There are always expectations from the budget about infrastructure, especially since governments around the world have lavished money on it as part of their stimulus packages. What do we need to do in infrastructure and where can the budget help?
Let us begin with energy. Our state electricity regulators must push to reduce distribution losses and encourage open access.
The budget can help by increasing incentives for loss reduction in accelerated power development and reform programme and compensation, if needed, as in adopting value-added tax, to implement open access.
Part A of the budget, which deals with expenditure and proposals, can announce funds for modernization of Coal India Ltd and introduction of the private sector in coal, as in the new exploration licensing policy for petroleum and gas, along with a regulatory framework, as promised in the last full budget.
Strict environmental safeguards and a generous rehabilitation policy for infrastructure projects can forestall legitimate land acquisition and environmental protests, which are under-appreciated hurdles to raising generation capacity.
With natural gas from the Krishna-Godavari basin off India’s eastern coast, cheaper liquefied natural gas and a possible Iran pipeline, a common carrier national gas grid is an imperative.
As the Petroleum and Natural Gas Regulatory Board offers greater clarity, private investors will emerge, but support for public investment, by raising GAIL (India) Ltd’s capitalization, is also needed.
Conversely, a lighter helping hand for Power Grid Corp. of India Ltd would prevent it from becoming an inefficient behemoth and encourage more private investment in transmission.
Finally, in energy, Part A could announce large budgetary support for Nuclear Power Corp. of India Ltd and Bhabha Atomic Research Centre, and simultaneously, legislation to permit entry of the private sector into atomic energy.
In telecom, Part A should outline spending the huge universal service obligation fund surplus on wireless high-speed data access in rural areas, more so with the universal identity card project in view.
Spectrum blocks need to be geographically smaller and uniform to improve price discovery. Non-tax revenue from spectrum may fall, and Part B should recognize this.
On roads, Part A needs to increase funding for Prime Minister’s rural roads programme and target a barrier-free national network, with all tolls flowing into a National Toll Corp. in five years. The sham transfer of traffic risk to private sector should cease.
The shipping ministry has proposed legislation for a stronger Tariff Authority for Major Ports and the airport regulator has been appointed. This is a start. To enhance competition, Part A needs to fund road connectivity projects for ports, and, where possible, by rail. The rail budget needs to prioritize high-speed freight and intercity projects.
The urban ministry has already indicated an enhanced Jawaharlal Nehru National Urban Renewal Mission (JNNURM). The programme is doing little to improve governance and at best funding a clutch of disparate projects in the cities. Extra funds should depend on a review of JNNURM and prioritized to stop cities from killing rivers with untreated waste water and dumping their solid waste, and go beyond buying buses to build public transport institutions.
The key challenge will be in Part B, which deals with revenue. We need a big push in many sectors to make up for our tentative investments over a long past. This will need resources. Dedicated funds allow for contractual structures based on performance-based payment and actually reduce the lifetime fiscal burden.
We need to put fears of fiscal balkanization aside. A cess-based model, as in education, rural telecom and roads (where it needs to increase), can work for pipeline and transmission networks, too. Where rational, the government must retain user fees and usage risk.
Such fund-raising needs to be married with execution through the public-private partnership (PPP) route. The key benefit of PPP is not extra resources but a more accountable relationship between the government and the private sector than works contracts. It delivers projects faster and at a lower lifetime cost. Part A can articulate a service oriented PPP policy and build strong capacity in finance and other relevant ministries to manage PPPs.
On financing, support through the usual clutch of tax concessions is neither here nor there. The need is to increase the tenor of funding. It is time India Infrastructure Finance Co. Ltd justified its existence.
More sector-specific financial institutions are not a good idea. The right question to ask is why our existing well regulated financial institutions shy away from funding infrastructure projects.
The root problem, especially for PPP projects, is not the high cost of funds; it is improper risk transfer to the private sector, which increases costs, discourages investors and makes Insurance Regulatory and Development Authority and Pension Fund Regulatory and Development Authority worried, preventing long-term insurance and pension money from flowing into infrastructure.
We need to revise the contractual frameworks to solve this, but the budget is not the place for that. It can, however, recognize that more use of public financing, though not public implementation may be wiser.
PPP is not a substitute for bad governance. Indeed, beneficial PPP is possible only with good capable governments. Otherwise, even if PPP projects happen, one ends up with bad projects, or bad partners, or both. At this time, we can afford neither.
Partha Mukhopadhyay is with the Centre for Policy Research, New Delhi. The views are personal.
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