led to the creation of
thriving illegal markets which involved additional payments
to middlemen as well as bribe-taking by bureaucrats who
were in charge of distributing the commodities, in return
for reduced waiting times17.
Despite the fact that commodities were often in shortsupply, governments continued charging low prices for
commodities on account of equity concerns and a desire
to reach the poor. Bribery often led to fast and efficient
provision of essential commodities to individuals who had
the ability and willingness to pay bribes. However, the
poorest of the poor still faced long queues and large waiting
times, and in many cases, were unable to obtain the
commodities.
Following the onset of widespread economic reforms in
India in the early 1990s, there was a marked change in
the distribution of essential commodities. The government
started offering ‘Tatkal’-like schemes to consumers in various
forms, which essentially involved a greater price, or
premium, in return for reduced, or zero, waiting time to
obtain a good18. In general, differential pricing schemes
(high prices corresponding to lower waiting times) are now
being frequently used to improve the efficiency in the
allocation of essential commodities and to enhance social
welfare.
One can argue that differential pricing schemes are
superior to illegal markets involving bribery because in
such schemes, the higher price, or premium, is paid
directly to the government, who can use it either to cover
its distribution costs, or to finance other social welfare
programmes. In contrast, with bribery, middlemen and
bureaucrats simply usurp the higher payment (bribe) for
personal gain. Bribery is also strongly opposed on ethical
grounds.
However, in the past, arguments favouring bribery have
also come about. Since the early 1960s, various social
scientists (Leff 1964; Huntington 1968) have asserted that
bribes act like ‘speed money’, or that bribery helps
consumers reduce large and costly waiting times that arise
in public distribution of goods and services. Moreover,
researchers such as Lui (1985) and Rose-Ackerman (1978)
have used theoretical models of queuing to show that under
some general circumstances, bribery improves efficiency
17
Debroy et al. (1994a, b) conducted two independent
questionnaire surveys to document the waiting times as well as
illegal payments associated with obtaining essential commodities in
the mid-1990s. De Soto (1989) similarly documented illegal and
informal markets in Peru.
18 Such parallel pricing schemes have been used earlier in some
cases such as for passports and telephone connections. See Debroy
et al. (1994a, b). However, it is only over the last few years that
such schemes have been widely introduced and used to tackle the
problem of distribution of essential commodities.
and enhances social welfare in the allocation of
commodities 19.
It is our contention that the above claim fails to hold
in rationing-by-waiting situations where the official price
of the rationed commodity is kept low for reasons of equity
and reaching the poor. Using a simple framework to
illustrate our ideas, we show that although bribery leads
to greater efficiency and social welfare at prices which are
not reasonably low, it does not improve efficiency and
lowers the welfare of the poor at the expense of the rich
in rationing-by-waiting at low prices20. If the rationed
commodity is in great short-supply, the poor can even be
excluded from obtaining the rationed commodity at low
prices due to bribery.
A BASIC FRAMEWORK
OF
RATIONING-BY-WAITING
Let us consider a simple rationing situation where the
government distributes an indivisible commodity at a fixed
price P. For simplicity, suppose that individual incomes are
distributed uniformly in the range zero to Y, where Y is
the maximum possible individual income in society. For
the sake of convenience, let us suppose that Y equals 1.
To make things interesting, let us assume that each
individual can buy upto one unit of the commodity, either
by law, or due to preference21. However, the rationed
commodity can be supplied only to a fraction S of the
population, and hence is in short-supply. Now, consider
a typical scenario where the fraction of buyers at the given
price P exceeds S. This implies that there is ‘excess demand’
at P, or P is below the ‘market-clearing’ price.
Since the commodity is distributed on a first-come-firstserved basis, a queue is expected to form, with individuals
arriving before the counter opens. Individuals who arrive
early enough are expected to get the commodity, while
19 However, later researchers such as Andvig (1991) have argued
that queuing processes can be immensely complex and different
ways of creating and managing queues can result in different outcomes
regarding average waiting times (see also Bardhan 1997). Hence,
they try to argue that bribery may not always enhance allocational
efficiency in queuing situations.
20 The framework described here is a simplified version of the
model presented in Kulshreshtha (2000). The basic model of
rationing-by-waiting was developed in Barzel (1974).
21 See Gabszewicz and Thisse (1979) and Atkinson (1995)) for
use of similar assumptions. However, individuals may illegally obtain
several units of the commodity. According to Debroy et al. (1994b),
commercial truck drivers in India tend to obtain about 5 licences
at a point in time. When caught by a traffic inspector for a
violation, they can either pay a fine, or turn in their licence to be
picked up later from the police station. This is where having more
than one licence is useful. When all five licences have been turned
in, a new set of five licences is obtained.
those who arrive later than others may fail to obtain it. In
short, waiting can help to clear the market. In fact, if there
are a large number of potential buyers and information
regarding individual waiting times is freely and easily
available, the individual waiting time needed to obtain the
good is determined by the market (that is, no single individual
can control the waiting time necessary to obtain the good)22.
Hence, the waiting time that clears the market (‘equilibrium’
waiting time) is expected to be uniform across individuals.
Figures 6.6.1 and 6.6.2 depict possible situations in the
rationed good market. We plot individual incomes on the
horizontal axis and individual satisfaction levels (corresponding to individual incomes) on the vertical axis. We
assume for the moment that there is no bribery in the
market. Therefore, an individual has two options: he/she
can choose not to obtain the good (and hence not to join
the queue), in which case he/she spends his/her income
on other goods, deriving satisfaction UO, which for
simplicity is taken as equal to income itself. Or, the
individual can choose to join the queue, wait to obtain
the rationed good and derive satisfaction UQ.
To make things interesting, let us suppose that possessing
the rationed good affects individual satisfaction in two
ways. First, it enhances satisfaction regardless of income
by an amount V, reflected in the vertical intercept of the
UQ line. Second, it can also augment the satisfaction
derived from income spent on other goods (‘other income’)
by a factor b (>1), which is reflected in the greater than
unity slope of UQ as in Fig. 6.6.123. However, waiting
dampens both of these affects, resulting in a lower vertical
intercept as well as lower slope of the UQ line. In fact,
as Fig. 6.6.2 shows, the slope of UQ can become less than
unity because of the disutility of waiting. Finally, note that
the waiting time in the market adjusts until the fraction
of individuals in the population who prefer to wait and
obtain the rationed good (that is, those with incomes such
that UQ > UO) equals S. The uniform ‘market-clearing’ or
‘equilibrium’ waiting time is denoted t*.
RATIONING-BY-WAITING IN THE PRESENCE OF
BRIBERY: EFFICIENCY AND WELFARE IMPLICATIONS
Let us consider what happens if there is bribery in the
rationed good market. In its simplest form, bribery gives
rise to a parallel black market, with bureaucrats selling a
part of the rationed good supply (S) in exchange for a fixed
22 Hence, waiting time is analogous to the uniform market price
in a competitive market.
23 For instance, possessing a ration card, or passport allows an
individual to carry out transactions that require a proof of identity,
hence raising individual satisfaction from other trades and transactions.
bribe b per unit (in addition to charging the official price
P)24. Moreover, no waiting is needed to obtain the good
via bribery25.
Figures 6.6.3 and 6.6.4 show how the outcome in the
rationed good market is altered due to bribery. The line
UB captures the satisfaction levels of potential bribers in
the population, for a given bribe b. Note that the slope
of UB is b (>1), since there is no waiting associated with
obtaining the good via bribery. In Fig. 6.6.3, where P is
greater than or equal to V/b, individuals with incomes
greater than, or equal to yQO are willing to queue up to
get the rationed good (since UQ > UO). However, individuals
with incomes greater than or equal to yBQ would prefer
to pay the bribe instead of waiting (since UB > UQ). Hence,
there is a switch from waiting to bribery for individuals
at the upper end of the income distribution (that is, those
with incomes exceeding yBQ).
Clearly, as Fig. 6.6.3 shows, bribers are better off (that
is, obtain a higher satisfaction level) in the presence of
bribery, as there is no waiting time associated with bribery.
But, what about the individuals who still queue up to
obtain the rationed good (that is, those with incomes
between yQO and yBQ)? Recall that in Fig. 6.6.3 (where
bribery is present) as well as in Fig. 6.6.1 (where bribery
is absent), price P is great than or equal to V/b and all
individuals with incomes exceeding (1 – s) are willing to
obtain the rationed good. The only difference between the
two cases is that some of the rich buyers switch from
waiting to bribery, when the latter becomes possible.
However, the equilibrium waiting time t* remains the
same in both cases (If the waiting time changes, the UQ
line shifts in both cases and hence the fraction of rational
good buyers no longer equals S). In other words, bribery
does not affect the waiting time in the market and hence,
the queuing individuals are not worse off because of
bribery.
Thus, bribery makes some individuals (the bribers)
better off, while leaving others (the queuing and nonbuying population) no worse off. In other words, bribery
eliminates costly waiting time for some individuals, while
24
Given that there are a large number of individuals in the
population, it is likely that bureaucrat cannot learn each individual’s
income. Therefore, it is reasonable to assume that he charges a
uniform bribe b to all individuals who are willing to bribe. Moreover,
for simplicity, we assume that the bureaucrat is not caught taking
a bribe, or equivalently, the cost to him/her of bribe-taking is very
low (not an unrealistic assumption, given the pervasiveness of bribery
in many developing countries).
25 It is reasonable to assume that the bureaucrat distributes the
bribed units randomly. However, in case the number of bribers
exceed the number of units sold via bribery, it is expected that the
bureaucrat will simply raise the bribe until there is no excess
number of bribers.
UQ
U
U
UO
UQ
V(1 – t*)
V(1 – t*)
Utility/Satisfaction
UO
0
0
P
Income
1 – S
Fig. 6.6.1
1
P
Y
P ≥ V/b
26 An outcome is said to enhance social efficiency if it makes
some individuals better off while making nobody worse off. Also,
note that bribery can be made completely redundant if the government
raises the official price to PMC, or the ‘market-clearing’ price for the
given S (see Fig. 6.6.3). This is because, by definition, no buyer needs
to wait to obtain the good at PMC (reflected in the UMC line which
is parallel to the UB line), while the set of buyers remains the same
as at any other P ≥ V/b. Therefore, the outcome at PMC is preferred
by all buyers to the outcome at any other P in the above range, since
(costly) waiting time is eliminated for each buyer at PMC.
Income
1
Y
Q
Q
affecting nobody else adversely. Hence, we can conclude
that bribery improves efficiency and enhances social welfare
in the queuing situation described above26.
However, it can be shown that the market outcome is
strikingly different in the case where price P is less than
V/b. Figure 6.6.4 illustrates that at prices in the above
range, individuals who can afford the rationed good (incomes
no less than P) but have incomes less than yQO prefer to
queue up, while those with incomes exceeding yBO (> yQO)
prefer to pay the bribe and obtain the good. Note that in
the absence of bribery, all individuals with incomes between
P and (P + S) (> yQO) will obtain the good via waiting (see
Fig. 6.6.2). Hence, it is clear that via bribery, some of
the available units are siphoned off to the relatively rich
individuals (those with incomes greater than yBO), leaving
less units for the relatively poor individuals (those with
incomes between P and (P + S)) who would have obtained
the good via waiting in the absence of bribery. This results
in greater competition among the poor individuals who
P + S
Fig. 6.6.2
P < V/b
would wait and therefore, the equilibrium waiting time
goes up (as depicted in Fig. 6.6.4 by a downward rotation
of the UQ line). As a consequence, some individuals (those
with incomes between yQO and (P + S)) decide to leave
the market altogether, due to the disutility of higher waiting
time.
Thus, when the official price of the commodity is lower
than V/b, bribery results in greater benefit for the rich who
bribe (because they are able to obtain the rationed good
without waiting) while the waiting poor face a loss (because
their waiting time is increased). Hence, we can say that
bribery does not enhance social efficiency and may not
increase social welfare because it makes the bribing rich
better off, but at the expense of the waiting poor who are
worse off due to bribery. In fact, it can be shown that when
the rationed good is in extreme short-supply (S is lower
than some critical value), the bureaucrat finds it optimal
to choose a bribe such that all units are sold to bribers
and hence, all waiting individuals are excluded from the
market. Hence, bribery can benefit some rich individuals
but may lead to exclusion of all waiting poor.
CONCLUSION
We have shown above that contrary to earlier assertions,
bribery may not enhance social efficiency and promote
social welfare in rationing-by-waiting situations. Although
bribery can have beneficial efficiency and welfare
UB
UMC
UQ
UB
U
U
UO
UQ
UO
V(1 – t*)
V
V(1 – t*)
V
0
P
Income
PMC YQO = P + b
1 – S
Q
Fig. 6.6.3
YBQ
1
Y
B
P ≥ V/b
implications in cases where price of rationed commodity
is not very low, it fails to achieve overall positive results
in situations where the commodity is priced low, which
is the most common scenario in developing and transitional
economies in the past.
The above result raises two issues. First, we have shown
that if a rationed good is in limited supply, bribery leads
to competition among bribers (who wish to reduce costly
waiting time) and the waiting poor to obtain the good. If
bribery prevails at low prices, the poor can get excluded
from the market. However, one can argue that if bribery
was not allowed, then at low prices it is the rich who would
be excluded from the market instead (as depicted in Fig.
6.6.2). This is because the poor are more willing to wait
at low prices than the rich (since the poors’ disutility, or
cost of waiting, is less). If the commodity is an essential
one, such as electricity, or water, exclusion of the rich is
as much of a concern as exclusion of the poor.
The crux of the problem here lies in the fact that the
commodity is in limited, or short-supply. The solution to
bribery and the consequent problem of exclusion lies partly
in raising the supply of the rationed commodity, while
creating avenues by which willing individuals can pay to
obtain the rationed good without waiting, or waiting less.
One way to do so is to introduce differential pricing
schemes in the allocation of essential commodities, while
increasing the overall supply of the commodities. It can
0
P
YQO
Q
Fig. 6.6.4
P + b YBO
Income
1
Y
B
P < V/b
be shown, and is an intuitive proposition, that differential
pricing will lead to lower bribery in rationing-by-waiting
situations. This is because the rich can find an easy
substitute for bribery in the higher-price schemes, where
the good is distributed instantaneously, or the waiting is
reduced substantially, in lieu of the increase in the
commodity’s supply.
The second issue that can be raised here is that bribery
may continue to prevail despite the prevalence of differential
pricing schemes, if the bureaucrats can influence the waiting
times of individuals by creating delays, or wasteful redtape. If bureaucrats cannot be monitored well, they would
have an incentive to use wasteful red-tape to create a
demand for bribery. By creating delays, bureaucrats can
impose large waiting costs on individuals even when there
is no a priori reason for waiting times to be large (that is,
when the rationed good is not in great short-supply).
Thus, if waiting time is endogenous, that is, can be
influenced by bureaucrats, bribery can arise even in the
presence of differential pricing schemes, or more generally,
when the rationed good is in greater supply. This possibility,
which is observed quite commonly in many developing and
transitional countries suffering from rampant bribery and
corruption, calls for greater monitoring and control of
bureaucrats via anti-corruption policies, in addition to the
use of differential pricing schemes to reduce the scope of
bribery in rationing-by-waiting situations.
6.7 THE ENRON DISASTER
Prayas Energy Group*
Enron, an American multinational corporation, made its
first entry into the Indian electricity sector in June 1992
by signing a Memorandum of Understanding (MoU) with
the power utility owned by the Government of Maharashtra,
viz. the Maharashtra State Electricity Board (MSEB).
The first Power Purchase Agreement (PPA) was signed
by the Dabhol Power Company (DPC), the Indian
subsidiary of Enron, and MSEB in 1993. This became
controversial with allegations of corruption in the deal. The
incumbent government in the state was defeated in the
subsequent elections. The new government promptly
cancelled the deal after assuming power in March 1995.
However, it renegotiated the deal with Enron, with equal
promptness. The amended PPA was finally signed in July
1996 and was further amended in a substantial manner as
late as December 1998.
Enron started commercial operation of the first stage
of the power project (with capacity of about 700 MW)
from May 1999. Though it is not utilizing the entire
capacity of the Enron plant, MSEB was paying about
Rs 95 crores per month to Enron as fixed capacity charges,
irrespective of the amount of electricity it bought from
Enron. This burden soon became unbearable for MSEB,
which had already been in a precarious financial situation.
Meanwhile, newspaper reports about the effective rate
of Enron’s power, which was quoted as Rs 7.80 per unit
[kWh], caused uproar in the state legislative assembly. The
state government agreed to appoint a high-power expert
committee to ‘review’ the deal. After a delay of more than
six weeks, the Godbole Committee was appointed, which
comprised of Madhav Godbole (Chairman), E.A.S. Sarma,
Deepak Parikh, R.K. Pachauri, Kirit Parikh, and V.M. Lal.
See Box 6.7.1 for a Summary of the Committee findings.
It would be appropriate to record two important
observations regarding the Committee at the beginning.
First, though many people raised protests that some
members of the Committee had a pro-Enron bias, there
cannot be any doubt that the Committee possessed a very
high-level of expertise and experience in the areas that were
crucial in this matter, viz. energy policy, infrastructure
finance, international trade and public administration.
Second, it is worth noting that all the members came from
mainstream institutions, and none could be branded as
having anti-privatization or anti-reforms leanings. The report
of the Committee should be viewed in the background of
these two distinctions, which make it clear that the proEnron quarters do not have a basis to protest about the
composition of this Committee.
THE MALADY
This story of greed, deception, and intrigue is not restricted
only to the Enron project. Similar stories and criticisms
are being heard about other projects started by the
independent power producers (IPPs). Further, it needs to
be noted that the Enron project (as well as the other IPP
projects) is just one symptom or outburst of the malady
that is plaguing the entire Indian power sector. MSEB, like
all other SEBs, is experiencing severe crisis.
The questions raised by the report of the Godbole
Committee, the broad governance failure, and the
widespread malady destroying the Indian power sector
need to be analysed with an integrated perspective. This
is especially important when the sector is being reformed
and restructured in a fundamental manner.
The integrated analysis should begin with investigation
into the question of why were ‘the broad governance failure’
and the three crises allowed to happen and persist. These
must have been allowed because some people, who are
powerful enough, benefit handsomely out of this rot, while
the sector in general and most of the consumers suffered
very badly. Further, those who have been benefiting have
adequate control over the sector to perpetrate this rot,
despite the resultant destruction and suffering for many.27
It is often and quite rightly said that at the root of this
performance crisis lies the ‘political interference’, to be
more correct, interference by partisan interests represented
by politicians. But the politicians are not alone in this
game. In fact, they are only one of the key players in the
alliances (and nexuses), who turn even a genuine project
into a disaster and a dishonest project into a death trap
(as happened in the case of the Enron project). The other
key players in these alliances include sections of top-level
bureaucrats, contractors, suppliers, officials, employees,
and even some consumers. Obviously, members of these
unholy alliances work to serve their own interests by
drawing maximum possible economic and political benefits
in every possible way.
27
* An NGO based in Pune working for consumer and civil society
rights in energy and infrastructure.
In fact, they must be powerful enough not only to repress the
marginalized sufferers but even to silence the powerful ones who are
not willing to join them.
Box 6.7.1
The Godbole Committee’s Findings
The Committee submitted the first part of its report on 10 April 2001. The report was extremely critical about the current
agreements and the process in which the agreements were cleared and passed by various government agencies as well as the
concerned autonomous agencies.
Here we bring out the findings and conclusions of the committee on the substantive aspect of the PPA for Enron’s DPC
project as well as those on the process in which the agreement was cleared (Government of Maharashtra 2001). (All figures in
brackets in the subsequent discussion refer to the page numbers in the Godbole Committee Report).
Substantive Problems with the PPA Instead of discussing, in detail, the findings of the Committee on the substantive aspects
of the agreements, this paper outlines the conclusive comments of the Committee only on the four major substantive issues in
order to maintain brevity.
The Inappropriate Project and Unwanted Electricity ‘The Committee finds that, while the initial demand projections for DPC
were flawed in that they ignored different load types in their projections, the demand projection that was the basis for
commencement of Phase II was based on patently untenable assumptions, given the information at that time; assumption that
have since proved to be completely unjustified’ (emphasis original) (53).
The Unnecessary Linkages with Supporting Projects with Excessive Capacities The Committee points out that various components
of the complex Enron project other than the power project such as the LNG Regassification Facility, Marine Facilities, Shipping
Charter and Gas-Supply Agreement were unnecessarily linked to the power project. Further, it also observes that the designed
capacities of all these supporting or connected projects were in excess of the needs of the power project. It also points out that
the cost of these overcapacities were loaded entirely on the power project (and hence on MSEB).
Surreptitious Overcharging of Rs 930 Crores per Year The most shocking revelation of the report is the surreptitious overcharging
done by Enron on at least four counts (with yearly excess payment figures in the brackets): (i) unnecessary capacity of the LNG
facility (Rs 253 crores); (ii) charges for the harbour facilities and shipping charter (Rs 100 crores); (iii) excessive operati on and
maintenance expenses (Rs 246 crores); (iv) inflated fuel consumption (Rs 332 crores). Thus, even within the framework of the
present agreement, it could be claimed that DPC is overcharging MSEB by about Rs 930 crores per year.
Unaffordability: Impacts on State Finances The Committee unanimously arrives at the conclusion that, in one year, the payments
to DPC have ruined the financial position of MSEB and put a heavy burden on the finances of the state government. This
prompts the Committee to comment: ‘This (burden of Enron payment) could conceivably lead to drastic cut in budget allocations
for the “State Plan” expenditure and can arguably lead to a declaration of a Plan Holiday’ (24).
Problems in the Process of Sanctioning the Project As mentioned before, the Committee also recorded severe criticisms of the
process in which the project was sanctioned. The process related criticisms are of direct relevance.
The ‘Fast Track’ Process of the Renegotiation Group While discussing the speed at which the Renegotiation Group functioned,
the Committee quotes from the judgement of the Bombay High Court: ‘The speed at which the whole thing was done by the
negotiating group is unprecedented. What would stop one to say, as was said by the Chief Minister in the context of the original
PPA, “Enron revisited, Enron saw and Enron conquered—much more that it did earlier”’ (39).
Negotiation vs. Bidding The state government had persistently defended the choice of the route of negotiations over the more
transparent route of competitive bidding. It has argued in the court that competitive bidding was not relevant, counterproductive
and inappropriate. The Godbole Committee found ‘(E)ach of these reasons to be deficient and suspect’ (43). The state
government has also argued that it had conducted intense negotiations before signing the contract. The Committee commented:
‘Both, the justifications and the quality of these negotiations are suspect’ (emphasis original) (42).
Central Electricity Authority (CEA) Clearances The Committee points out that, contrary to its regular practice, the CEA, in
its relevant letter, did not explicitly give the required ‘techno-economic’ clearance to the Enron project. Neither, at any stage, did
the CEA indicate that it reviewed the economic aspects of the project. This prompts the Committee to comment: ‘Thus, it is
a moot question whether the CEA discharged the statutory duty cast on it under the Electricity Supply Act adequately. It is
not clear from all this whether the economic aspects of the project have been comprehensively evaluated’ (48).
Tariff Competitiveness: A Fraud on the Public Interest In order to satisfy the legal requirement and also to establish that the
project is in public interest, it was necessary to demonstrate that Enron’s tariff would be competitive. Further, in order to
demonstrate its competitiveness, Enron’s tariff should be demonstrated to be lower than the tariff for an equivalent project
according to the central government norms. After detailed investigation into this issue of competitiveness, the Committee
comments: ‘Thus, in each and every instance, both for Phase I and Phase II, the assumptions are not only untenable; they are
also favorable to DPC. . . . The Committee considers this combination of circumstances to be beyond the realm of coincidence
and thereby is constrained to conclude that these assumptions were deliberately chosen so as to show that the DPC tariff was
lower than GoI tariff. As can be seen, the entire demonstration of public interest owing to the lower DPC tariff is on extremely
shaky ground and in the opinion of the Committee utterly unsustainable’ (emphasis original) (61).
Lack of Due Diligence by DPC and Financial Institution The Committee found severe lapses on the part of the financial
institutions that provided funds to the Enron project: ‘The Committee also finds that the financial institutions showed poor
judgement and lack of due diligence in accepting these (demand) projections without demur . . . The decision of the financial
institutions to fund this project seems to have been based primarily on escrow account given by MSEB, guarantee by the state
government and the counter-guarantee by the central government (for Phase I) rather than on an independent and meticulous
appraisal of the project’ (53).
The ‘Broad’ Failure of Governance The Committee says: ‘The Committee is troubled with the failure of governance that seems
to have characterized almost every step of the decision making process on matters relating to DPC. This failure of governance
has been broad, across different government at different points of time, at both the state and the central level, and across different
agencies associated with examining the project, and at both the administrative and political levels. It strains belief to accept that
such widespread and consistent failure to execute assigned responsibilities is purely coincidental’ (84). These startling, if not
shocking, observations and findings of the Committee comprised of the men of high expertise and experience should certainly
give a severe jolt to every right thinking citizen. Obviously, the entire Enron saga could prove to be an illustrative case study
for the students of public affairs. The subsequent part of the paper draws lessons for governance from this saga.
There are many examples of such unholy alliances
operating in the Indian power sector and drawing benefits
for their members. As is evident in the case of the Enron
project, the political bosses, top-level bureaucrats, and
Enron joined hands to throw to the winds every legal
provision that posed even the slightest hurdle for the project.
But the next question is how exactly did these unholy
alliances manage to do this? As the analysis of the Enron
deal by the Godbole Committee suggests, these alliances
and nexuses effectively take control of one or many of the
three main functions of the governance process: (i) decision
making, (ii) implementation of the decisions made, and
(iii) regulation (ensuring adherence to rules) of the decision
making and implementation functions.
These three governance functions, in normal circumstances, are expected to work to serve the public interest.28
However, by taking over the control of these three governance
functions, the members and leaders of these unholy alliances
and nexuses ensure that, instead of the public interest, the
sector would function to mainly serve their own interests.
In this sense, there is a breakdown of the governance of
the sector. In other words, we can describe this situation
as the crisis of governance in the sector. Thus, we can
conclude that at the root of the performance crisis (as well
as that of credibility and financial crises) lies the governance
crisis.
Lack of Transparency
The answers to these questions could be provided in terms
of the three lacunae in governance, which are discussed
28
Here, the term public interest is used in a somewhat broader
sense. It includes interests of the disadvantaged sections of society
plus the broader and long-term interests of society as a whole.
in the following paragraphs. These alliances manage to take
control of the sector primarily because they can manage
to avoid examination of the propriety and rationality of
the decisions. This is possible because the alliances not
only manage to hide all this information about the decisions
but also deceive people by giving false information. The
Enron saga provides a plethora of illustrations to support
this observation.29
This lack of information (or provision of misinformation)
on crucial aspects of the decisions or their implementation
points at the first lacuna, viz. lack of transparency, that
allows the unholy alliances to take the control of governance
of the sector.
Lack of Accountability towards the Public
The second lacuna relates to the lack of accountability of
those who make the decisions or implement them. There
are many instances in which the politicians, bureaucrats,
and experts who made the decisions that proved to have
seriously adverse impacts on public interest could not be
forced to own up to their responsibilities and to pay for their
unjustifiable, irrational, and blatantly anti-people decisions.
This was again well illustrated in the Enron saga.30
29 Take the example of the separation of the regassification
facility as per the recommendation of the Renegotiation Group in
1995. MSEB and Enron (and possibly the Government of
Maharashtra) decided among themselves not to follow this
recommendation without informing the public about this decision
to deviate. This is despite the fact that the reduction in capital cost
due to this separation was one of the main arguments put forth by
the state government to justify the renegotiated deal.
30 The pro-Enron politicians and bureaucrats claimed that
Enron’s tariff would be Rs 1.89 per unit (in the case of the first
Lack of Public Participation
There is another critical lacuna in the current governance
process, especially in the decision making and regulatory
functions. It has been clearly established that the major
decisions are, in most cases, made by a small coterie
comprised of politicians in power, top-level bureaucrats
and their commercial consultants, all coming from the
advantaged and largely urban sections of society. In effect,
most of their decisions reflect not only their limited
understanding of the socio-politico-economic reality at the
ground level but also result in welfare of the advantaged
sections. This lack of participation of diverse sections of
society with different socio-politico- economic backgrounds
provides scope for the unholy alliances to serve their own
narrow interests at the cost of public interest.
To sum up, because of the lack of transparency, the lack
of accountability of decision makers and executors of these
decisions, and the lack of public participation in decision
making and regulation, it was possible for these unholy
alliances to hold the sector for ransom. Thus, the breakdown
of the governance of sector, or the ‘crisis of governance’
in the sector, is rooted in the lack of Transparency,
Accountability and (Public) Participation (or TAP). Hence,
lack of TAP is seen in this analysis as the core malady
besetting the sector.31
THE REMEDY
World Bank Model’s Limitations
As far as the power relationship between the unholy alliances
and the consumers (these include industrial consumers
also) is concerned, privatization will certainly not make any
PPA, Rs 2.40 per unit). When Enron started sending bills with
an effective tariff of Rs 6.00 to Rs 7.80 per unit, it became clear
that MSEB, the state government, and the economy of the state
would soon be on the brink of financial disaster. However, all
these decision makers and the implementers continue to espouse
Enron’s cause.
31 This diagnostic analysis could be extended further. It must be
noted at this point that, even in the earlier model (of the earlier
era), there were certain provisions for TAP. For example, there has
been a provision in the Electricity Act for establishment of a
Consultative Council (CC), which is expected to advise the SEB on
policy matters. Similarly, the decision makers in the sector were to
be held accountable through the politicians who were the ultimate
masters of the sector. These politicians were to be held accountable
through democratic elections. However, the CCs were hardly
functional, if at all they existed. This was because their formation
and functioning has been left to the discretion of the SEBs. Similarly,
the politicians devised many ways and tricks to win elections
without being held accountable for their actions. This circumvention
of the existing TAP related provisions was possible mainly because
these provisions were indirect, vague, and discretionary.
change in favour of the latter. In fact, there is a danger
that with entry of the powerful corporations, the new and
equally (if not more) powerful and equally unholy alliances
of corporations, politicians, and bureaucrats might take
control of the governance of the sector. The situation after
the entry of Enron and other IPPs has demonstrated that
this apprehension is not ill-founded.
In a way, this is acknowledged even by the protagonists
of privatization. They agree to the need for stringent and
independent regulation to keep in check the ‘non-competitive
behaviour’ of private players, especially in view of the
natural monopoly in the Indian power sector, which is
going to persist at least for some decades to come.32
However, there is one crucially distinctive characteristic
of the independent regulation as envisaged by the proprivatization elements who largely subscribe to the World
Bank’s model of electricity sector reforms. In this model,
the regulation is to be independent of the state and ‘investorfriendly’. This is because the main objective guiding the
design of the regulatory system in this scheme is to protect
private players and investors from ‘interference’ of the
state. Such a system will not automatically serve the purpose
of protecting interests of consumers and people in general,
and the disadvantaged sections in particular, from the
designs of the unholy alliances. This is mainly because such
a system does not pay necessary attention to the special
needs of these sections, and does not emphasize on creating
space for these sections in the regulatory process and on
building their capabilities to utilize this space. This effectively
excludes the small consumers and disadvantaged sections
from participating in the ‘independent’ regulatory system.
Further, as our earlier study of the World Bank’s Orissa
model demonstrates, the regulatory institutions in this are
severely prone to sabotage by powerful vested interests
(Dixit et al. 1998).33
Democratization
To be more precise, these requirements should be articulated
as: (i) complete transparency towards public (T); (ii) direct
accountability primarily (not towards the investors but)
towards public (A); and (iii) meaningful public participation
(P). Thus, TAP is essentially ‘public-friendly’ as against the
‘investor-friendly’ TAP envisaged by the World Bank.
32 It is by now clear that despite the enthusiasm of some, it is
quite difficult to bring in bulk competition in the Indian power
sector without precipitating the attendant legal, procedural, and
financial problems. There is no need to mention here that retail
competition will remain a distant dream, if not an impossibility, in
decades to come.
33 However, it needs to be acknowledged that there is some
space for the public and consumers to intervene in the regulatory
process. The new model is certainly better than the old, state
centred model, at least in this respect.
The Regulatory Commissions
The practical way to approach this task is to begin with
agencies that would be discharging the three governance
functions.
The regulatory commissions are products of the particular
reform model that is tailored largely on the lines of the
US model and actively sponsored by the World Bank. As
mentioned before, the main function of the ‘independent’
regulatory commissions, as envisaged in the World Bank’s
model, is to shield private players from the interference
of the state and politicians. However, their American
genealogy has left many provisions—which are conducive
to ‘public-friendly’ TAP—intact in the structure and
functioning of these regulatory commissions. As our
experience in Maharashtra suggests, the available space for
public-friendly TAP in the structure and functioning of the
regulatory commission could still be effectively utilized to
exercise public control, to a great extent, not only on the
regulatory function but also on the decision making and
implementation functions.
Continued Role for the State
However, in the Indian situation, many state governments,
despite establishment of the regulatory commissions, have
retained a considerable amount of decision making power,
especially in the case of policy decisions. In addition, to
make matters more complex, most of the state governments
maintain ownership of the SEBs. There is a growing demand
that these governments should hand over all the powers and
responsibilities to the regulatory commissions, which are
mentioned in the relevant reform Acts. However, at the
same time, the demand for divesting even the policy making
functions (that still remain with the state governments) and
hand them over to the regulatory commissions might prove
premature and counter-productive.34
TAPing the Governance Agencies
As Table 6.7.1 indicates, all the three agencies—government,
regulators and utilities—will be handling the decision
34 This observation is rooted, first, in our analysis of the structure
of the regulatory system in Orissa, which was designed by the World
Bank and found to be deficient on the grounds of ‘public-friendly’
TAP. It is feared that due to this lacuna, the regulators might turn
into the new unrestrained kings of the sector (Dixit et al. 1998).
The second reason for this caution is rooted in the fear that the
regulatory commissions—because of their particular structure,
mandate, and functioning style—will be much beyond the radius of
influence of the disadvantaged sections of society. As against this,
the state will be comparatively more amenable to influence of these
sections, who, despite their disadvantages, have gained considerable
political leveraging power in the five decades of not-so-perfect
democratic activity.
making function.35 The state will be handling mainly the
policy related decisions, while the utilities will be making
many important functional decisions in the techno-economic
and financial areas. The regulatory commissions, however,
will be adjudicating on major decisions such as tariff and
propriety of investments.
Further, while implementation function will be mainly
handled by the utilities, the regulation function will be
handled by the regulatory commissions.36
There are four main routes or mechanisms (or strategies)
to fulfil the task of TAPing the three governance agencies.
The first route is the ‘democratic-political’ means that are
available in the democratic system. These means include
activities such as submitting petition and organizing public
education or protest programs. These are especially useful
and effective in the case of publicly-owned utilities. Here,
the term ‘democratic-political means’ needs to be
differentiated from the term ‘political interference’, which
essentially means interference by partisan politicians aimed
at protecting narrow political or economic interest and not
public interest. As against this, democratic-political means
are used by various civil society institutions (CSIs) and
individuals to put forth either public grievances or their
own positions on public issues.
The second route is the judicial route. The state agencies
could be forced to respond to TAP related demands using
many existing laws, for example, the law such as the newly
enacted Right to Information Act.37 As far as the regulatory
commissions are concerned, there is provision in all the
reform Acts permitting judicial review of the decisions of
the regulatory commissions.38
The third route is using the TAP mechanisms that are
in-built in the structure and functioning of (especially of
the publicly-owned) utilities, the state, and the regulatory
commissions. As we have seen earlier, there have been
certain in-built TAP related mechanisms in the government
35 Table 6.7.1 is aimed at providing a somewhat simple picture.
Many intricacies and exceptions could be identified to make the
picture more sophisticated.
36 Though there will be considerable diversity in the functioning
of the State Electricity Regulatory Commissions or SERCs, the
different strategies to address this diversity will not be discussed in
this paper.
37 Though many observers have (rightly) expressed doubts over
the efficacy of this set of new laws. However, a lot can be achieved
by trying to enforce the existing provisions of these laws while
pressing for changes in the laws.
38 However, in the case of most of the states where the World
Bank consultants have drafted the Act, the Act allows review of the
orders of the decisions of the commissions only on procedural
grounds, precluding the substantive examination of the orders of the
commissions. However, in the other states, the orders of the
commissions are open to procedural as well as substantial review.
Table 6.7.1
TAPing the Three Main Governance Agencies
Governance agency
Governance function(s)
Utilities
The State
Regulatory
Commissions
Decision-making
Implementation
Regulation
and the utilities, which are often given short shrift. CSIs
should undertake concerted efforts to press for adherence
to these in-built mechanisms. In the earlier era, the blatant
avoidance of these mechanisms was, in fact, allowed to
spread wide because of their neglect by CSIs.
The fourth route is using the inter-agency pressures.
Though not exactly designed with a comprehensive
perspective, the three governing agencies keep each other
in balance by exerting inter-agency pressures. For example,
the regulatory commissions can pull up the governments,
if it is demonstrated to them that certain actions on the
part of the government encroach upon the decision-making
powers of the commissions. Conversely, the governments
can give policy directions to the commissions, if desired.
The Two Preconditions: Space and Capabilities
Our experience with the Maharashtra Electricity Regulatory
Commission suggests that it is possible to TAP and to
democratize governance agencies to varying degrees
(functions) if the following two preconditions could be
fulfilled. First, there should be legal and procedural ‘space’
for effective TAPing of the governance agencies. Second,
the public (interest) institutions or civil society institutions
should have the resources, information, and capabilities
(expertise and skills) that are necessary to make optimum
use of this available space.
Creating the space (in terms of institutions, Acts, and
rules) for TAPing of the governance agencies through
appropriate legislation is a tougher task. This is very well
demonstrated in the case of deceptive legislation that has
been enacted in various states under the name of ‘Right
to Information’ Act. In the case of the Indian power sector,
the Central Reform Act (the Electricity Regulatory
Commissions Act of 1998) and the state-level reforms Acts
in most states allow, in principle, considerable space for
TAPing regulatory commission and utilities. However, in
some states, this space is not clearly articulated at the
operational level in the design of the ‘Conduct of Business
Rules’. This results mostly in leaving the TAP related
provisions vague, indirect, and discretionary. Further, there
Routes for TAPing the agency
Through democratic ‘political’ means
Through courts using laws (such as the ‘Right
to Information’ Act)
Through in-built TAP mechanism (such as the
Consultative Councils and public proceedings)
Through inter-agency pressures
is a need to set the right procedural precedents to create
and/or establish the TAP.
The task, which is equally daunting, is to evolve the
necessary capabilities (expertise and skills), resources, and
attitudes in various social and political (or civil society)
institutions in order to make the best use of the available
space for TAP. Because governance of the power sector
involves complex technological, economic, financial, and
legal issues, in order to be effective, the civil society
institutions would require information, analytical
capabilities, and legal skills of highly sophisticated levels.
All this also requires equally higher levels of human and
financial resources. It needs to be understood that the
structure, perspective, capabilities, skills, and resources
possessed by most of the civil society institutions in India
are geared to deal with the old, state-centred political and
economic regime. To make changes in all these would
require vision, concerted efforts, and leadership, all of
which seem to be absent from the scene.
CONCLUSION
The major contribution of the Godbole Committee is in
highlighting the ‘broad failure of governance’ as the root
cause of the fraud and tragedy that struck the state of
Maharashtra in the form of the Enron project. But, again,
Enron is not alone. The story is not much different in the
case of the other independent power producers (IPPs) in
the country.
Unfortunately, the prescription suggested by the mainstream institutions to resolve the prevailing crises—
privatisation and independent regulations—are not
appropriately designed to address the root cause of the
governance crisis, viz. the control of unholy alliances. As
a result, the crucial governance agencies in the new model,
viz. the regulatory commissions, remain highly prone to
sabotage by the unholy alliances of the vested interests.
This leaves us no choice but to give centrality to the
public-friendly TAP provisions in our efforts to reform and
restructure the Indian power sector. This, in turn, would
require that all the governance functions and governance
agencies are made amenable, on mandatory basis, to full
transparency to the public, direct accountability to public,
and meaningful participation of public.
The three major governance agencies—the state, the
utilities, and the regulatory commissions—could be TAPed
in a variety of ways. However, the space and capabilities
of civil society institutions will be the important
determinants of successful TAPing of these agencies.
Improving on both these counts in a rapid manner is the
main challenge facing the civil society in this country.
Another challenge before the civil society in this country
is to resist the attempts by the vested interests to urgently
bulldoze major and irreversible changes in the structure
and frameworks (including the ownership patterns) in the
sector.
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Rural Infrastructure 187
7
RURAL INFRASTRUCTURE
7.1 ENDOWMENTS AND RURAL INFRASTRUCTURE: ISSUES TODAY1
Keshab Das
The removal/reduction of poverty and the provision of basic
civic amenities to the population, especially those living in
rural areas, have been the most important goals in the Plan
documents. This was stated as a primary objective by even
the National Planning Committee, People’s Plan, and
Bombay Plan prepared during the period prior to
independence. The approach and agency for accelerating
rural development have varied across Plans.
Rural areas would have a high concentration of poverty
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in agriculture. Access to land, and ownership of land are
the key to income differences since land is the major
productive asset in rural areas. Rural areas may be more
usefully viewed as concentration of poor resulting in little
value for economic demand for infrastructural services. The
fact remains that state interventions, despite their large scale
of operations, never aimed at any basic structural changes
in the agrarian society. What could have been the simplest
and most effective way i.e. through land reform to eliminate
poverty was never pursued despite the rhetoric. Governance
and infrastructure are secondary to endowments. But without
endowments, good governance is a contradiction in terms.
The numerous programmes/schemes that included massive
interventions such as the Integrated Rural Development
Programme (IRDP), Mini-mum Needs Programme (MNP),
and Public Distribution System (PDS) have, as both scholarly
1
Sincere thanks are due to Sebastian Morris for substantive
comments on an earlier draft and constructive editing. Pragmatic
comments by Rajiv Shekhar proved very useful. Thanks are also due
to Dennis Rajkumar, Loraine Kennedy and Tara Nair for meaningful
interventions.
analyses and reports in the media establish, generally failed.
Such failures have been attributed to serious deficiencies/
loopholes in design, access, and targeting. The ubiquitous
scapegoat has invariably been identified as ‘poor implementation’—a catch-all expression for corruption, leakages,
selection bias, paro-chialism, vested interests, and power
politics.
The government too has been doing its own evaluations;
but beyond getting ritualistic studies conducted through
external agencies, little or no corrective measures, based on
their recommendations, have been pursued with effect. As
it happens, more often than not, by the time the evaluation
of a certain programme/scheme is nearly over, the next
programme gets launched, afresh and without reference to
possible lessons through a thorough evaluation of a previous
programme.
So far as the basic infrastructure for rural areas is
concerned, there hardly seems any improvement despite
reforms. Even during the post-reform period, say between
1993–4 and 2001–2, not only has the share of budgetary
expenditure on all social services and poverty alleviation
programmes declined from 2.08 to 1.87 per cent, but also
the share of rural development in all social services and
poverty alleviation programmes has fallen from about 32 to
25 per cent during the same period.
PLANNING
AND THE
RURAL SECTOR
It is impossible to ignore the rural sector whenever strategies
of development are pursued. Indian planning has a history
of intervening in and emphasizing and the problems of the
rural sector.
It was around the mid-1970s that the concept of basic
minimum needs came into the policy frame, with an explicit
acknowledgement of the worsening rural poverty situation
and large scale unemployment. During the Sixth Plan, issues
relating to basic infrastructure were sought to be addressed
in a rather cohesive and more direct manner than before.
The Integrated Rural Development Programme (IRDP)
was introduced as a major strategy to create gainful
employment through helping to generate a resource base at
the household level and, ultimately, removing poverty.
Despite a well spread out and adequately staffed rural
development machinery with a supposedly strong
bureaucratic, administrative, and training network, the results
of the IRDP and related programmes were most
unsatisfactory, with unbelievable stories of manipulation
and misuse of funds being reported time and again. As the
Draft Approach Paper to the Tenth Plan (p. 5) has surmised:
the projects undertaken under the programme suffer from
numerous defects including especially sub-critical investment
levels; unviable projects; lack of technological and
institutional capabilities in designing and executing projects
utilising local resources and expertise; illiterate and unskilled
beneficiaries with no experience in managing an enterprise;
indifferent delivery of credit by banks (high transaction
cost, complex procedure, corruption, one-time credit, poor
recovery); overcrowding of lending in certain projects such
as dairy; poor targeting and selection of non-poor; absence
of linkage between different components of the IRDP;
rising indebtedness; and scale of IRDP outstripped capacity
of government and banks to absorb...Besides, the programme
for upgrading skills, TRYSEM (Training of Rural Youth for
Self Employment), was not dovetailed with IRDP. One
discovered non-existent training centres and non-payment
of stipend in some cases.
The reasons for such implementation failures varied
extensively. Whereas many scholars and policy observers
blamed the failures on a variety of problems inherent in the
design and delivery mechanism of the Programme (see, for
instance, Rath 1985; Dreze 1990), some located the glitch
in the system itself. That is to say, for the state to conduct
the ‘passive revolution’, ‘irrational’ politics was taking
advantage of ‘rational’ planning not only to further the
interests of the dominant ruling classes but also to legitimize
their hegemonic rule. This happened by mobilization of
elements within the dominated groups and their
accommodation (Chatterjee 1997: pp. 94–9; Byres 1997:
pp. 71–2). With the government and bureaucracy coming
under severe criticism for their laxity, mismanagement and
general distancing from the concerned people, the hitherto
inconspicuous so called non-governmental and voluntary
organizations (NGOs, for short) were considered to be
‘closer’ to the people and could deliver effectively. Through
the Seventh Plan document, the government formally
acknowledged the importance of popular participation,
especially in rural areas, for the successful execution of its
programmes, and explicitly sought to engage NGOs in the
implementation of the MNP and various anti-poverty
programmes. Towards facilitating NGO’s involvement,
especially since the mid-1980s, there has been both an
increase and diversification of government funding made
available to them. Grants to the NGOs are obtainable
directly through the government as also parastatal bodies
like the Council for Advancement of People’s Action and
Rural Technology (CAPART), mainly for activities
concerning infrastructure, both social and physical—for
instance, to NGOs working in the areas of health care,
drinking water, adult education, literacy, socio-economic
welfare of women and children, rural housing, and forest
development. With the growing proclivity towards economic
liberalization and reforms, the state increasingly expected
the NGOs not only to emulate its own agenda and pattern
of development, but also to actually assume governmental
role in rural development (Sen 1999: p. 344). A large
number of NGOs did, in fact, undertake implementation
of governmental programmes. The Eighth Plan, by which
time the reforms process had formally begun, was clearer
and keener than the previous Plan in stressing the critical
role of NGOs in carrying out development programmes at
the grass-roots.
Despite the State’s proclaimed inclusion of NGOs in
rural development programmes, the former’s attitude and
treatment towards the latter, so far as micro level functional
aspects are concerned, have come under much criticism. As
one important study puts it, the State–NGO relationships
have often been ‘characterized by the hostility of politicians,
party workers, local elites, lower level bureaucrats, and lower
level employees of the state towards NGO activity’ (Sen
1999: p. 353).
CHRONIC RURAL POVERTY: THE BITTER REALITY
It is well known that the achievement through planned
development till almost the early 1960s, that is, during the
Third Plan, was commendable, relative, to the growth rate
during the colonial period. East Asian industrializing
economies were able to achieve much higher rates of growth.
Despite this, a high proportion of rural population remained
below the poverty line; between 1960 and 1964, the poverty
ratio remained between about 57 per cent and 54 per cent,
accounting for over 202 million people. The growth rate
of GDP, subsequently, hovered around an almost fatalistic
and clearly ignominous 3 to 3.5 per cent per annum,
reflecting the combined effect of not only a series of bad
agricultural years, idle industrial capacity, and an
unfavourable terms of trade against agriculture, but also
Table 7.1.1
Dimensions of Poverty and Inequality in Rural India, 1973–2000
Year
1973–4
1977–8
1983
1987–8
1993–4
1999–2000
Poverty Ratio
56.4
53.1
45.7
39.1
37.3
27.1*
24.0**
No. Of Poor
(million)
Poverty Gap
Lorenz Ratio
Index
261.3
264.3
252.0
231.9
244.0
16.56
15.73
12.32
9.11
8.45
0.27581
0.33861
0.29759
0.29826
0.28190
No. of Rural and
Urban Poor (million)
321.3
328.9
322.9
307.1
320.3
* Based on 30 day recall; ** Based on 7 day recall.
Source: Ninth Plan (1997–2002): Institutional Development at http://planningcommission.nic.in and Economic Survey 2000–2001 at
http://www.nic.in.
political instability arising from the decline and division of
the monolith of the Congress party and the rise of regional
contingent politics.
Between the late 1960s and late 1970s, probably the
most difficult period for Indian development, the populism
of promise to eliminate poverty remained the ‘trump card’
of both the Congress (I) as well as the Janata Party, which
came to power towards the end of the 1970s. With or
without the slogan of ‘Garibi Hatao’, the proportion of
rural poor hardly declined; in fact, the proportion had
reached around 53 per cent, which implied that over 260
million persons remained below the poverty line even during
much of the seventies (Table 7.1.1). The outcome was,
unfortunately, not in keeping with the claims of the two
parties. The early 1980s witnessed the return of the Congress
party with redoubled vitality derived from a massive mandate.
And with that the platitudes and programmes to abrogate
poverty were invigorated. The percentage of rural population
below the poverty line did climb down somewhat, but, not
again, commensurate with the efforts and the hype. As
Table 7.1.1 indicates, in 1983 the number of rural poor
remained as high as 252 million even as the poverty ratio
declined to about 46 per cent. With further reduction in
the ratio to 39 per cent in 1987–8 and 37 per cent in 1993–
4, one could talk of a ‘secular’ decline in the incidence of
poverty.
Equally importantly, the Lorenz ratio, the most commonly
used measure of inequality, for rural India has remained
more or less stable. But this stability, especially for the
recent years, have begun to be questioned, as ‘there is reason
to believe that the measures of inequality based on the NSS
consumption distribution may actually understate the true
level of inequality in the country’ (Ninth Plan 1997–2002:
Institutional Development, section on Growth Performance
and Poverty, at http://planningcommission.nic.in).
The total (both rural and urban) number of poor has
remained at around a staggering 320 million virtually
throughout the two decades spanning between 1973–4 and
1993–4. As per the NSS 55th round of survey, during 1999–
2000 the poverty ratio for rural India has been estimated
at about 27 per cent (based on 30 day recall) or at 24 per
cent (based on 7 day recall). The results of this specific survey
round, stated to have used a different/innovative methodology,
are still being debated as to their comparability with results
of the previous ones. Meanwhile, the latest available World
Bank data shows a clear rise in the incidence of poverty in
India—with a GNP per capita of US$440 in 1999, India
continues to have the highest concentration of poverty, with
more than 360 million people (about 36 per cent of its total
population) living below the official poverty line. Using an
international poverty line, India is estimated to have 40 per
cent of the world’s poor (Das 2001).
After a decade of economic reforms, it is fairly obvious
that the grand neo-liberal proposition that growth shall
trickle down to the poor and elevate their levels of living
has not been realized. In a detailed analysis of poverty
statistics by S.P. Gupta (as reported in Das 2001), it has
been established that the 1990s have hardly done anything
for the poor in India, the rural poor, particularly. In fact,
data suggest that during the reforms period not only was
there no secular decline in poverty but actually there was
an addition of 70 million people to the poverty category
between 1989–90 and 1997. Importantly, during the 1980s,
when between 1983 and 1990–1 the incidence of poverty
declined by 3.1 per cent per annum, the GDP growth per
annum was 5.6 per cent. Almost as a reversal of the situation,
between 1990–1 and 1997 the incidence of poverty increased
by 1 per cent annually, although the GDP growth had
accelerated during the same period (Not shown in the table).
The focus of the reform have been away from poverty
alleviation programmes, or for the rural sector particularly,
or even agriculture, the backbone of the Indian rural
economy. Plan outlays for rural development hardly rose
during the 1990s. The ‘unmistakable’ urban–industrial bias
of the reforms strategies have further accentuated rural–
urban disparities in income (Bhaduri and Nayyar 1996: p.
111; Nagaraj 2000: p. 2838). Moreover, the differences
between per capita income of the rich and poor states have
been on the rise during the reform period. As Jha (2001:
p. 8) points out, ‘regional inequality in the incidence of
rural poverty is increasing over time, particularly since the
reforms began. Thus not only are the poorest of the poor
getting ignored, they are also getting regionally concentrated’.
It was more by design and less by default that the economic
opportunities for the rural poor, who are anyway
disadvantaged by high incidence of illiteracy, ill health, and
constricted access to basic physical infrastructure, failed to
be created in a manner that would have energized the rural
economy. This underscores the fact that growth of GDP per
se does not automatically ‘pull up’ people into gainful
employment or root out chronic and abject rural poverty
(Dreze and Sen 1995; Guhan 1995; Dev and Ranade 1999).2
remain innumerable villages (not to mention their many
habitations) that lack even the most basic facilities. It will
be naive to state that there is no need for the same. But why
did not the private capital flow to these regions? It is
instructive to take note of the following from the ‘Draft
Approach Paper: Tenth Five Year Plan 2002–2007’ (at http:/
/planningcommission.nic.in): ‘There are many areas, e.g. the
social sectors, where its (the government’s) role will clearly
have to increase. There are other areas, e.g. infrastructure
development, where gaps are large and private sector cannot
be expected to step in significantly. In these areas the role
of government may have to be restructured. It will have to
increase in some areas of infrastructure development which
are unlikely to attract private investment e.g. rural
infrastructure and road development’ (Chapter 1, p. 2,
emphasis added).
STATE
Probably one of the most dismal records that India has
relates to sanitation, especially in rural areas. As per the
Census of India 1991, it is truly a shame that a staggering
91 per cent of households in Indian villages did not have
toilet facilities! As may be seen from Table 7.1.2, even at
the turn of the new millennium and almost a decade since
the reforms began, a meagre 9 per cent of rural population
had been covered by some form of sanitation.
This is an infrastructure of utmost urgency, and no time
should be wasted over such issues as whether there exists
a demand for it, whether class and caste factors prevail upon
the decision to possess and use such facilities, etc.3 In a
country where the rural infant mortality rate has remained
OR
MARKET?
It may be pertinent to note that in order to counter criticism
of the government’s apathy towards social sectors during the
first five years of the reforms process (this was amply reflected
through the pattern and quantum of Plan expenditure on
this sector and also the low ratio of this expenditure to the
GDP at current prices), during 1996–7 an all-out effort was
made to increase investment in social sectors towards
‘achieving distributive justice’. As most of these sectors came
under the domain of the State List, a conference of chief
ministers on Basic Minimum Services, held in July 1996,
recommended the adoption of a set of objectives so as to
strive towards their attainment by 2000. For our present
purpose, these objectives included, 100 per cent coverage
of provision of safe drinking water in rural areas, provision
of Public Housing Assistance to all shelterless poor families,
and telecom connectivity to all unconnected villages and
habitations. In addition to continuing all centrally sponsored
schemes relating to the aforesaid basic minimum services,
the states were to raise their annual entitlement by 15–20
per cent annually. Further, it endorsed that ‘the funds
allocated for these Basic Minimum Services in the States’
and Central Plans should not be diverted’ (Economic Survey
1997 at http://www.nic.in/indiabudget/es97/chap10.htm,
pp. 1–2).
By 2001, the claims about fufilling all the gaps in
infrastructure for the rural poor have, literally, fallen by the
wayside. Not only has rural poverty persisted but there
2
But growth at very high rates, as in East Asia, have led to
significant increase in incomes of all sections and this growth was
itself contigent on endowment for all (ed.).
SANITATION FACILITIES
Table 7.1.2
Sanitation Facilites in Rural India, 1985–99
(Percentages)
Year
1985
1990
1995
1998
1999
Population covered
0.7
2.4
3.6*
8.1*
9.0*
* With government initiative only. Authentic data on coverage
through private initiative not known. Percentage coverage based
on population in current year to corresponding 1991 Census.
Source: Government of India, Economic Survey 2000–1, p. 208.
3 Indeed, the external effects of toilets are very large and positive,
to such an extent that it would be easy to show that those who can
afford would be willing to subsidize those who cannot, in the interest
of health and well being.
as high as 82 per thousand live births (1993 figure based
on the Sample Registration Survey prepared by the Registrar
General of India) and a major cause of mortality is diarrhoeal
diseases (occurring mostly due to oral faecal infection),
sanitation remains crucial. It is rather unfortunate that
while Indian scholars and planners have debated for decades
over rural poverty and its correlates, one hardly comes across
a study that has undertaken careful analysis of the pathetic
perfomance in rural sanitation (this was despite valuable
data being made available in the National Sample Survey
Organisation (NSSO), Census, and other rural development
data sources).
Notwithstanding the dearth of studies in this field,
especially relating to demand for and willingness to pay in
the rural Indian context, it will be worthwhile to consider
the provision of household level facilities, rather than
common toilets. In the case of common toilet arrangements
in urban and semi-urban areas, mostly through the very
successful Sulabh International efforts, the facility is mainly
used by a non-resident and transient population. However,
in rural areas, at a residential level, such a concept will be
difficult to operationalize. In fact, maintenance on a regular
basis will remain the most ticklish issue to handle.
In an extensive field survey based study (Das and Visaria
1998) concerning evaluation of an intervention under the
Integrated Rural Sanitation Programme conducted in north
Gujarat, it was learnt that most beneficiary households
reported the use of latrine facility by all members of the
household. What is interesting to note, however, is that
among the reasons given for the use of the facility, hygienic
considerations did not receive prime attention. Whereas this
could be reflective of laxity in efforts at IEC (information,
education and communication), the clear preference for the
facility indicates presumably that once a facility is created
its advantages begin to be recognized and it gets used,
providing an instance of hardware-induced change in
sanitation practices.
The provision of latrines under the Integrated Rural
Sanitation Programme to some households had generated
a high demand among the non-beneficiaries to have the
latrines. Nearly 90 per cent of those surveyed indicated their
willingness to have latrines constructed.

india i

Transcription

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