I I N N D D I I A A R R U U R R A A L L I I N N F F R R A A S S T T R R U U C C T T U U R R E E R R E E P P O O R R T T F F U U N ND D E E D D B B Y Y S S I I R R R R A A T T A A N N T T A A T T A A T T R R U US S T T N NA AT TI I O ON NA AL L C CO OU UN NC CI I L L O OF F A AP PP PL LI I E ED D E EC CO ON NO OM MI I C C R RE ES SE EA AR RC CH H PARISILA BHAWAN, 11 INDRAPRASTHA ESTATE NEW DELHI 110 002 PHONE NO. 233 9861-66 FAX NO. 2337 0164 EMAIL : [email protected]
The India Rural Infrastructure Report, sponsored by the Sir Ratan Tata Trust and prepared bythe National Council of Applied Economic Research (NCAER), New Delhi, documents thestatus of rural infrastructure in India and makes policy recommendations on different aspectsof rural infrastructure. The need to undertake this study stems from the empiricallyestablished fact that access to infrastructure can have very important positive implications foreconomic development and poverty reduction. Given the fact that rural areas differ from theirurban counterparts in terms of per capita income, population density and average size ofagglomeration, infrastructure-related problems in rural areas are different from those of urbanareas. Thus, for example, complicated and expensive piped water supply and seweragesystems are inappropriate for rural areas. Given that the solutions to rural infrastructureproblems would necessarily be somewhat different, a study focusing specifically on ruralareas is appropriate. It is also important for the reason that the bulk of the poor in India is inrural areas, and improved infrastructure would contribute to poverty reduction. Necessaryevidence is documented in the introductory chapter.
The report deals with four rural infrastructure sectors – telecommunications, power, roads,and drinking water and sanitation. The report makes concrete policy recommendationsregarding the mode of provision and financing, governance and regulation. Desirable policiesfor different sectors have a lot in common. This commonality is stressed in the report.
A report of this kind has to be based on accurate statistical data. The report relies on bothprimary and secondary data. Primary data was collected through a detailed nationwidesample survey. The design of the survey is described in the Appendix to the report. Itemerged out of a brainstorming session with scholars from leading academic and researchorganisations in India. Secondary data were culled from Government of India (GOI)publications on infrastructure, National Sample Survey (NSS) publications and the MarketInformation of Households (MISH) conducted by NCAER.
The introductory chapter of the report reviews research that suggests that access to ruralinfrastructure has a strong positive association with rural economic development and a strongnegative association with the incidence of poverty. This underlines the need for improvedrural infrastructure from the point of view of both poverty alleviation and economicdevelopment. At present, rural infrastructure is largely owned and run by the government.Access of the rural population to infrastructure facilities in most sectors is poor. This isbrought out by the statistics presented in the report. However, given the constraints ongovernment funds it is necessary to encourage private participation in the sector. This issomewhat problematic, as private funds are attracted only in those areas where rates of returnare at least reasonable. This is possible in large cities and strategic rural locationscharacterised by high population density and per capita income and possibly large
agglomeration size. The report attempts to resolve these contradictions by proposing a public-private partnership in which the government would subsidise the private sector at a rate,which would vary positively with the backwardness and remoteness of the area. This wouldensure balanced regional infrastructure development and attainment of “full access" toinfrastructure facilities.
Apart from advocating public-private partnerships, the report makes recommendations in thefields of regulation and finance. In regulation it proposes a decentralised system with aregulatory office at the Zila Parishad level. The intention obviously is to take into account thevarying ground level realities in different regions in terms of the level of demand, per capitapurchasing power and the suitability of different types of infrastructure. It is envisaged thatthe regulator would fix tariffs and ensure that contracts are completed within a specifiedperiod of time and that these meet certain quality standards. Decentralisation, however, mightbe associated with higher costs relative to centralisation. The report proposes a solution to theproblem of high costs in the form of multi-utility regulators.
The report also proposes micro-financing of electricity-powered durable goods, telephonesand vehicles. This would help to ensure that infrastructure facilities are used optimally,especially in remote and low-income areas.
The Council would like to acknowledge the generous contribution by the Sir Ratan Tata Trustto undertake this study. A number of reviewers went through the report, and theircontribution in the finalisation of the report is greatly appreciated
Suman BeryDirector General
CONTENTSFOREWORDRESEARCH TEAMEXECUTIVE SUMMARYLIST OF ABBREVIATIONS
1. INTRODUCTIONOverview
1.1 Rural Infrastructure Investments, Economic Growth and PovertyAlleviation
1.2 The Deficiency of Rural Infrastructure in India1.3 The need for Reform in Rural Infrastructure1.4 Targeting of Rural Infrastructure Projects1.5 Context of the Study
2. TELECOM SECTOROverview
2.1 Status of Rural Telecommunications2.1.1 Introduction2.1.2 The Current Situation2.1.3 The Approach so far2.1.4 Critique of the Existing Approach2.1.5 Critique of Reforms
2.2 Critique of the Existing Approach2.3 Suggested New Approach2.4 Financing the New Approach
2.4.1 Increasing Demand through Micro-Finance2.4.2 Network Approaches though Semi-Privatization and Subsidies2.4.3 Efficient use of subsidies
2.5 Regulation and governance2.5.1 Regulators in a Multi-Operator Regime2.5.2 Decentralised Regulators2.5.3 Pricing Rules2.5.4 Legal Issues2.5.5 Decentralised Governance and Transparency
3. POWER SECTOROverview
3.1 Status of Rural Power3.1.1 Introduction3.1.2 Power situation in rural areas3.1.3 The approach so far
3.2 Critique of the existing approach3.3 Towards a new approach
3.3.1 A new approach: from availability to access3.3.2 A three-pronged strategy3.3.3 New connections3.3.4 New Technologies and New Statutory Provisions
3.4 Financing the new approach3.4.1 Increasing demand through micro-finance3.4.2 Network approaches though semi-Privatization and subsidies3.4.3 Promoting informal providers
3.5 Regulation and governance3.5.1 Regulators in a multi-operator regime3.5.2 Decentralised regulators3.5.3 Decentralised governance and transparency
3.5.4 Combating Power Thefts4. Roads and Transport Sector
Overview4.1 Status of Rural Roads
4.1.1 Importance of Rural Roads4.1.2 The Current Picture4.1.3 The Approach so Far
4.2 Critique of the Old Approach4.3 The Need for a New Approach
4.3.1 Survey Findings4.3.2 Investment Required for Full Coverage4.3.3 Changing Profile of Rural Consumers
4.4 Suggestions for a New Approach4.4.1 Decentralisation of Road Building and Maintenance4.4.2 Finance to Stimulate Demand for Vehicles4.4.3 Encouragement to Small Operators4.4.4 Better Financial Management4.4.5 Development of Simple User Fees4.4.6 Local Governance
5. Drinking Water and Sanitation SectorOverview
5.1 Status of Rural Drinking Water and Sanitation5.1.1 Economic Benefits and Costs of Drinking Water and Sanitation5.1.2 The Current Situation5.1.3 The Approach so Far
5.2 Critique of the existing approach5.3 Towards a new approach
5.3.1 The Overall Approach5.3.2 User Charges – Getting the Price Right for Drinking Water5.3.3 Regulatory Issues5.3.4 Local Governance
6. ConclusionsOverview
6.1 Policy Recommendations6.1.1 Promoting a new approach6.1.2 Financing of Infrastructure6.1.3 Regulation and Governance6.1.4 Fixing Tariffs6.1.5 Lowering Entry Barriers6.1.6 Decentralisation in Regulation6.1.7 Fiscal Decentralisation6.1.8 Better Targeting of Subsidies6.1.9 Development of Competencies6.1.10 Changes in Regulatory Structures
6.2 Limitations of the Study
Selected BibliographyAppendices1. Tables for Village Public Telephones2. Janmabhoomi Yojana3. Performance of SRTU in the Recent past4. Rajiv Gandhi National Water Mission (RGNDWM)
The importance of rural infrastructure is demonstrated by the positive influence that an
increase in its stock has on the promotion of economic growth and decline in the incidence of
absolute poverty. The objective of this study is to assess the status of rural infrastructure,
analyze the trends in investment and suggest such measures as would contribute to a better
flow of infrastructure services to the rural population. The study is confined to four sectors:
telecommunication, power, roads and transport, and drinking water and sanitation.
The current status of rural infrastructure in India leaves much to be desired. For instance,
Rural Tele-density is 1.90 per hundred of population though 98% of the villages, as of
November 2003 had public telephones. The Planning Commission’s estimate (revised norms)
of the investment required for full coverage was Rs 92, 690 crores at 2002-03 prices. In
contrast BSNL’s average annual budget over the decade of the nineties has been a meager Rs.
2700 crores. A comparison of the two figures suggests that reliance on government
investment alone will not achieve full coverage in the future. The story for the rural power
sector is not much different. 18% of the villages do not have access to electricity and around
46% of the households are not covered. The Planning Commission’s estimate for investment
required for attaining full coverage is around Rs 1,07,823 crores at 2000-01 prices. This
figure seems very large in comparison to the average annual investment of Rs. 8,800 crores
over the past ten years. As for the rural roads sector as much as 44% of the rural population
is not covered by the rural road network. The average annual investment over the past ten
years has been Rs 2,133 crores which is extremely small in comparison to the estimated
investment requirement of Rs 15,643 crores for full coverage (Planning Commission). The
situation in regard to rural drinking water and sanitation sector is however somewhat mixed.
Around 95% of the rural population have access to some sort of drinking water source.
However the state governments, which are responsible for operation and maintenance of
these sources, are unable to carry out their functions effectively because of shortage of funds.
As far as the sanitation sector is concerned the problem is one of poor coverage with also
very low average annual per capita investment as indicated by investment data during 1990-
98.
This shows that the government alone will not be able to achieve the target of full coverage
on its own and it would be necessary to involve the private sector. Some already been made
to facilitate the participation of private sector in infrastructure development. Thus the
legislative structure for full participation of private providers in the power sector is finally in
place with the Electricity Act 2003. The act allows for private participation, distribution and
transmission. The Act also allows for provision of electricity by alternative providers. These
providers attain economies of scale at much smaller scales of operation than conventional
providers and are also able to supply electricity to small populations in remote areas at a
much lower price. It seems that power reforms have evolved to provide for private provision
of electricity in a manner suited to rural areas. In rural telecommunication sector, cellular,
fixed line and domestic long distance operations were opened up to private competition
through policies enacted in 1994 and 1997.
While legislation, which allows privatization in the power and telecom sectors, have been
enacted there still remain problems and unanswered questions. These are regarding pricing of
private services, ensuring profitability of private providers, and enabling potential private
investors to meet their investment needs and the design of a proper regulatory mechanism.
In practice the prices, fixed by regulatory bodies and the government, are sometimes
uneconomic and make it difficult for private telecom and power providers to supply their
services at those prices. In this study we describe how orthodox and proven techniques can be
used to fix prices. These are rate of return pricing, benchmark pricing and price cap
regulation. The study advocates the benchmark rule because it compels the private firm to
operate efficiently and prevents the exploitation of the consumer. Chile, a successful model
of telecommunication reform has adopted benchmark pricing. In contrast countries adopting
other pricing rules have not performed as well. The study describes how benchmark pricing
can be used in combination with demand estimates to fix targets for private sector companies.
Besides ensuring appropriate prices for private initiatives in the field of power and telecom
sectors there are other measures which can be taken to improve the profitability of private
enterprises. In the case of power, the efficiency of the existing distribution systems could be
improved through public-private partnerships where private initiatives piggyback on public
investments to increase efficiency. Last mile providers can receive the supply of electricity
from public networks at the periphery of the villages and distribute it within the villages.
They can also run mini-hydel plants and generators to distribute the electricity in the
neighboring areas. In the case of telecom the public enterprise can set up wireless, cellular or
land line networks. Phone services can be provided by private companies. This should allow
adequate returns on investment as well as a fixed return on the leased capital asset. In telecom
the profitability of PCO operators can be increased by allowing them to provide other value-
added services such as Internet services. The direct synergy between telecommunication and
power can be exploited to increase profitability of private providers in both the fields. A way
to do that would be to permit the integration of the provision of telecom and power services.
Finally, besides improving the profitability of private providers through micro-finance for
telecom and power connections, the government can also facilitate better utilization of
infrastructure facilities in power and telecom sectors.
Potential private investors in the fields of telecom and power often fall short of funds
required for investment on their own. Government and development banks can perform an
important function by providing loans and subsidies to private investors. This is happening to
an extent the problem is in allocating a limited pool of funds for subsidy and credit among
numerous and potential investors demanding funds. The method proposed in the study
suggests and that banks and finding agencies rank potential projects on the basis of a
weighted average of potential efficiency gains and poverty levels of the affected area. Once
the ranking is done, then credit or subsidy as the case may be is provided in descending order
of ranking till the entire pool is exhausted.
Potential private investors in power are sometimes deterred from investing because of large-
scale power thefts and non-payment of bills. Power thefts could be discouraged by regular
inspection of grid lines, use of remote sensing meters to monitor consumption of electricity
and heavy penalties when such thefts are discovered. The problem of non-payment of bills
can be mitigated to an extent in case the use of penalties can be combined with incentives
such as discounts for advance payment.
Another important issue for telecom and power discussed in this study concerns the design of
the regulatory authority. A decentralized regulatory regime supported by appropriate
enforcement machinery may help in reducing corruption, take care of local tastes and needs
in taking decisions, and allows prices to vary according to the conditions of the local area.
In regard to the rural roads, the problem is one of accelerating the attainment of full coverage
and improving the operation and maintenance of roads. One option is to allow village
communities and private providers to form rural road associations, build roads and recover
their construction/operation and maintenance costs - through user charges. The government
can help in this task through provision of capital subsidies. The government will however
face the problem of allocating its resources for capital subsidy among many competing
village communities. In this case the study proposes ranking the road projects according to a
weighted average of the estimated economic benefits and the poverty of the village
community affected by each project. The subsidy is then provided in descending order of
ranking till the entire pool of financial resources is exhausted. The amount of subsidy
provided to any project is given by the difference between the construction cost of the road
and the willingness to pay of the rural community.
The operation and maintenance costs of the village roads have to be recovered through user
charges by promoting community decision making processes. This will generate a sense of
ownership of the assets While legislation authorising the government of India and state
governments to collect tolls on roads constructed and maintained by them have existed for a
long time, only certain states like Rajasthan and Gujarat have legislation/policies which
permit private entities and communities to collect tolls on roads constructed by them.
Therefore, the legal structure in many states will have to be suitably modified before one can
initiate a plan for collecting tolls to finance operation and maintenance expenditure. In the
design of tolls one option is to adopt a policy of benchmark pricing based on demand
estimation. In order to enable the public to make best use of the expanded rural road network,
government and development banks may consider providing micro-credit for purchase of
vehicles. For roads too, it may be appropriate to adopt decentralized regulatory regime as it
makes it easier to monitor small operators. As decentralization is usually expensive its extent
should be determined by the regulatory budget
As far as the water sector is concerned, there are two major problems. These relate largely to
proper maintenance of water-providing assets and eliminating wastage of water. One possible
option to overcome these problems is to levy user charges based on water consumption. This
can be done through demand estimation of water and levying user charges, which provide the
subsistence level of consumption to consumers at the poverty line level of income. The anti-
poverty programs of the government can cover the people below the poverty line.
Government subsidy on the creation of private water providing assets can be provided on the
same basis as the one for community provision of roads.
In the case of sanitation, while the government’s existing subsidy scheme of providing 80%
of the costs (subject to a maximum of Rs. 500/-) of providing a latrine to the BPL families is
attractive, the low per capita expenditure suggests that this scheme has not made a significant
dent in the overall provision of sanitation facilities.
Thus, the problem facing all the four-infrastructure sectors considered in this study is one of
inadequacy of government funds devoted to rural infrastructure. The solution lies in looking
for alternative sources of investment in infrastructure. This study advocates the promotion of
partnerships between public enterprises and private and alternative providers in power and
telecommunication. In the case of roads it recommends the provision of roads by village
communities through provision of subsidies. In the case of both water and roads it stresses the
need to recover operation and maintenance expenditure through user charges. However, for
sanitation there is no substitute but to enhance the government spending.
The above policy recommendations are also designed to improve transparency and increase
participation by the people in decisions regarding infrastructure provision.
LIST OF ABBREVIATIONS
ANERT Agency for Non Conventional Energy and Rural TechnologyARTI Applied Research Training InstituteARWSP Accelerated Rural Water Supply ProgramASM Arthik Samata MandalASTRA Center for Application of Science and Technology to Rural AreasBHEL Bharat Heavy Electrical LimitedBSNL Bharat Sanchar Nigam LimitedCBO Community Based OrganizationCEE Center for Environment EducationCII Confederation of Indian IndustriesCRSP Central Rural Sanitation ProgramCSP Cellular Mobile Service ProviderDELs Direct Exchange LinesDESI Decentralized Energy Systems IndiaDOT Department of TelecommunicationsDRDA District Rural Development AgenciesESA External Support AgencyFC Fully coveredGDP Gross Domestic ProductGOI Government of IndiaGRIDCO Grid Corporation of OrissaGRWSSP Ghogha Regional Water Supply and Sanitation ProjectGSS Grameen Sanchar SocietyIDBI Industrial Development Bank of IndiaIDFC Infrastructure Development Finance CorporationIFAD International Fund for Agricultural DevelopmentILFS Infrastructure Leasing and Financial ServicesINEP Indo-Norwegian Environment ProgramIREDA Integrated Rural Energy Development AuthorityIT Information TechnologyITDA Integrated Tribal Development AgencyKPTCL Karnataka Power Transmission Corporation LimitedKREDL Karnataka Renewable Energy Development LimitedLIC Low Income CountriesMISH Marketing Information Survey of HouseholdsMNES Ministry of Non Conventional Energy SourcesMNP Minimum Needs ProgrammeMVS Multi village schemeNABARD National Bank Of Agriculture and Rural DevelopmentNC Not coveredNCAER National Council of Applied Economic ResearchNEDCAP Non-Conventional Energy Development Corporation of Andhra PradeshNGO Non Government OrganizationNHAI National Highway Authority of IndiaNIRD National Institute of Rural Development
NSSO National Sample Survey OrganizationNTP National Telecom PolicyO&M Operation & MaintenanceOED Operations Evaluation DepartmentORG Operation Research GroupPC Production CentrePC Partially coveredPCO Public Call OfficesPEO Provincial Electric AuthorityPHE Public Health EngineeringPIU Project Implementation UnitPMGSY Pradhan Mantri Gramin Sadak YojanaPRI Panchayati Raj InstitutionsPWD Public Works DepartmentQP Quality ProblemRD Rural DevelopmentREC Rural Electrification CorporationREDA Rajasthan Energy Development AgencyRGNDWM Rajiv Gandhi National Water MissionRSM Rural Sanitary MartSEB State Electricity BoardSELCO Solar Electric Light CompanySERC State Electricity Regulatory CommissionSEWA Self-Employed Women's AssociationSKDRDP Shri Kshethra Dharmastala Rural Development ProgramSPV Solar Photo VoltaicSTC State Transport CorporationSUTRA Sustainable Transformation of Rural AreasTIDE Technology Informatics Design EndeavorTRAI Telecom Regulatory Authority of IndiaTRANSCO Transmission CorporationTSC Total Sanitation CampaignUNICEF United Nations Children's Education FundUSAID United States Agency for International DevelopmentUSO Universal Service ObligationVPT Village Public TelephoneWSP Water & Sanitation Program
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CHAPTER 1
INTRODUCTION
OVERVIEW
The study was commissioned by Sir Ratan Tata Trust to analyze four infrastructure sectors in ruralIndia – telecom, power, roads and drinking water supply and sanitation. As per the terms ofreference, the study focused on detailing the current status of infrastructure, estimation of investmentrequirements, evaluation of programs implemented by various agencies and identification of feasiblepolicy options in the four study areas of rural infrastructure. Inter alia the progress indecentralization in various states and its impact on the provision of rural infrastructure, the changingneeds for subsidies, and the alternative methods for financing infrastructure form part of the study.
The issue of the provision of rural infrastructure is particularly relevant for India which is
predominantly rural. Further, as we see later, the findings of various empirical studies clearly
indicate the positive impact that infrastructure development has on economic growth, poverty
alleviation and human development. Some of these issues are discussed later in this report. A
related issue is the existing regulatory framework which is in need of reforms.
Given the low per capita income of rural households, and hence their low affordability, there
is a clear need for government intervention in taking suitable initiative for improving access
to infrastructure services, with a view to eventually moving towards achieving the objectives
of universal coverage. This implies gradually improving physical proximity for all to the
sources of infrastructure services. Thus, through universal access, the residents of every
village should be able to access a common telephone. Each village should be able to connect
to wired network/electricity grid, have access to a road and be close to a drinking water
source. However, it may be noted that universal access does not necessarily imply universal
service. Universal service implies ensuring that each household consumes the infrastructure
service. In other words each household has an electricity connection and is physically and
economically able to make phone calls and use roads for motorized transport. Thus, universal
service is something more than universal access.
We now try to answer the question as to why issues concerning the provision of rural
infrastructure services should be tackled in a manner different from those concerning urban
infrastructure. The need to draw this distinction arises from the fact that urban areas have
characteristics which are vastly different from those of rural areas. These differences are
3
largely in respect of population density, per capita incomes, and sparsely distributed
populations.
The population density in rural areas is much lower than that in urban areas. Urban
population density as a multiple of rural population density varies from 3.79 in Kerala to
41.91 in Maharashtra. For the country as a whole, the figure is 15.75. Rural population
density is greater than 500 per square km only in three Indian states – Delhi, Kerala and West
Bengal. In 12 out of the seventeen states captured in table 1.1 it is less than 300 persons per
square km. Such low density, for example, implies high per capita cost for setting up wired
networks. In a situation like this, say for power sector, it might be a good idea to use mini-
generators instead of wired networks connected to the main grid. Similarly, in the case of
telecom, phone services based on wireless technology might turn out to be a more
economical option than say landlines.
Table 1.1 Urban and Rural Population Density in Indian States in 1991
We now turn to an analytical discussion of the effects of specific types of infrastructure on
the economy. When population growth leads to more demand for food and traditional fuels,
electricity aided irrigation (such as electric pumps) reduces the overall cost of irrigation and
permits a more intensive cultivation of land, which helps to meet the increased demand. It
also helps to overcome the shortages of other conventional fuels such as kerosene as well as
provide better lighting. Thus, any further deterioration in living standards of the poor is
prevented and in fact possibilities for improvement are opened up.
Investment in the water and sanitation sector too has positive impact on the economy. A
UNICEF report highlighted the benefits (economic and non-economic) from investment in
improved sanitation:
Investments in rural roads can and often do
result in lower cost for goods and services
consumed. Beneficiaries of rural road
rehabilitation projects in Kon Tum and Dac
Lac Provinces in the Central Highlands
region of Vietnam noted that the cost of
goods in their village decreased to the same price as goods sold in the commune center
following the upgrading of roads to year-round access gravel or asphalt roads. An OED
(Operation Evaluation Department) evaluation of World Bank supported rural road
rehabilitation in Ghana and found that rural sellers profited from higher prices, as they were
now able to sell their goods directly rather than through middlemen. Shopkeepers noted that
bringing goods to the village was not only less expensive but also pushed up their sales.
Box No. 1.1 Benefits of Improved Sanitation
• Lower rates of death and sickness• Savings in health costs• Higher worker productivity• Better learning capacities of school children• Increased school attendance, especially by girls• Strengthened tourism• Heightened personal dignity and national pride
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However, in order to allow the rural poor to derive of benefits from improved infrastructure,
it is critical to remove or at least minimize obstacles and create a supportive environment for
rural economic growth. For example, in rural electrification, obstacles may include high
connection costs, limited or no access to credit, or unfavourable loan terms that dissuade the
poor from borrowing. Limited skills may prevent villagers from maximizing the benefits
accruing from electrification, underlining the need for imparting relevant skills training. A
supportive environment for rural growth should build on the assets and capacities of the poor.
Cottage industries or small business initiatives may have limited benefit for the poor,
particularly when demand for such goods is low. There is a need to develop micro-enterprise
advisory services and pro-poor credit opportunities in order to promote off-farm employment
and diversified production.
1.2 THE DEFICIENCY OF RURAL INFRASTRUCTURE IN INDIAFor any country, development of rural areas is a pre-requisite for the overall growth of the
economy and it is particularly important for a developing country such as India, where 71%
of its one billion plus population reside in the rural areas. There is thus a serious thinking on
part of policy planners and implementing agencies that for a prosperous India, strengthening
of the network of rural infrastructure facilities is critical. It is therefore not surprising that in
1996 the United Front government under the Common Minimum Program gave utmost
importance to the development of rural infrastructure. The government had announced
special schemes for development of rural infrastructure from time to time. However the
implementation of these schemes has been generally very tardy. A major hindrance to rural
development has been a lack of access to safe, reliable power, telecommunications, water,
sanitation and transport services. On the average 89 percent of rural households do not own
telephones, 52 percent of households do not have domestic power connections. The average
brownout in India is 3 hours in non-monsoon months and 17 hours in monsoon months; 20
percent of rural habitations have partial or no access to safe drinking water supply; 2 Km is
the average distance from a village to an all weather road and 52 percent of people living in
habitations away from the main village do not have access to all weather roads.
In India the telecom sector has been characterized by poor teledensity (see Yatish Mishra,
2001), the power sector by poor access, long outages and excess demand (see Mallick and
10
Murthy, 2001 for details), the road sector by the increase in road length but failing to keep up
with booming vehicular demand, and the drinking water and sanitation sector by both poor
availability and poor quality of services
Part of the reason for this poor performance may be the fact that the rural infrastructure sector
has been entirely government owned. There has been insufficient investment by the Central
government and inadequate maintenance expenditure by the state governments.
Infrastructure development has been largely supply driven with not much attention paid to the
needs of rural citizens. The demand for better quality of infrastructure arising out of a large
increase in the size of the middle class has not been met.
1.3 THE NEED FOR REFORM IN RURAL INFRASTRUCTUREWhen policy makers are deliberating on which form of infrastructure restructuring to
undertake or how to design a regulatory agency, it is important that the right decisions are
taken. A key element of any decision making process should be a review of the evidence on
the impact of the various types of reforms.
The need for policy reform is brought out by a study by Carsten Fink et. al (2002). The study
is carried out for the telecommunications industry. The econometric results show that
Privatisation, competition and the introduction of an independent regulator lead to an increase
in tele-density by 8 percent and an increase in labour productivity by 21 percent. Fink,
Mattoo and Rathindran (2002) claim that private ownership is likely to lead to greater internal
efficiency for a variety of reasons, ranging from lower costs of monitoring, more precise and
measurable targets and greater flexibility to devise incentive contracts. Many other studies
have come out in favour of Privatisation.
For example, Privatisation of Argentinea infrastructure companies yielded rich dividends in
terms of efficiency increase and price reduction in the period, 1993-95, as is documented by
Table 1.6.
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Table 1.6 : Changes in Performance Between 1993 and 1995 (%)
Industry Sector ElectricityGeneration
ElectricityDistribution
GasDistribution
WaterDistribution
Telecoms
First year of private operation 1992 1992 1992 1993 1990Efficiency gains(measured as reductions inintermediate input purchases as ashare of total sales value)
19.51 6.26 8.84 4.86 11.28
Labour Production gains(measured as GWh/staff forelectricity, 000m3/staff fir gas,population served/staff for waterand lines in service/staff fortelecoms)
23.10 17.59 4.79 -27.58 21.25
Increases in Investment(concession contracts for gas andactual investments for the othersectors)
8.65 n.a. 4.56 75.97 28.10
Improvements in quality(measured as reduction in losses:net of consumption bytransmission/production forelectricity and gas, waterunaccounted for/production forwater, lines in repair/lines inservice for telecoms)
n.a. 10.00 27.80 6.12 4.56
Changes in real average tariffs(defined as total sales value by aphysical indicator of production)
n.a. -9.5 -0.5 5.5 -4.9
Source : Table 4.1 Changes in Performance between 1993 and 1995 Chisari, Estache and Romero 1997.
However, there are enough documented failures of Privatisation as well. Two out of the many
examples are the case of Telecommunications of Jamaica and Lan-Chile, the Chillean
National animal. Pankaj Tandon (1997) makes the point that the efficiency of a firm is
determined not by whether it is public or private but by whether it is exposed to competition
or not. His hypothesis is consistent with the success stories and failures in the public as well
as the private sectors. An additional point made by him is that the success attributed to
Privatisation is often the result of general conditions of boom in the economy. However, a
certain amount of Privatisation might be necessary for the introduction of competition. On
the other hand total Privatisation might give rise to the formation of cartels which might
mimic a monopoly like environment.
Competition can be expected to bring benefits in productive, allocative and dynamic
efficiency. Regulatory regimes can be set up to mimic competition when this is absent from
the market, although this is likely to be an poorer alternative because of problems associated
with imperfect information. Furthermore, the costs of acquiring and analysing the data will
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ultimately have to be paid for by the consumer. In general, governments have differed in their
willingness to concede control to the market, and most have a penchant for gradualism.
Competition has been introduced, but the number of firms has been fixed by policy.
Privatisation has often been partial with limitations imposed on foreign participation;
“autonomous” regulators have been created but are rarely fully independent.
Commitment to Privatisation on paper without proper implementation is not enough. No
government, whether in developed or in developing countries, has been able to foresee every
pitfall and so no perfect model of reform exists. Countries in Latin America such as
Argentina and Chile, that have led the reform process, have had mixed successes and failures,
and despite these problems the reform process has been able to make a significant impact on
the performance of the economy. What is important, however, is to accept the fact that, while
these sorts of problems are bound to arise, a mechanism does exist which ensures sufficient
flexibility to deal with these problems effectively and fairly. It should be recognized that
reform is an on-going process and that governments should treat initial major reforms as the
start of a process that is capable of yielding substantial benefits to the economy in question.
However, governments can take several steps to limit their exposure to conduct of regulation
risks. These include the introduction of:
• The greatest degree of competition that is possible (although the cost-benefit trade-off should
always be considered); Thus, exclusivity agreements with any infrastructure provider as is
seen in many countries should be avoided.
• Rules to ensure that vertical and horizontal ownership issues that make conducting regulation
even more difficult are limited (or hopefully non-existent);
• Rules to ensure that all the information that the regulatory authority is likely to need is
available in a timely, consistent and accurate format.
• Cross-subsidisation should be avoided as the section of the population, which is supposed to
subsidise the rest often takes recourse to avenues other than using the infrastructure. Subsidies
must be targeted towards the poorer consumers but must be financed by government tax
revenues or an infrastructure development fund.
Finally, it is also important to place the reform of the utility and infrastructure companies in
the context of broader institutional reform. Some of the successes of the utility and
infrastructure reforms may be diluted in case other broader reforms have not occurred. The
13
impact of labor-shedding created by providing the private operators with incentives to
achieve the lowest costs of production is a good example. If the labor market still faces
rigidities and is consequently unable to handle the labor that is released from the utility and
infrastructure companies, then some of the benefits of the sector reform will be lost.
Another factor favouring Privatisation is the insufficiency of government resources to meet
the increasing demand for infrastructure. This is especially true in the case of rural
infrastructure development.
There are several aspects of reform that need to be considered. These include:
• Industry structure – structural reform which is primarily concerned with the introduction of
competition into a sector or the removal of barriers to entry to new players so that
contestability is a real option;
• Operation – conduct reform whereby a natural monopoly is constrained by rules covering
areas such as quality, pricing and access. The key to the successful implementation and
enforcement of these rules is an effective regulatory system which ideally requires the
establishment of an independent agency;
• Ownership – reforms are often associated with a change in the ownership of previously state-
owned enterprises to some degree or form of private sector ownership.
• Decentralization in allocation mechanisms: These often play an important role in enhancing
the influence of economic forces and the participation of stakeholders in the infrastructure
sector. This is generally true for the water sector.
• Change in regulations: Regulations can often have an adverse impact on welfare. For
example, regulation aimed at controlling prices and entry into markets is likely to reduce the
average standard of living (Guasch and Hahn, 1997). There are certain principles which
should be followed in changing or introducing new regulations :
(a) The choice of regulation should be based on cost-benefit analysis.
(b) Any regulatory policy should have a clear economic rationale.
(c) Evaluation of the regulation should be done by an independent agency which considers
the economy-wide impact and not by a sector-specific agency.
(d) Regulations should be simple and subject to careful scrutiny. These improve accessibility
to the public (transparency) and diminish the likelihood of capture by political groups.
While changing regulations, the objectives and instruments of regulation should be kept in
mind. Our discussion is based on the work done by Galal and Nauriyal (1995). Given scarcity
14
of public funds for investment in an infrastructure sector, regulation has three objectives: to
attract high private sector investment, to assure reasonable rates of return to the producers,
and to provide improvements in consumer satisfaction. Common regulatory tools are pricing
rules, the degree of competition allowed and conflict resolution mechanisms. It may be in
order to briefly describe each of these regulatory tools.
Common pricing rules are of three kinds: rate of return pricing, benchmark pricing and price
cap regulation. Under rate of return pricing the firm is assured of a stipulated fair rate of
return on its cost. This allows the firm to inflate its costs and gain at the expense of the
consumer. Under benchmark pricing a benchmark is set (say the cost of an efficient firm) and
the firm is assured a stipulated rate of return on the benchmark. This forces the firm to reduce
its costs in order to maximize its profit. Under price cap regulation the price increase is given
by the increase in the retail price index minus a X factor reflecting technological or other
changes. The adhocism in setting the X factor reduces the attractiveness of this pricing rule.
From the discussion it seems that benchmark pricing is the preferred pricing rule. This is
supported by the fact that Chile, a successful model of telecommunication reform, has
adopted benchmark pricing and countries adopting other pricing rules have not done as well.
We now turn to conflict resolution mechanisms. When there is a conflict between different
parties (firm, consumer and government) a resolution of the conflict is necessary to prevent
losses to parties. The sureness of neutral resolution of a conflict with rules for conflict
resolution spelt out in detail beforehand makes the infrastructure contract(s) more attractive
and secure to all contracting parties. Again this is demonstrated by the success of Chile’s
conflict resolution mechanism in the telecommunication sector. In order to assure neutral
resolution of conflicts an independent regulatory agency with quasi-judicial powers is
needed. Another crucial aspect of regulation concerns the extent of competition which may
be permitted. Competition in an area replaces the need for price regulation as it promotes cost
as well as tariff minimization that is compatible with an acceptable rate of return. However,
the existence of economies of scale in certain infrastructure sectors implies that the decision
to allow competition within a certain area would depend upon the size of the consumer base
and the potential scale on which the various firms can operate.
15
Apart from the above mentioned instruments, provisions may be included in regulation so as
to ensure that the firms perform. This is done by having clauses which state that the license
will be revoked in case the firm fails to meet stated targets.
1.4 TARGETING OF RURAL INFRASTRUCTURE PROJECTSRural infrastructure projects lead to efficiency gains as well as social equity gains through
reduction of poverty. Projects that provide a high rate of return might not have very many
favourable implications for social equity or the reduction of poverty. On the other hand
projects with lower rates of return may have more benefits in terms of social equity and the
reduction of poverty. Therefore, selection of projects on the basis of efficiency alone may not
necessarily be social welfare maximizing as they understate the importance of poverty
reduction.
Traditional methods for project selection especially in the road sector have been based on
cost-benefit analysis. Benefits consist of travel time savings, vehicle operating cost savings
and increases in agricultural production brought about by road investment projects. This
method of project selection therefore tends to bias investments for rich high traffic areas.
Thus, this method would tend to lead to a neglect of rural areas. In case there is a fixed
infrastructure budget for rural areas, the poorer rural areas get neglected. Dominique Van de
Walle of the World Bank has come up with a method, which effectively combines equity and
efficiency considerations. In later chapters we try to adapt this method to specific
infrastructure sectors.
1.5 CONTEXT OF THE STUDYOne of the goals of the study is to analyze the recommendations of previous reports such as
NCAER’s India Infrastructure Report and refine these recommendations keeping in mind the
typical needs of rural areas. Among the many points made by the India Infrastructure Report,
two are particularly important in the context of rural infrastructure. In view of the massive
investment requirement arising from rising economic growth rates and fiscal stringency, in
many countries are looking for additional sources of financing infrastructure. This is certainly
true of rural infrastructure in India. Inadequate state funds have prevented the government
from achieving full coverage. The state governments, because of the precarious nature of
their finances have not been able to ensure even the maintenance of existing infrastructure.
16
On the other hand, economic growth in rural areas and a reduction in persons below the
poverty line have pushed up the demand for infrastructure. The India Infrastructure Report
thus calls for allowing the entry of private players into the provision of infrastructure. This is
made even more feasible by the fact that new emerging technologies in infrastructure
encourage competition rather than monopolization.
Another objective of the present study is to find out whether the recommendations of the
India Infrastructure Report regarding regulation hold in the case of rural areas which are
characterized by the existence of sparsely populated areas and a much lower level of demand
for infrastructure per capita than urban areas. The potential suppliers are also inclined to
operate on a much smaller scale in rural areas. The India Infrastructure Report stresses that
the regulatory agency should decide the prices at which the service should be provided to
final consumers. It also views decentralization with skepticism.
The availability of rural infrastructure in India is poor. Given significant positive linkages of
infrastructure to economic growth and poverty alleviation, it is necessary to extend the
coverage of infrastructure. In the absence of sufficient government funds, Privatisation and
the introduction of competition in the provision of rural infrastructure may be required.
Similarly reforms in regulation may be called for. The ensuing chapters examine these issues
on a sector by sector basis.
The ultimate aim seems to be providing universal access to infrastructure. However, the
conceptualization of universal access needs to be changed from time to time. For example,
universal access in telecommunications might involve community access at first followed by
institutional access and then household access. Similar changing concepts of universal access
are seen in road and other sectors. Given the complementarities among different types of
infrastructure, their expansion in the pursuit of the goal of universal access should be
coordinated.
1.6 STRUCTUREThe report consists of four sectoral studies, each of which dwells on the subject of provision,
financing, regulation and governance. The concluding chapter then sheds light on the cross
cutting issues.
17
IINNDDIIAA
RRUURRAALL
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RREEPPOORRTT
TTEELLEECCOOMM SSEECCTTOORR
18
CHAPTER 2
THE TELECOM SECTOR
OVERVIEW
The rural economy in India is characterised by a poor telecommunication network. Rural tele -density is 1.04 and only 62% of the villages have public telephones. Till recently ruraltelecommunication was a public monopoly. As in other infrastructure sectors, lack of investible fundshas been an impediment to achieving a higher coverage. The Planning Commission’s estimate of theinvestment required for full coverage (rural tele - density of 4.2) was Rs 92, 690 crores at 2002-03prices. In contrast, DOT’s average annual budget over the decade of the nineties was around Rs 2430crores at 2000-01 prices. Thus, it seems that public sector provision of telecommunication in ruralareas is grossly inadequate underlines and private sector participation the need for.
Fortunately, telecom policy and regulation have been moving in the direction of privatisation. Thefirst ever-public telecom policy in India was the National Telecom Policy of 1994. Objectives includedthe availability of telephone on demand by 1997 and achievement of universal service at affordableprices in all rural areas by 1997 (see Mani for more details). The financial requirement for achievingthe objectives of this policy was around Rs 23 billion. However because of the precarious financialposition of the government the objectives were far from met even though limited privatisation wasallowed after the announcement of this policy. As a result the government came out with anotherpolicy in 1999 which was called the New Telecom Policy. This gave an impetus to privatisation. Newcellular and fixed line operators were to pay for a license on a revenue sharing basis and a one-timeentry fee. The one time entry was much lower than the old licensing fee. It was felt that this wouldencourage the entry of new players into the market. Further, the domestic long distance market wasto be opened to competition from January 1, 2000.
While private operation of public telephone booths in rural areas was to be allowed, the lines andtelecommunication services were to be provided by BSNL. Small local private providers would savethe BSNL unnecessary expenditures. The United States has had a very successful experience withsmall and co-operative providers and recently West Bengal has successfully experimented withpublic-private partnerships.
NCAER studies undertaken onbehalf of TRAI and USO Fund Administration point to surging demandfor rural telecom servies. Rural areas are characterised nowadays by a growing middle and upperclass This provides an opportunity for cross-subsidisation, with the wealthier villagers using the moreexpensive private lines and the poorer villagers using the less expensive public telephone service.Thus, the twin objectives of profitability and affordability could be satisfied.
Telecommunications have an important role in economic development and poverty reduction. Theeconometric study cited in the introductory chapter supports this result. At the same time it waspointed out that inadequacy of funds with the government means that it cannot on its own support thedevelopment of the sector. Therefore, the objectives of any strategy for rural telecommunicationsshould include (i) provision of incentives for privatisation keeping in mind the profitability of privateproviders, and (ii) expansion of the rural consumer base for telecom services. These objectives can bepromoted through provision of micro-finance to villagers, who cannot otherwise afford telecomservices.
19
2.1 THE STATUS OF RURAL TELECOMMUNICATIONS
2.1.1 Introduction
The situation in the rural telecommunication sector is generally very encouraging.
Technological changes in the last decade such as the switch to wireless networks has meant
that rural networks, which cover small low density agglomerations, are no longer less
economical than urban networks. Second, remote areas can also be covered by the network
because under the wireless technology distance is no longer a relevant factor unlike in the
case of cabled networks. The adoption of wireless technologies will result in huge reduction
in the number of telephone exchanges that would have been needed to service the entire rural
territory of India. Thus, because of these technological changes a very rapid spread of
telephony in rural India is possible. (For details see T.H. Choudhary, 2001)
The spread of rural telecommunication has the potential to promote economic growth and
reduce poverty. Telephone services can also result in considerable savings on cost and time
on travel. Business transactions can often be negotiated on the phone. This often makes it
convenient to enter into business transactions, which are otherwise difficult to negotiate
because of large physical distances. Wives of migrant husbands can consult their men folk
before taking important investment and production decisions. The spread of
telecommunication also generates employment opportunities as demand for telephone
operators is generated. The economic benefits of telecommunication are by now well known
as can be seen by the findings of several case studies. (See box 2.1 & 2.2).
There is a high benefit-cost ratio in telecom services, even if the average user makes only a
few calls a month, or in some cases in a year. An evaluation of the public pay-phone project
in several African countries indicated that 80-90 percent of calls from villages and 66 percent
from provincial towns in Kenya, Malawi and Zimbabwe were long-distance calls. While 60-
65 percent of the urban pay phone calls were for social reasons, 30-35 percent were related to
business and 5-10 percent dealt with family emergencies. The pattern often changes in rural
areas: In rural Malawi 50 percent of calls involved business or other money transactions, 10
percent were for family or personal reasons and almost 25 percent were made to arrange
visits and travel. The Senegal study showed that 34 percent of calls were for business or
monetary transactions and 37 percent were for urgent family or personal matters. The degree
20
of importance placed upon calls is reflected in the fact that in Malawi and Zambia 40-50
percent of sampled callers travelled more than 5 Km. to make a call, an experience that is
shared by rural users in most developing countries. The large share of business calls in total
rural calls indicates the high potential benefit of rural telephony. In Botswana, where rural
communities have a lower degree of agricultural activity and rural-urban migration is an
important factor, over 75 percent of calls are for personal reasons and the effective catchment
area for most pay-phones was relatively small. 38 percent of users had only a primary
education or none at all and 78 percent were women, but well over 30 percent of calls had
economic benefits associated with travel substitution. Despite the very different situation in
Botswana annual revenues per pay-phone were still as high as almost $1,800 and the ratio of
overall economic benefits to costs was calculated at 8:1 for the first pay-phone in a
community and 2:1 for subsequent ones.
2.1.2 The Current Situation
Around 90% of villages in India had village public telephones as of November 2003. There
has been a massive increase in the spread of telecommunication in the last decade.
Nevertheless, the fact is that the rural penetration rate is abysmally low at 1.9. This is just
Box 2.1: Gramin Phones, Bangladesh
Gramin Phones, has started a pilot project to selltelephone services in rural areas. Gramin Phones hasset up the infrastructure to connect cellular telephoneowners and members of the Gramin Bank are givenloans to buy phones. These members in turn sell 'airtime' to individual consumers. The project plans toeventually employ 40,000 operators and connect 950villages and 65,000 people through GSM cellularphones.The project has had a tremendous impact on poverty-reduction. First, operators’ incomes have risen byaround 24 percent. Second, as villagers have access totelephone services within their village, they save 2.6-9.8 percent of travel costs. They have a further savingas they can call during off-peak hours and receiveincoming calls on demand. Many of these villages havea high rate of male migration, so the improved andconvenient telephone services help in the safe deliveryof remittances from migrants and allow women tocommunicate directly with their men-folk and consultand involve them in decision-making related tohousehold and agricultural activities.
Source: Richardson, Dr. Don, Ricardo Ramiraz and MoinulHaq: Gramin Telecom's Village Phone Project in RuralBangladesh: A Multi-Media Case Study" 17/3/2000, CIDAand Telecommunications Development Group, Canada.
Box 2.2 : Self-Employed Women's Association(SEWA)
Ms. Puri Ben, a member of SEWA and resident ofBanaskana, Gujarat, spoke about how she hadbenefited from having a phone. The village isunderdeveloped and the residents have almost noskills, but the women take up embroidery work on adaily wage basis. They travel to nearby towns tocollect orders and to deliver the work when completed.The village of 4,000 families had only 30 telephonesfour years ago when she decided to invest in atelephone line. She now receives orders for work bytelephone, saving travel time and money. She is alsoable to complete her orders on time, by staying intouch on the telephone. Her average monthlytelephone bill is Rs. 150 to Rs. 200. Unfortunately, atany given time, half the village phones are usually outof order.
Source : Presentation at seminar on Telecom, NCAER, SRTTRural Infrastructure Project 2002.
21
around a quarter of the overall penetration rate in India and less than 1/50th of the penetration
rate in the U.S.A. Thus, we can conclude that there is considerable scope for improving the
reach of the rural telecommunication system.
Table 2.1 Telecom Services: International Comparisons (1998)
Parameter Unit USA UK China Japan Korea India LIC * WorldTel. Lines M 178.80 32.80 80.42 63.58 20.09 21.59 33.94 844.03Digital % 89.30 100 99.8 100 68.7 99 86.3 87.4Growth rate % 3.80 3.7 29 1.3 2.6 21.7 17.1 6.9Tele density Per 100 66.13 55.64 6.96 50.26 43.27 2.2 1.64 14.26Public phones M 1.75 0.336 2.062 0.777 0.607 0.732 0.430 10.79Cell phones M 69.21 14.87 23.86 47.29 14.02 1.2 2.35 318.89Revenue/line US$ 1378 1128 235 1322 533 284 391 871Lines / empl. 175 212 197 370 332 51 44 155TotalInvestment
Source: Annual Report 2002-03, Dept. of Telecommunications; Census of India (1981, 1991, 2001)Notes# Maharashtra +Goa+ Mumbai$ Arunachal+ Manipur + Meghalaya+Mizoram+Nagaland+Tripura.
It was with a view to accelerate the spread of the telecommunication network that
privatisation was introduced in 1994. However, the targets for VPTs and DELs were not fully
met by private licensees in the ninth five year plan. As part of their agreements the six
licensees were to provide 20.18 lakh direct exchange lines (DELs) over a three-year period,
of which 10 percent were to be in the rural areas. Till March 2002 operators had rolled out
only 2.34 lakh DELs, mainly in urban centres.
Rural tariffs, connection costs and rentals for telephones are kept artificially low.
Connection costs range from Rs. 1000 to Rs. 3000. Monthly rentals are in the range Rs 50-
190. Tariffs vary from 0.50 Re to 1 Re for short distance calls. Long distance rates are used
to subsidise short distance rates.
23
The project’s field studies have found that rural dwellers typically own phones to access the
incoming calls. Those who make calls prefer to use the public call office in a nearby town
where services tend to be more reliable than the village phone. Most people are not interested
in owning telephones as the service is generally poor and they do not want to lock up money
in rentals.
It has been broadly assumed, based on
experience and case study data, that rural users
in developing countries collectively pay 1-1.5
percent of their gross community income for
telecom services. If this is assumed for India
then a rural household, which is in the richest 11
percent (of all rural households) and has an income of above $1 a day (at the current exchange
rate), can afford to own a telephone at a monthly rental of Rs. 70. Cross-country village-level data
collected for this project indicates that only 11 percent of households own telephones and pay
monthly rentals of around Rs 150. Around 10 percent of households who do not own telephones
typically make only four to five calls a month, incurring an average expense of Rs. 200. Thus
only those households whose per capita incomes are above a 'dollar a day' at the market exchange
rate (around Rs. 1350 per month) are regularly accessing these services (MISH, 1998 NCAER
Source: NCAER Surveys conducted by networking organisations
Table 2.5 is a further proof of the fact that the use of telecom services has still not become
popular in rural areas. This can be attributed to both demand and supply side factors -
inadequate income and insufficient supply of telecom services. The per capita annual telecom
expenditure in rural India is a mere Rs. 2.9 per year. In states like Orissa and Tamil Nadu the
figure is close to a rupee per year. West Bengal, Punjab, Maharashtra and Madhya Pradesh
also show lower per capita expenditure on telecom services than the national average. If the
use of telecom services is to be promoted then a two-pronged strategy needs to be adopted:
augmenting the supply of telecom services and increasing the affordability of telecom
services by providing capital subsidies to the service providers.
2.1.3 The Approach so Far
As in many countries world wide, the
government has been the main provider of
telecom services in India, including
services to the rural areas. While until 1996
the government made no separate
budgetary allocation for setting up rural
telecom exchanges, telephone connectivity
however increased through its policy of
setting up village public telephones (VPTs).
In 1999 the government’s telecom policy
included a universal service obligation, which was aimed at expanding rural services through
an increase in the supply of VPTs. Until liberalisation of the sector which began in the early
Box 2.4: Calculation of Telecom Revenues
Through a survey on number of people usingtelephones, the average frequency of usage and thecost per incoming call were obtained for a sample ofvillages in the nine states listed in Table 1.4. It wasassumed that the frequency of outgoing calls was halfthat of the reported frequency of usage. The productof these three variables for each state sample dividedby the sample population gave the sample estimate ofthe per capita revenue (consumer expenditure) fromtelecom services. This figure multiplied by the actualrural population of the state gave the estimate of ruraltelecom revenue in that state. The sum of theseestimates across sampled states divided by the shareof these states in All India rural population gave anestimate of rural telecom revenue at the All Indialevel.
26
1990s, the main government agency supplying these services to both rural and urban areas
was the Department of Telecommunications (DOT).
The telecommunications policy changes commenced in 1999 allowed private service
providers to offer basic telecom services. The DOT has since been corporatised and the new
entity is called Bharat Sanchar Nigam Limited (BSNL). Basic service operators bid for
services and eight operators were awarded licences to provide services in different circles. In
keeping with the government’s universal service obligation, a specific clause in the licence
agreement called for a commitment to roll out services in the rural areas, and the Ninth Plan
(1998-2002) target for new rural telephone connections was increased from 2.79 lakh to 5.51
lakh VPTs.
Table 2.6 Telecom: Targets for Village Public Telephones (till 2002)
Number of Villages 6,07,491Villages with VPTs (2000) 3,74,566VPTs on multiple access rural radio 2,11,313VPTs on overhead wire 1,63,253Public sector target (1999-2002) 1,77,038Private sector target (1999-2002) 55,848
Source: Mid-Term Appraisal of the Ninth Plan, Planning Commission, New Delhi 2002.
Private service providers have paid large amounts in license fees to operate in certain circles,
and they are eager to recover their costs. Their circles include urban markets which are still
not fully saturated. Using already existing technological infrastructure, they have been able to
expand their market merely by improving the quality of services and that too by catering
predominantly to the urban areas. Further, the long-distance revenue-sharing agreement gives
them higher profit margins provided they restrict to urban consumers making long-distance
phone calls. Therefore, there is no incentive for them to provide services to rural areas.
The per capita rural expenditure in the telecom sector in 1999 was Rs.44. compared to Rs. 14
in 1993 (Table 2.7). However, incumbent public providers are still plagued by a shortage of
funds to invest in the quality of their networks.
27
Table 2.7 Telecom: Expenditure From 1993 to 1999
(Rs. in 2000-01 prices)Year Rural Population Total Rural Expenditure Rural Expenditure per capita1993 59,79,24,923 8,38,58,53,458 141994 61,10,79,272 11,30,55,22,832 191995 62,45,23,016 17,85,99,56,688 291996 63,82,62,522 21,21,68,12,466 331997 65,23,04,298 21,70,32,28,493 331998 66,66,54,992 26,72,41,75,476 401999 68,13,21,402 29,96,20,13,047 44
2.2 CRITIQUE OF THE EXISTING APPROACHThe Planning Commission has come out with two estimates for attaining full coverage in therural telecommunication sector. The two estimates are in accordance with original norms andrevised norms respectively. (For definitions of the norms see Appendix to the report). Theoriginal norms require that all villages have VPTs. Under this norm the number of villageswithout VPTs is multiplied by Rs.1 lakh; Rs.1 lakh is being the assumed average cost ofproviding a VPT. The investment required under this norm is Rs. 2299 crores (2000-01prices). The revised norms require that the tele-density be raised to 4.2 DELs per 100population and Rs. 35000 per DEL. The required investment under this norm is Rs 92690crores. It may be noted that the revised norm considers household as the basis for arriving atfull coverage compared to a village in the earlier norm. The revision of norm was based onthe emergence of new technologies. Given that the average annual outlay is Rs. 3000 crores,government investment alone will not be able to achieve full coverage as per the revisednorm in the near future. The current investment policy is based on population density anddoes not take into account either demand or need. The system of subsidising short distancerates through long distance rates is faulty as the rural poor primarily use long distanceservices. The short distance services are used by the rural rich and urban rich. Thus, thissystem of subsidy results in a regressive transfer from the rural poor to the rural and urbanrich. While private providers’ tariffs cannot diverge greatly from those set by publicproviders, there is a hidden cost for people using PCO services; while the cost of a PCOtelephone call is Rs 1, users’ costs could be anywhere between Rs 4 and Rs 12, as they haveto travel to a PCO which is often quite a distance away from the village. The people usingPCO's are often poorer than people with their own DELs.
28
Table 2.8 Status of Rural Exchanges as on 31st March 1999
Source – Revised Estimates of Meeting the Uncovered Areas by the Department of Telecom
Available evidence indicates that theprivate sector can play an importantpart in the rural telecom sector if itsrole is appropriately defined. Whilethe department of telecommunicationcan set up the telecom networks(wireless or wireline), the actualprovision of rural telephony through
mobile wireless or cellular telephones can be done by private operators or community basedorganisations. The success of this experiment in West Bengal (see box 2.5) seems to indicatethat this initiative can be replicated in other parts of the country.
Box 2.5: Public private partnership in West Bengal
A successful experiment of franchising telecom services hasrecently been witnessed in West Bengal. The DOT hasconverted the entire rural West Bengal into a wireless zone.The Grameen Sanchar Society (GSS) has provided wirelessphone services to the rural population through its mobilevendors. The people are assured of easy and affordable tele-connectivity. A fixed percentage of the revenues is paid tothe government for providing the wireless facilities and therest goes to GSS.
30
2.3 SUGGESTED NEW
APPROACHThe new approach suggested in
this study is one of decentralised
provision. This would enable
provision to be tailored to
demand. The Chilean example
(see box 2.6) indicates that even
a small cluster of villages could
be the basis for viable projects.
What is essential is assessing the
need for telephone services of the
community and identifying the social spaces where it could be used most effectively.
Planning the network, which includes determining the location of phones, would call for a
detailed socio-cultural analysis of demand for telephones.
Second, there should be an attempt to facilitate the matching of technology with demand.This is because some technologies are suitable (from cost effectiveness considerations) forlow levels of demand whereas others are better suited for relatively higher levels of demand.Further, small private providers should be encouraged. This is because at lower levels ofdemand, small providers providing PCO or mobile services are as competitive as largeoperators providing a DEL service. As we have mentioned in the introduction to this chapter,cellular and wireless technologies are more suitable for providing telephony in low densityand remote villages. Operation and maintenance cost of landlines is much higher than cellularphones. The provision of telephone lines by private operators could be made more affordablewhen encouraged to provide multiple services such as internet surfing and videoconferencing.
It is suggested that in order to promote cost effective suppliers willing to provide services atlow prices there should be multiple bidders for rural telecom networks. If the maximum priceenvisaged by the government /regulator for rural people is lower than all the bids, then theoperator with the lowest bid should be selected and a subsidy given to him to make up thedifference between the quoted price and the ceiling price.
Box 2.6: Chile: Competitive Bidding Based on Subsidies
Chile has successfully implemented projects that are governmentfunded to improve rural connectivity. Applications are invited fromvillage clusters (usually comprising around 20 villages each) whichwant telecom connectivity. Then a cost-benefit analysis of the datacollected from these villages ranks the clusters according to thecommercial viability of the projects needed to introduceconnectivity. The highest ranked cluster is connected first.Project are awarded on the basis of competitive bidding. Theregulator usually determines the pricing criteria in advance, andbased on a reasonable rate of return, fixes the subsidy. The subsidyneeded to introduce services is calculated based on the model thathas the lowest costs, independent of technology. The tenderingprocess is then initiated. Because the bidding process iscompetitive, the subsidy is always lower than the projected amount.If there are no bids at a given rate of subsidy, the regulator canincrease the subsidy award for the project in a subsequent cycle.
Source : TRAI Seminar on Universal Service Obligation, 9-11 April, 2001
31
The following strategyshould be followed in pricingtelephone services. Based onthe public investment made increating the capital asset, theprice of the service should befixed by the regulator as closeto cost as possible whileaccounting for subsidies. Thecriterion for fixing the price isto arrive at a reasonable rateof return on the investmentalready made.
2.4 FINANCING THE NEW APPROACHThe first priority in promoting new initiatives is to put pressure on existing providers to
maintain quality. This can be done by increasing the number of consumers who could push
for improved service. At present, the absence of depth in the rural telecom market makes it
difficult for users to lobby for improved quality. The function of monitoring quality has been
recently taken up by the Universal Service Obligation Fund. The second priority is to
generate funds from within the sector that can be ploughed back to increase coverage.
Corresponding to these challenges there are alternative approaches: the household approach
through micro finance, the network approach though semi-privatisation and efficient use of
subsidies.
2.4.1 Increasing Demand through Micro-Finance
Rural rental rates are only half of those in urban areas and the cost of per call is also lower.
Owners of phones also pay a deposit to the operator to provide the service, and this deposit
Box 2.7: Costs of services and risks: Various Options
1. Rural Exchange and Wire-line Option: The number ofsubscribers in the wire area system varies from 0 to 5,000. Thisanalysis found that the cost per line varies considerably from$1,500 for a 300-line exchange to $5,500 per line in a 30-lineexchange. The cost per line reaches a minimum at around 1,000subscribers. However, maintenance costs of wire line option arehigh at 5-10 percent and stand-alone exchanges have a lowercapacity as they continue to function when transmission systemfails. In comparison, remote switch units allow for larger capacitybut are vulnerable to transmission failures.
2. WLL (Fixed, Cellular and Wireless Local Loops Option): Thecost of implementation was investigated for 5,000 sq. km and50,000 sq. km. The total number of subscribers in the wirelesslocal loop (WLL) system varied from 0 to 5,000. This analysisfound that cost per line varies considerably from $1,000 to $3,000for a 64-channel system and $1,500 to $ 2,500 per line for a 120-channel system. The cost per line reaches a minimum at around500 subscribers.
3. Mobile Satellite Option: Here operation and maintenance costsare very low. The analysis found that the cost per line variesconsiderably beyond $10,000 and this is strictly seen as apremium service or only applicable in situations where distancesare large enough to render territorial solutions beyond $10,000 aline, such as very small aperture technologies (VSAT) in the north-eastern states in India.
Source: Kayani, Rogeti and Andrez Dymond: Options for RuralTelecommunications Development, World Bank Technical Paper 359, June1997.
32
often acts as a deterrent to ownership of phones. One way to expand the rural markets for
telecom services is to provide micro-credit to those who cannot currently afford to pay the
rentals to allow them to own the service instead of having to use the PCO to make calls.
Loans can also be made available by local (consumer/agricultural) credit societies to own a
telephone. These in turn could be supported through soft loans for providing micro finance.
These could be low-interest, loans with a repayment period of 3-5 years. Another option is
for these credit societies to float a deposit mobilisation scheme that would give depositors a
free phone; part of the interest on the deposit could be recovered to pay for the telephone
owned by the depositor.
2.4.2 Network Approaches though Semi-Privatisation and Subsidies
Attracting Private Funds
There are nine major agro-based industries with outreach programs in different regions and
villages. They have a stake in forming long-term partnerships with their regional suppliers
and are willing to invest in developing the region. They would be willing to invest a few lakh
rupees as interest-free or soft-term loans The investment by the different industries could be
set aside as a one-time fund for a private last-mile provider to develop a network for a small
region. The service provider would then be responsible for maintaining and developing the
network further.
2.4.3 Efficient Use of Subsidies
Another option, which is already being
exercised, is tapping the Universal Service
Fund, which is made up of compulsory
levies at the rate of five percent of the
revenues of private operators. Money from
the fund is being kept aside to subsidise the universal service obligation, which includes
rolling out services to unconnected areas. The implementation of this plan by the USO Fund
Administration has been of limited success chiefly because the award of the license to
provide the subsidized services is selected through bidding from among the existing license
holders.
Box 2.8: Telecom: Recommendations
• Decentralised provision• Matching technology with demand• Using micro-finance to increase demand• Public –private partnership• Tying subsidies to socio-economic criteria
33
In order to encourage efficient use of subsidies one way is through inviting bids from all
interested parties including new entrepreneurs, so that the bidder who needs the least amount
gets it. This is an attractive option to channelise private capital in the rural telecom sector.
Interest in taking up such subsidied services can be increased by down sizing the franchise
area to the level of a taluk/tehsil. The telecom sector as a whole has been making profits, so
it does not qualify for outright subsidies. However, hidden subsidies exist in the form of
capital asset subsidies, which are transfers from the centre to Circles by the public sector
provider of the service. Some transfers are subsidies that target rural consumers in general
and others are cross-subsidies for local calls. It may be possible to pool all government
transfers to be shared by all service providers. Currently as noted, subsidies are being
provided only to incumbent operators. This neglects the developmental aspect of telecom
services and is biased against the new operators and uncovered regions. The government
may consider providing subsidies or loans to potential in addition to existing private
providers on the basis of sound socio-economic criteria. In October 2004, TRAI has
circulated a new discussion paper that envisages the entry of 'niche operators' broadly
corresponding to the concept we have outlined above. The paper also suggests the sharing of
existing telecom infrastructure (e.g. towers) by all new entrants. These proposals merit early
implementation.
In the example that follows we shall be discussing the case of subsidies but the problem of
allocation of loans can be treated in an analogous manner. Private providers could apply for
subsidies with details of their telecom provision. In the first round of elimination all those
bidders can be selected who meet all the technical norms and have asked for subsidies less
than the preset maximum amount. In the second round if there are multiple bidders for
provision to a given area the one seeking minimum subsidy is selected. After these two
rounds of elimination the list of competing bidders is shortened considerably. The
corresponding projects are then ranked according to their social and economic desirability
using the formula D= iii BSN∑ where the i refers to the community served by the project, N
refers to the Number of People in the Community, S refers to the Social Equity Weight
reflecting the incidence of poverty in the community, and B refers to the Benefits provided by
the Project to the Community. After projects are ranked then the government provides
subsidy to the first ranked project, then the second ranked project and so on till the entire
funds available for credit are exhausted.
34
2.5 REGULATION AND GOVERNANCEBefore listing the recommendations under this head we describe the current situation in
regard to regulation. The two landmarks in the telecom policy and regulation in India were
the NTP (National Telecom Policy) 1994 and New Telecom Policy 1999. The NTP 94
facilitated private entry through auctions of licenses. But the poor design of these instruments
resulted in delays in privatisation. NTP 99 attempted to resolve these problems through a set
of provisions given below:
• It allowed operators to carry their own intra-circle traffic without seeking an additional
license.
• Operators could interconnect to any other service provider including any other Cellular
Mobile Service Provider (CSP) which was not earlier allowed.
• Direct interconnectivity to VSNL was also possible, after domestic long distance was opened
up
• Operators were eligible for licenses for any number of areas
• Licence fee was to be restructured as a one time entry fee and recurring revenue share
• Entry of more service providers would be based on the recommendations of TRAI and the
situation would be reviewed every two years
• Licenses were to be available for 20 years and were extendable by 10 years
• Both voice and data traffic could be carried by a service provider
• Direct interconnectivity between the licensed service provider and any other type of service
provider in its area of operation and sharing of infrastructure with any other type of service
provider was possible
• There was to be free entry in basic services FSP and cellular mobile services and cellular
mobile services for each area of operation (Source : India Infrastructure Report 2001).
Around 2000 a National Long Distance Policy was implemented. This allowed the following
licensing criteria:
• A one time entry fee of Rs 100 crores
• Bank guarantee of Rs. 400 crores which will be refunded in phases of fulfillment of network
obligations
• Paid up capital of Rs 250 crores of the applicant company with a total net worth of the
promoters at Rs 2500 crores
• An Indian registration with a maximum foreign equity of 49 percent
35
Regulation in the Telecom Sector is extremely centralized. While officially all regulatory
powers are vested in TRAI (Telecom Regulatory Authority of India) its decisions are
reviewed by the Telecom Commission staffed by people from DOT.
2.5.1 Regulators in a Multi-
Operator Regime .
The Telecom Regulatory
Authority was set up at the Centre
to regulate the newly privatised
telecom sector. However, given
the size of the country and the
heterogeneity of the user
population, one centralised
authority may not be sufficient.
What is needed is a more
decentralised approach to telecom
regulation that can monitor a
multi-operator regime at levels
that are smaller than the current
circles.
2.5.2 Decentralised Regulators
Discussions and consensus on the desired socio-economic results for first-line connectivity
are important. The most cost-effective way to achieve the desired level of decentralisation in
regulation of the prevailing heterogeneous mix of providers would be to have multi-utility
regulation at the district level, which would reduce the administrative costs of regulation.
This could be independent of the local Panchayati Raj institution or one of its components.
Box 1.9: Models for New Services
Globally there are different models for providing telephoneservices to previously uncovered areas. All these models,however, are based on the assumption of a strong, independentregulator with comprehensive powers and clear authority toeffectively perform its functions1. Costing Models by Providers: Potential providers conduct a
comprehensive costing exercise for rolling out new servicesand give it to the regulator under a guarantee ofconfidentiality. The provider with the lowest costs isselected to roll out new services.
2. Proxy models by Regulators: Based on certain assumptionof technology-use, demand and quality of service, theregulator fixes the costs of providing new services. Theprovider who is willing to accept these costs is awarded thecontract to provide the services.
3. Forward-looking Model : This is a competitive optionwhere the regulator does the costing and demandscalculation and sets a benchmark the level of maximumsubsidy. The provider conducts a detailed costing and riskassumption study. The firm that requires the least amountof subsidy to provide new services is awarded the contract.Best practices dictate that the incumbent sets prices andcosts.
The regulator administers most new service rollouts. The bestpractice is where the amount of subsidy (usually a one-timeamount) is fixed but disbursement is variable depending oncircumstances. A new network system could be expanded byphases, with the network provider giving a bank guarantee foreach phase completion. Costs, quality of services and safetynorms need to be monitored and an administrative structure fordaily, monthly and annual monitoring needs to be in place.
36
2.5.3 Pricing rules
In the concluding chapter, the use of demand analysis for pricing rules has been described
which shows how price and quantity can be determining the price rules. Potential private
telecom operators have hesitated in entering business in India because of the huge license
fees required. The licensing fee can then be determined by applying a common rule to all
potential entrants:
F = a P Q
where a is a parametric constant which should be suitably chosen to attract a reasonable
number of entrants, P is the price , Q is the quantity and F is the amount of fee charged.
2.5.4 Legal Issues
The major challenge before a regulator of a multi-operator regime is to ensure that the
commitments made by the private service providers are honored. The credit worthiness of the
provider becomes an important concern. It may therefore be possible to ask for some
financial guarantees by the providers of the service linked with the promised quality of
service. It is especially relevant in case of new rollouts where the transaction costs of
changing a defaulting incumbent may be very high.
In addition to the intentional default by the provider there could be factors beyond the control
of the provider, which may compel him to default on his obligations. Impacts due to the
macro performance of the economy may affect his performance. In addition in developing
countries undeveloped financial markets may not permit efficient risk coverage. Financial
regulations may prove to be another barrier in the performance of a provider.
A more informal dispute resolution mechanism will need to be put in place to deal with inter
connect agreements. There is usually a tension between the regulator, the incumbent public
operator and new private providers. The atmosphere is further vitiated by the fact that the
regulator is not seen as being unfair and biased by the new entrants. There is a clear need to
have a quick and effective dispute resolution mechanism as taking resort existing courts or
law or tribunals is both expensive and time consuming.
37
2.5.5 Decentralised Governance
and Transparency
Certain practices have emerged as best
practices in ensuring transparency and
decentralised governance strategies.
Monitoring network rollout requires
that service providers and license
providers can be asked questions and
therefore regulators and administrators
need to be closer to the area where they provide their services. Such decentralised and
transparent procedures adopted by the government have paid rich dividends in Ghana
recently. Since there are no rules the recent best practices can be taken as a road map. (TRAI:
Operating in a Multi-operator Environment, 2001).
INTERCONNECT AGREEMENTS
Interconnect agreements in telecommunications are agreements to share revenues between
two parties, typically the provider and supplier/producer of services or between two providers
of unequal size. A fair interconnect agreement should be stable over a reasonable period of
time, such as 3-5 years, so that new investors are assured a reasonable horizon to make
investment decisions. Without an assured revenue stream, the proposals are not bankable.
Putting in place the interconnect agreements will check the tendency to shut out competition
by large players, whether incumbent or otherwise. So far the experience has been that it has
taken a long time to negotiate these agreements, thus prolonging the status quo of stagnant
rural infrastructure and poor rural development. It is necessary to decide on interconnect
agreements quickly to ensure fair working conditions for small and large players in service
provisions.
FRANCHISING SERVICES IN RURAL AREAS
Licenses for telecom services in rural areas are held by the incumbent and a few basic service
providers in each state. Improving the quality of services will require additional investment in
demand-based micro-planning, establishing the baseline of consumer consumption profile
and other efficiency measures. At present, service providers have no incentive to penalise
consumers who do not pay by disconnecting services, because revenues are so low that the
Box 2.10: Ghana’s New Telecom Rollout Programme
The government of Ghana entered into concession termsagreements with basic service providers to roll out servicesin rural areas. The agreement did not specify thetechnology to be used, but it did provide norms for servicequality.The government received 100 tenders and it auctioned 916public phones; 50 villages and 2.1 million people havebeen the beneficiaries of this programme. The one-timesubsidy amount was determined based on capital andoperating expenditures. The subsidy on any single licensewas never more than 50 percent of service costs and wasreleased when predetermined norms for service qualitywere achieved.
38
cost of monitoring is higher than the revenues generated. A successful experiment of
franchising telecom services has recently been witnessed in West Bengal (see Box 1.5)
CONVERGENCE BETWEEN SERVICES
The volume of demand for any service in the rural areas may be too small and dependent on
the efficient functioning of other sectors. In this scenario, multi-utility providers who can
integrate different services will be more likely to have the capacity to raise funds. For
example, a telephone franchisee with a switch, which also offers power and small transport
services, would attract better private capital. Therefore, there is a case for multi-utility
providers.
CONCLUSIONThe rural telecom sector has moved away from public ownership, and the challenge is to
move it towards substantial private ownership of infrastructure service where such
privatisation is to the advantage of the consumer. Decentralisation in regulation and operation
and the introduction of competition in the telecom sector are also called for. Public–private
partnerships or agreements can help to utilise better the respective strengths to their mutual
benefit. This is evident from successful partnership between the Department of
Telecommunication and the Grameen Sanchar Society in West Bengal.
The main suggestion for the rural telecom sector may be summarised as follows: (a) use of
new technologies such as wireless and cellular technologies, which are more suited to low
levels of demand and low population densities (b) augmentation of supply of telecom
services through subsidies for private providers and enhancing demand through capital
subsidies to consumers (c) reduce the costs of provision for the public sector through public
private partnerships where the last mile provision is done by private agents, and (d)
encouragement of multi-utility provision and regulation.
39
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PPOOWWEERR SSEECCTTOORR
40
CHAPTER 3
THE POWER SECTOR
OVERVIEWThat access to electricity has positive implications for economic development and poverty alleviationis well known. In rural areas the government still remains the dominant provider of electricity.However, coverage still remains poor as illustrated by the fact that a large number of villages do nothave access to electricity. The proportion of covered households is about 50%. In addition the supplyof power to rural areas is intermittent and of poor quality. The Planning Commission’s estimate forinvestment for full coverage based on past trends is Rs. 1,07,823 crores at 2000-01 prices. The actualinvestment in the past ten years has been Rs. 87,992 crores. The State Electricity Boards (SEBs)which own 65 percent of the total installed capacity in India are in a financial mess, having recordeddouble digit negative rates of return on capital employed in the last ten years. Clearly, a need forprivate participation in the rural power sector is indicated.
Let us now look at the legislations enacted to see what progress has been made to accommodateprivatisation. The first policy measure in this regard was a policy resolution adopted in 1991,according to which the ultimate aim of the government was private participation in the generation,transmission and distribution of electricity. The Indian Electricity Act and the Electric Supply Actpermitted private sector power generation. Up to 100% foreign equity participation was allowed,restrictions on borrowings from foreign commercial sources were removed and new power projectsbecame eligible for a five year tax holiday.
The problem, however, was that distribution was still in the hands of the SEBs. This meant thatprivate power generation companies had to sell generated power to the SEBs. The unsatisfactoryfinancial status of most SEBs implied that potential private players were not sure that they wouldreceive payments for the supplies to be made. Independent private producers had to be offered stateguarantees backed by central counter-guarantees to mitigate the risk of SEBs defaulting on payments.To enforce some financial discipline on SEBs, the government required the SEBs to put part of theirrevenues into escrow accounts earmarked for payments to producers. In a bid to attract private sectorprojects SEBs overstated their escrow cover. This over-commitment led to the withdrawal of mostfirms from the so-called 'fast track' projects.
To raise the extent of private sector participation, clearly private distribution of power had to beallowed. The Electricity Act 2003 provides for private participation in generation, transmission anddistribution. However, licenses have to be obtained for transmission and distribution. The tariffs orcharges were to be fixed by the State Regulatory Commissions. Certain concessions for rural areashave been proposed in the Act. Stand-alone systems (including those based on renewable sources ofenergy and other non-conventional sources) are permitted.
It should be noted that electricity generation through non-conventional sources is often suited forsupplying power to small populations located in remote areas. Rural electrification and managementof local distribution in rural areas through Panchayat Institutions, users’ associations, co-operativesocieties, non-government organisations and franchisees ares to be promoted through a nationalplan.
To conclude, power sector reforms though initially unsatisfactory, have evolved to provide for privateparticipation in all the segments of generation, distribution and transmission. The policy of allowingstand-alone providers based on non-conventional sources augurs well for rural areas. It seems thatthe financial constraints faced by the State Electricity Boards and government will not be a majorlimiting factor with regard to rural electrification. However, it must be added that while the reformsappear good on paper, the actual success in their implementation will depend on implementationmeasures involving agencies at State and sub-state levels.
41
3.1 STATUS OF RURAL POWER
3.1.1 Introduction
There is unanimity on the positive effect that increased access to electricity has on living
standards and the levels of social and economic development. There are immense social
benefits of having electrical connections at home for children's education and income-
generating activities for women. That good quality, regular power supply has a positive
impact on agricultural productivity is consistently reported in several studies2. The village
economy is transformed by the availability of power through mechanisation and productivity
increases. Post-harvest processing of agricultural commodities, drying and grinding, cold
storage facilities and IT-based access to price and market information allows farmers to
expand their markets. The availability of power also gives a boost to the non-farm sector.
These studies also point out that power price, quality of supply and access are closely related.
In fact, it is not enough to be connected; the quality of the power supplied is vital; poor
quality negates the benefits through lowered efficiency, damage to electrical equipment, and
so on.
3.1.2 Power Situation in Rural
Areas
Universal availability of electricity in
India is a distant dream. The national
penetration rate (number of connected
households per 100 households) is
around 52. This average however
tends to conceal considerable inter-
regional variations. Thus while
Punjab has a penetration rate of
99.87% in Orissa, it is as low as
17.82% (table 3.1). Those who have connections pay on average Rs. 136 a month for power.
Domestic power is consumed mainly for lighting, a finding that is substantiated in the energy
survey undertaken in 1994 by the NSSO which reported that 1.2 percent of rural consumer’s
gross energy needs were met through electricity and the need for domestic consumption was
2 See, for example, the World Development Reports 1994, 2000
Box 3.1: Estimation of Electricity Expenditure/Revenue
A sample of villages in each of the selected states wassurveyed to yield data on monthly electricity expenditure perconnected household, the total number of households andthe number of connected households at the village level.This data were used to work out estimates of expenditure onelectricity per connected household and per household.Using the actual number of rural households in each state asweights an average for the combined sample was workedout for all ten states. This was taken as an estimate for the allIndia average. In a similar manner an estimate of the allIndia penetration rate was also worked out. These twoestimates and the figure for the actual number of ruralhouseholds in India were used to work out estimates for totalannual electricity revenue generated in rural India
Source: NCAER, Field Study Notes
42
mainly for light-energy. The percentage of villages covered by a supply of electricity is
around 82%. The disparity with the ratio of households electrified which is only 52% (table
3.3) is indicative both of inadequacy of power supply and a lack of purchasing power.
The field surveys have provided other important results. The proportion of connected
households having metered connections varies considerably from state to state (see table 3.1).
In Kerala it is 100% followed by Maharashtra with 90.91%, and Punjab with 90.97%. At the
lower end we have states like Uttar Pradesh and Orissa where the proportion is less than 50%.
There can be considerable conservation of electricity if metering is popularised in these
Source: NCAER Surveys conducted by networking organisations
As in several other countries, until 1991, power generation, transmission and distribution
were a public monopoly in India. Since then, power generation and distribution are being
gradually privatized.
Although there was no separate budget line for rural power transmission until 1976, the
government provided power in rural areas through village-level transformers. Many of the
46
rural development schemes have focussed on meeting the rural universal service obligation
which consists in providing access to a power connection when demanded and at least one
light bulb per village. These development schemes are funded mainly by the Rural
Electrification Corporation. Rural electrification has also benefited from the policy of
Ministry of Non-conventional Energy (MNES) which guarantees a floor price of Rs 2.2 per
unit of power generated through alternate sources.
The supply of subsidised power to rural areas was based on two premises: the social equity
premise requires that they receive the same quality of power as urban areas. However, this
does not happen in reality because of the poor distribution system. At the same time, the
assumption is that rural incomes are on the average lower than urban incomes. Therefore, the
government cross-subsidizes rural power by charging tariffs that are lower than costs, while
keeping industrial and commercial tariffs above costs.
Power tariffs to rural residents are doubly subsidised: all domestic consumers are subsidised
by industry and rural consumers are subsidised further through low rates for agricultural
consumption. The total subsidy to residential and agricultural groups amounted to Rs. 26,982
crores in 1999-2000 which is almost 1.1 percent of GDP. About 80 percent of the subsidy
accrues to the agricultural sector where only a fixed charge (in some states no charge) is
levied for electricity consumption3. About 23 percent of subsidies to agriculture and
residential consumers were financed through cross-subsidies from the industrial and
commercial users in 1990-91. This percentage is increased to about 40 percent in 1999-2000.
Average revenue per unit was estimated at about Rs. 2.07 per kilowatt-hour in 1999-2000
compared to average cost of about Rs. 2.81 per kilowatt-hour that year4.
The power network in rural areas has been expanded through a centrally planned approach
that is based on population measures, rather than on the demand for power. It has resulted in
the creation of a vast network, but much of the capacity in the system is under-utilised. Over
the last decade, the central government has invested in capital creation in the power sector at
an almost constant per capita rate and the average annual per capita expenditure is around Rs.
360 (State-wise details in table 3.6).
3 Indian Country Framework Report for Private Participation in Infrastructure, World bank and Private InfrastructureAdvisory Facility, March 20004 Annual Report on the Working of State Electricity Boards & Electricity Departments, Planning Commission, April 2000
47
Table 3.6 Rural Power: State-wise Expenditure Per Capita (only central)
While private companies have entered distribution in Orissa, major capital investments have
not been made in the rural sector. This is partially because tariffs are still regulated. Political
intervention in agriculture does not allow for full cost recovery for power supplied.
Moreover, regulation of prices has prevented price competition, an important promoter of
cost-effective technology.
The major problems faced by the SEBs – high
transmission losses and non-recovery of tariffs
– continue, and in some areas have worsened.
The Boards are in severe need of funds that
will prevent theft and leakages from the system. However, their poor recovery record means
that they do not have the resources, and are also losing the incentive to invest further in the
rural areas.
Box 3.2: Power: The Current Scenario• Around 50% of households connected• High rate of power outages• Private provision is rare• High subsidy on power tariffs• Inadequate government funds
48
While publicly reported energy losses throughout the country are about 21 percent, closer
examination of SEB losses shows some serious underreporting. There are indications that
state governments overstate un-metered sales (in agriculture, for example) to avoid reporting
growing system losses due to theft, defective meters and under-investment. Since the fixed
charges in agriculture benefit large farmers more than small farmers, there is political
resistance to metering power. 24% of rural connections are un-metered. This promotes
wastage and makes it difficult to track electricity consumption. There are wide inter-regional
variations in the use of un-metered power ranging from 2 percent of households in the south
to 40 percent in the east
The state still has a monopoly over power distribution in the rural areas. New distribution
companies which could invest in a network to cover a few villages at perhaps a substation
level, face legal entry barriers. Current norms prevent them from using the existing SEB
networks and enhancing their efficiency through metering in a franchisee-type arrangement.
They will need to build independent parallel distribution networks for power, to ensure the
economic viability of the enterprises.
There are some private providers providing rural power. However most of these initiatives,
apart from the stand-alone solar lanterns, work outside the law. There are no realistic
estimates of supply by alternate providers. There are also legal initiatives by small producers
of electricity using alternate energy sources, but they have to sell the power generated to the
grid
The Electricity Supply Act of 1948 was modified in 1991 to allow private sector participation
in power generation. However, although the government has cleared projects which would
add additional generation capacity of 23,000 megawatts, only 3,000 megawatts of capacity
has so far been added by independent power producers5. Most of the additional capacity has
been added in large industries, in the form of captive power plants, which have increased in
the last decade from 10,000 megawatts to an estimated 27,500 megawatts.
5 Indian Country Framework Report for Private Participation in Infrastructure, World Bank and Private InfrastructureAdvisory Facility, March 2000
49
After the Electricity Regulatory
Commissions Act of 1998, many states set
up State Electricity Regulatory
Commissions (SERCs). A Central
Electricity regulatory Commission was also
set up.
3.2 CRITIQUE OF THE EXISTING APPROACHWith rural revenues being lower than urban revenues, low or negative profit margin makes
SEBs reluctant to expand services to rural areas. Contrary to the claim that rural agricultural
subsidies are meant to benefit poor and small farmers, the study shows that subsidies do not
adequately target the rural poor. Consider that 77 percent of poor households in rural areas do
not have an electric connection6. Typically, in the agricultural rural sector, those who pay for
power pay a fixed amount for consumption, which benefits the rich more than the poorer
farmers7.
Government funds for investment in rural electrification are inadequate. The average annual
government investment is around Rs. 8700 crores. The investment required for full coverage
as estimated by the Planning Commission is Rs. 107823 crores according to original norms
and Rs. 55423 crores according to revised norms (see table 3.7 & 3.8). Additional resources
(not anticipated by the Planning Commission) will be needed to cover the unconnected
villages, which are more remote and therefore more expensive to cover through the grid.
Covering these villages effectively will require the promotion of small distribution companies
which will put in last-pole services. It seems that entry of private companies into the rural
power sector is critical. Poor recovery of dues by the government is another factor, which
makes privatisation a better option.
6 Indian Country Framework Report for Private Participation in Infrastructure, World Bank and Private InfrastructureAdvisory Facility, March 20007 India Power Sector Reform and the poor, paper presented at the Workshop on Power Sector Reforms and the Poor, WorldBank, 18 April 2002
Box 3.3: A Pioneer in Sstate Power Reforms
The first state to initiate reforms in its power sectorwas Orissa, which began the process in July 1997.Licences were given to private distributioncompanies to provide services for four circles withinthe state. Other governments followed suit and now15 major states in India have their own stateelectricity regulatory commissions, in addition to theCERC (Central Electricity Regulatory Commission)set up in 1998.
50
Table 3.7 Estimate I Investment needed for full coverage based on original norms
The field surveys have shown that rural households typically demand small quantities of
power - two to four hours of lighting and use of fans per household. While income
differentials may continue to exist between rural and urban India, there is an increasing
realisation that the rising middle class in rural areas has the necessary affordability to pay
non-subsidised tariff rates for good quality supply. There is a need for a major shift in
strategy for village-level power provision, away from centrally planned targets (such as one
electricity pole per village) to improving access to services and better service delivery, so that
more people within a village would be willing and able to have access to power connections.
A three pronged strategy is recommended.
3.3.2 A Three-Pronged Strategy
The three-pronged strategy consists of focusing on promoting last-pole service providers to
improve distribution efficiency, removing barriers to the entry of informal providers, and
making provision for new connections.
8 Ehrhardt, David: Impact of Market Structure on Service Options for the Poor, PPIAF
52
Promoting last-mile service providers to improve distribution efficiency: Small distributors
can build on the existing power transmission network to ‘bring power’ to homes that are not
currently connected. The distribution lines of the large distribution companies would run up
to the periphery of the village. The last mile service provider determined through a
competitive process would link the village households to the distribution network run by the
large distribution company by investing in the necessary infrastructure. It would charge a
fixed amount for the electricity connection and a commission on the variable price charged
by the large distribution company. In case the last mile service provider is unable to collect
variable charges and transfer these to the large distribution company in time then the latter
would have the option of disconnecting the supply to the village or replace the current last
mile provider with another. There are built in incentives for the last mile provider to expand
his network inside the village and ensure payment from the customers. In fact it might be in
the interest of the last mile provider to operate with the assistance of the village panchayat or
other local community networks so as to reduce default in payment and electricity thefts.
Promoting local vendors and other informal
providers: In situations where it is
uneconomic to connect households to wired
services, informal providers could be
encouraged to supply small volumes of
power. This will introduce much-needed
competition at the district level, thus help in
increasing access to rural power. An
advantage of having service providers
operating at district levels will be that they
will focus on cost-reducing technologies,
franchising services to vendors, and so on. Suitable measures may be initiated to give
legitimacy to all informal and alternative providers. This could be brought about by low cost
registration of informal providers. The approach will promote new mini-scale developers who
produce power using new technologies. This would also encourage small providers
generating electricity through generators or environmentally viable mini-hydel plants.
Box 3.4 Using Savings to Finance Power
The Sahakari Vahan Dhrak Society, a non-bankingfinancial organisation, uses an innovative savingsscheme to give people solar lanterns with excellentafter-sales services. The weekly or monthly incomescheme had door-to-door collection agents, whowere also trained to carry out minor repairs orcontact technical help for more serious repairs. Themoney collected by the agent was invested by theorganisation, which used 1 percent of the interest tofinance the lanterns. The scheme provided users adependable supply of electricity when most needed.It was also income enhancing as it allowed smallbusinesses to extend their hours.
Source: NCAER: Field Study Notes.
53
New 'Roll Outs'
Developing feeder links to provide new connections (new ‘rollouts’) should be based on
socio-economic and technical considerations and the short-term and long-term costs relative
to those of mini-scale and stand-alone producers of power. This will promote least-cost
solutions that are best suited to meet local demand needs. Several recent innovations in power
allow for a combination of grid-based power production and distribution, and local mini-grids
set up by stand-alone providers. However, there is a limit to the amount of power that these
stand-alone systems can produce.
3.3.3 New Connections
New services that may be unprofitable to provide at a state level could become viable within
a smaller geographical sphere, such as a cluster of talukas. Feeder networks can be prioritised
within this cluster, based on population, economic activity, regional administrative
importance and aggregate income. Having arrived at reasonable cost and price estimates for
the new capacity roll-out, bidders can be invited to service the network. The bidder that
requires the least amount of subsidy to roll-out additional connections and to keep the
network operational at a predetermined quality of service is to be considered as a successful
bidder and hence forwarded the contract. The contract may include a one-time capital asset
subsidy or an interest subsidy. To ensure quality, the subsidy amount could be released yearly
and linked with compliance with quality standards. It will have a sunset limit of five years
after which the process can be reviewed. The network capacity so created could be serviced
through local vendors.
Another way of promoting electrification is through providing loans to private alternative
providers. Potential projects can be ranked according to the economic benefits generated and
the social equity weights. The social equity weight reflects the poverty in the community (set
of habitations) affected by the power supply project. The greater the poverty the greater the
social equity weight. Thus, the desirability of a power supply project is given by
Di = Si Bi Ni
where the subscript i refers to the power project i, S is the social equity weight, B refers to
the economic benefits generated and N refers to the population affected by the rural power
supply project.
54
How does the government help potential private suppliers of power? In this case the bank
collects applications for private sponsored power supply projects and then ranks them
according to the desirability criterion mentioned above. A cap on the amount of loan, which
can be provided to a power provision scheme is fixed. The bank then moves from project
ranked 1 to 2 to 3 and so on, selecting projects which ask for a loan less than the maximum
permitted amount till the total amount allocated for credit is exhausted. If there is more than
one proposed power supply scheme for a given community then the one requiring the least
amount of loan is selected.
3.3.4 New Technologies and New
Statutory Provisions
Are there new technologies which are
available for power supply that will provide
the same quality of power at lower costs?
There is no simple answer to this. There is a
lot of variation in rural areas in terms of
population density, resource supply,
topography, and so on. This means that
some technology will be more or less
efficient in different areas. In some cases,
alternative technologies such as mini-
hydro, wind, solar and biomass may prove
appropriate for rural supply, if both
distribution and maintenance are efficient.
The lowest cost of a service depends on the optimal density of usage, which is determined by
the number of connections in a system. The operation and maintenance cost of mini-hydro or
biomass technologies is much higher than solar or wind technologies which require near-zero
maintenance for up to 20 years. Capital investments, however, are loaded up-front in these
technologies. Finally, density will depend on how many people use the service, which in turn
will depend on how often they 'fail' to get electricity.
Thus the choice of technology will depend on the socio-economic and geographical attributes
at which the service is targeted and the objectives of the provider.
Box 3.5 Alternative Sources of Rural Power
Rural co-generation: The per unit cost ofproduction is Rs 35,000 per megawatt. However, theproduction is available only for 8 to 9 month of theyear if sugar bags is used. For the rest of the yearfossil fuels like diesel or other sources have to beused.Rural mini-hydro: The advantage here is thatvariable costs are zero. The cost of generation is theinvestment in building small dams (if required) andin capital equipment. The disadvantage is that to alarge extent it depends on the monsoons. As therecovery of revenue from power generation improvesover time, loans can be refinanced.Rural biomass option. In this technology, inputcosts of generation are negligible as local biomasscan be used, but this needs to be collected andprocessed. It also has very low operation andmaintenance costs. Gestation time is around 18months, but each plant generates volumes of powerthat are low, just enough to light up 2light bulbs andone fan each for 200 households.Solar home lighting/ lanterns systems: In thesetechnologies the capital cost is the main investmentand varies from Rs 3,500 for a stand-alone system toRs 25,000 for a home-lighting system.
Source: Conference on Rural Electrification, 2000
55
As mentioned earlier, Electricity Act 2003 carries some provisions specifically aimed
towards improving rural electrification. These include the intended notification of a national
policy permitting stand alone systems based on renewable and non-conventional sources
(Section 4) and a national policy for management of local distribution through Panchayat
Institutions, users’ associations, co-operative societies, non-Governmental organisations or
franchisees. The success of these potentially very beneficial ideas depends on the quality of
the follow-up, mainly at the State and local government levels. There is need for targeted
capacity-building programmes towards these areas in order to ensure speedy and efficient
implementation.
From the objective of promoting private investment in rural electrification, the most welcome
provision of Electricity Act 2003 is that the requirement of a formal ‘license’ is dispensed
with for generation and distribution of electricity in rural areas to be notified by the State
Government (Proviso to Section 14). This again needs quick follow-up by State
Governments.
3.4 FINANCING THE NEW APPROACH
3.4.1 Increasing Demand Through Micro-Finance
At present the regulator decides on power tariffs and connection costs, which in rural areas
are lower than in urban areas. In the absence of a well-developed market, customers cannot
successfully lobby for an improvement in service quality, and hence one way to increase rural
demand for power is to provide micro-credit to those who can afford the tariffs but not the
connection costs or the appliance that will work on electricity. Local (consumer/ agricultural)
credit societies could extend loans for people to buy a consumer durable, such as a pumpset.
These, in turn, could be supported through soft loans - low-interest, long-term loans with a
repayment period of 3-5 years. Another possibility is a deposit mobilisation scheme that
would give away a free refrigerator or a television set, or some similar incentive and part of
the interest on the deposit could be recovered to pay for the commodity owned by the
depositor.
56
3.4.2 Network Approaches through
Semi-Privatisation
Expanding network connections is as big
a challenge as providing services to
covered areas. One way to achieve this
achieved efficiently is through semi-
privatisation. One such scenario is where
last-mile distribution companies earn
revenues by leasing sub-station-level
distribution rights and improving the existing network
In order to attract private capital into rural power services competitive bidding for the right to
provide services could be introduced and the contract is awarded to the provider that needs
the least amount of (interest or capital) subsidies. It may be possible to pool all government
transfers and subsidies into a common fund for to attracting new players, although their use
has to be monitored for efficiency and they would have to have a time limit.
Dedicated Funds
Since the government is committed to a universal service obligation, a dedicated universal
service fund could be created through a levy of say around 5 percent on the revenues of all
power companies (generation and distribution). This could be used to provide soft loans for
rollout of new services, especially in areas where the ‘last mile’ to be covered is a marginal
group of poor households.
New Sources of Revenue
If the predominant power usage pattern for
those with connections in rural areas is for a few
hours a day, lower rates for non-prime time
usage would promote the base-line demand for
power. This could be met through an integrated
energy-planning approach for a village or a
group of villages. Building a base demand at the local level would make the provision of
power a more viable proposition.
Box 3.7 : Main Recommendations
• Promotion of last mile serviceproviders/informal providers
• Provision of loans to private providers onsocial equity basis.
• Increasing demand through micro-finance• Decentralised regulation• New measures to combat power theft
Box 3.6: Catering to the Needs of RenewableRnergy Source Power Producers
Power producers that use renewable energy sourcehave asked for telescoping the interest subsidy intothe future. This is because project costs are front-loaded, and operation costs are almost negligible. Itis only after two or three years from the date ofinitiation, when the demand for power from thesesources begins to build up and producers can begin torepay interest on the project.
Source: NCAER: Field Study Notes.
57
3.5 REGULATION AND
GOVERNANCEWe now take a quick look at the
current status of regulation in the rural
power sector. In the power sector State
Regulatory Commissions have taken
over the powers of regulation in both
(as mentioned earlier) rural and urban
areas. These regulatory commissions
fix the levels of subsidy for
backward/rural areas as well as the
compensation that the supplying utility should receive from government for providing
subsidized services. The modalities for providing access to those without access have been
left to the State government and to these regulatory commissions. There is an emphasis on
stand alone units for supply of power to remote rural areas. Regulatory issues, mainly those
regarding pricing are within the domain of the regulatory commissions. The state regulatory
commission can also leave the determination of market prices to the free play of market
forces.
Our recommendations under this head are listed below.
3.5.1 Regulators in a Multi-Operator Regime
Power regulatory authorities have been set up at the centre and subsequently in the states for
regulating the newly privatised power sector. However, given the country’s size and the
complexity of the sector, a single centralised authority, even at the state level will probably
be inadequate to regulate the multi-operator environment proposed in the new approach. A
more decentralised approach to regulation would more effectively monitor the multi-operator
regime.
Box 3.8 : Role of the Regulator
The regulator can choose from among several models fornetwork planning and new roll outs for power distributioncompanies:The Guidelines Model: The regulator sets guidelines forthe data needed from each distributor and guaranteesconfidentiality. Each power distributor carries out acosting exercise and submits the results to the regulator.The distributor showing the lowest cost wins the contract.Proxy Model: The regulator establishes the cost ofproviding the service. The distribution companies acceptor reject the cost structure.Forward-looking Model: The regulator does a costingand demand calculation and sets a benchmark maximumsubsidy. Distribution companies then conduct detailedcosting studies based on risk; the contract is awarded tothe company with the minimum subsidy requirements. Themost recent best practice is that incumbent sets prices andcosts.
58
3.5.2 Decentralised Regulators
It is important to have stakeholder participation at every step in the process right from the
planning stage. Discussions and consensus are especially important on the desired socio-
economic outcomes for new connections. Administrative costs could be kept low by having a
district-level multi-utility regulator for power and telecoms, which is independent of the local
Panchayati Raj institutions.
Pricing Rules
The essential feature of a multi-operator system is a revenue-sharing agreement on
interconnections between producers, transmitters, and distributors, of power. This would
ensure for example, that a small distribution company is not held to ransom by a large
electricity producing company. Apart from providing a level playing field for all providers,
consumers would receive least cost services.
There are different ways a regulator can ensure that consumers receive least-cost, good
quality services: One way of achieving this is through linking tariffs to costs. For medium-
sized networked monopoly providers the regulator can use a variant of this approach to
arrive at an estimation of price caps that ensures a reasonable rate of return on the investment
made by the provider. As the price may vary across regions, so it ought not to be fixed but
watched closely and regulated if necessary. The pricing rules that emerge from these
considerations are benchmark pricing and rate of return pricing (refer to the chapter on
regulation and governance for details).
Legal Issues
A major challenge faced by regulators in a multi-operator regime is to how to ensure that
providers honour their commitments. In most cases, the creditworthiness of the provider is a
major concern. Providers could be asked for a financial guarantee that is linked to the
promised quality of service.
Apart from intentional default, the provider may default because of factors beyond their
control. The performance of the economy, for example, may affect his performance; further,
in developing countries, less well-developed financial markets may not permit efficient risk
coverage. Financial regulations may prove to be another barrier in the performance of a
provider.
59
• Therefore, reforms pertaining to financial regulations should be undertakensimultaneously in order to generate confidence among providers.
It is not only important to have a fair and unbiased regulator but the authority must be seen by
all players as being unbiased. It is said that a fair regulator is one with whom all concerned
parties are equally but not greatly dissatisfied. At present there is a degree of mistrust among
the regulator, the newly corporatised public sector and new private providers of the service,
who view the regulator as biased. A more efficient and quick dispute resolution mechanism
will need to be put in place to deal with inter-connect agreements among different providers
of the service such as independent power producers, transmitters and distributors of the
service. Seeking retribution from the courts or tribunals is expensive and time consuming.
• An unbiased regulator with a more efficient and quick dispute resolution mechanism(tribunal) needs to be in place quickly
Electricity Act 2003 envisages the setting up a new high level ‘Appellate Tribunal for
Electricity’ that will have jurisdiction to hear appeals arising from the decisions of
Regulatory Commissions as also of adjudicating officers dealing with cases of power theft
(Section 110). While the Act provides for some degree of decentralisation (through the
setting up of ‘Benches’ of the Tribunal at various locations, the actual accessibility of this
mechanism by aggrieved users remains to be tested.
3.5.3 Decentralised Governance and Transparency
Certain practices have emerged as best practices in ensuring transparency and decentralised
governance strategies. Effective monitoring of network 'roll out' requires that the regulator is
close to the area where services are being set up. Case studies provided in a separate
annexure volume to this report give some clues as to what has worked most efficiently in
different parts of the country.
For all stand-alone providers of electricity the important issues were after-sales service and
availability of individual finance. Solutions that have managed to address both these issues
have led to successful initiatives. Given the size and diversity of the country, a major
specification for providing electricity should be service. Technology will get determined on
the basis of commercial viability. For example an area that has received a lot of financing,
including aid and an interest subsidy, is co-generation technology based on sugar bagass.
However, the power generated through this source is always supplied to the grid or to a third
60
party via the grid. It may be worthwhile to explore the direct supply of power from this
source to an independent distributor.
3.5.4 Combating Power Thefts
In India a huge amount of power is stolen. In 2002 the Uttar Haryana Bijlee Vitaran Nigam
investigated 34,031 consumers and discovered 2,043 cases of theft. On this basis about 6
percent of customers are found to steal power. Non-payment of bills is another serious
problem. A high incidence of power thefts and non-payment of bills block privatisation. Any
endeavour towards alleviating these phenomena is bound to lead to expenditure. One should
try to maximise the net benefit from such expenditure.
Common methods used for power theft are (a) tampering with terminal seals, (b) breaking
control wires (c) tampering with metre seals (d) shorting control wires (e) direct connections
to grid. (f) tampering with the metres and (g) switching control wires. The Provincial
Electric Authority (PEA) of Thailand has successfully tackled the problem of power theft
through regular inspections of meters and gridlines with priority given to the inspection of
meters belonging to large consumers and those with a bad record in the past. Use of remote
sensing meters by inspection staff to monitor consumption can also help.
The experience of Eastern European countries suggests some ways of checking default on the
payment of electricity bills (Suriyamongkol 2002). These are elimination of intermediaries in
billing, metering and collection, incentives to collection staff for good bill collection,
discounts to customers who pay in advance for electricity and legal reform enabling
disconnection in case of non- payment.
It is a welcome feature of Electricity Act 2003 that it strengthens the hitherto weak machinery
for tackling power thefts. A particular deficiency was that punitive action could be stalled by
wrongdoers in various ways. This has been corrected in the new Statute by defining power
thefts and related irregularities as criminal offences over which civil courts will have no
jurisdiction even for granting ‘stay of proceedings’ (a favourite route to delay punitive
action). The Act also empowers State Governments to set up Special Courts as necessary and
to conduct summary trials.
Again, timely follow-up action by State Governments and power utilities is needed to
translate these provisions into tangible improvements.
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CONCLUSIONThere has been an initial move towards privatisation in generation and distribution of power.
The challenge is to shift to providing more economically viable infrastructure service, using
affordability criteria. Small private providers can act as an intermediary between the
company owning the large distribution network (which in almost all cases is a public sector
enterprise) and the ultimate consumer. In many cases they can act as stand alone providers
which run generators or mini-hydel plants for provision of electricity at the village level. The
new approach envisages that these will be provided with the necessary subsidies. Private
ownership within the sector should result in improved service standards, increased efficiency,
possibility of competitive industry structures and an economically viable industry with
assured returns. It would also result in multi-operator regimes using different production and
distribution strategies and ensure that the diverse needs of all consumers are met. All this
would need better developed and regulated financial markets and a more effective regulatory
regime.
62
ROAD AND TRANSPORT
IINNDDIIAA
RRUURRAALL
IINNFFRRAASSTTRRUUCCTTUURREE
RREEPPOORRTT
RROOAADDSS AANNDD
TTRRAANNSSPPOORRTT
63
CHAPTER 4ROADS AND TRANSPORT SECTOR
OVERVIEWDevelopment of roads is known to generally help in promoting economic growth andlessening the incidence of poverty. The enabling mechanisms are a better access to input andoutput markets and education and training facilities. In India the access of villages to roadsleaves much to be desired. Around 44% of the rural population is not covered by the ruralroad network.
Investment required for rural roads is provided by the central government, and the operationand maintenance expenditure is incurred by the state government. The investment made inthe past ten years at 2000-01 prices is Rs. 21,327 crores whereas the investment required forfull coverage is Rs. 15,643 crores. At this rate full coverage would take eight years toachieve. Operation and maintenance of the expanding road network will be another problemas state governments spend 95% of their road budget in paying staff salaries and only 5% isavailable for operation and maintenance expenditure.
How does one facilitate faster attainment of full coverage and ensure better operation andmaintenance of roads? Allowing private providers and village communities to build roadsand recover their expenditure through user charges is one option. The government can helpgreatly through capital subsidies. Even state governments can augment their operation andmaintenance expenditure through levying user charges. The economic rationale for usercharges is quite sound. Revenue collected from users is in direct proportion to the vehiculartraffic and thus provides for higher operation and maintenance expenditures which the morecongested roads require.
The legal framework for collection of tolls by Central and State governments is in place. TheIndian Tolls Act of 1851 enables the Government of India to levy tolls for usage of publicroads and bridges in order to recover the project cost. The provisions of the Act have beenadopted by all the State Governments through state level acts which give these governmentsthe right to levy tolls on any road or bridge made or repaired at the expense of the stategovernment. However, levy of tolls at the village community level will require facilitatinglegislation.
Recently certain states like Rajasthan and Gujarat have passed legislations/policies, whichpermit private entities to collect tolls on roads, constructed by them. These tolls can cover theconstruction cost as well as provide an adequate return on investment.
The government has a limited budget for the rural road network. Ranking rural roadprojects on the basis of economic benefits generated and social equity helps the governmentto identify the relative importance of projects. The budget can then be allocated on the basisof the relative importance of road projects in the form of loans, subsidies and transfers.
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4.1 STATUS OF RURAL ROADS
4.1.1 Importance of Rural RoadsThe development literature on rural roads indicates a positive relationship between goodquality feeder roads and rural development, growth and rural incomes. One of the majorbenefits is access to markets, which increases employment and business opportunities, andencourages small-scale and cottage industry activities, roadside stalls, and shops in thevillages. Good, well-designed rural roads have proper drainage and consequently produce apositive effect on the environment.
4.1.2 The Current PictureThe proportion of villages connected by ruralroads has gone up considerably during the lastdecade and a half. In all, 13 states and unionterritories have village connectivity up to 85percent and above, 5 states have 60 percent to85 percent connectivity and 14 states/unionterritories have less than 60 percent
connectivity. However, the picture in absolute terms is far from satisfactory. Only around40% of the 661,000 villages in India are not connected with all-weather roads, though there isa wide disparity in connectivity among states. For example, in Karnataka only 0.4% ofvillages were unconnected in 1997. For Madhya Pradesh inclusive of Chattisgarh the figurewas as high as 71.6%. Bihar another deprived state with a proportion of unconnected villagesequal to 52%. Many villages still rely on earth tracks that are unsuitable for motorizedtraffic due to poor riding quality, and which become practically impossible during the rainyseason because of missing bridges and culverts. Much of the network is under-developed, oflow standard and poor quality, structurally weak, poorly maintained, and extremelydeteriorated. The lack of roads means that an estimated 20-30 percent of the agricultural,horticultural and forest produce gets wasted because of inability of transporting the produceto marketing and processing centres.
Box 4.1: Roads: Current Scenario
• Around 40% of villages unconnected• Huge losses for state transport undertakings• Main focus of road construction is
employment generation and not quality• Poor maintenance by state governments• Substantial rise in incomes and vehicle
ownership, relatively small expansion of roadstock.
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Table 4.1 Total Stock of Rural Roads As on 31st March (Statewise)
(In Km.)Major States 1990 1991 1992 1993 1994 1995 1996 1997Andhra Pradesh Total 133,307 133,371 135,929 145,243 148,753 154,751 155,632 160,637
Surfaced 1,324 1,389 2,157 1,279 1,315 1,304 1,323 1,396All India Total 1359712 1376938 1398168 1414865 1433781 1460146 1496831 1560705
Surfaced 579257 593046 608702 666287 683078 706601 682962 748386Source: Basic Road Statistics-Ministry of Surface Transport, New Delhi (1990-97)
66
The government’s commitment to providing rural roads has achieved some good results:Between 1990 and 1997, the total length of rural roads increased from 1,359, 712 Km. to1,560,705 Km. in 20 states; surfaced roads increased from 5,79,257 Km. to 7,48,386 Km.Table 4.1 lists the total stock of rural roads in different states in different years in the period1990-97. Table 4.2 gives the additions to road length in different states in the period 1990-97. The net addition in rural road length is 78,500 Km. This moderate figure understates thesuccess in increasing rural road length. This is because the negative figures in table 4.2 aredue to upgradation of village roads to higher level roads. Therefore, they represent a positivephenomenon.
All India Total 1359712 17226 21230 16697 18916 26365 36685 63874 2,152,801Surfaced 579257 13789 15656 57585 16791 23523 -23639 65424 1,182,935
Note: 15% increase in length of Rural Roads at All India level in the period 1990-97 Source: Basic Road Statistics-Ministry of Surface Transport, New Delhi (1990-97)
67
Table 4.3 gives an idea of the proportion of villages which were not served by rural roads in1997.
Table 4.3 Rural Roads: Gaps in Supply
State Number ofVillages
Estimated Number OfUnconnected Villages AsOn 31/03/97
Note: @ Based on 1981 census data According to 1991 census, there are 15822 villages and 855 villages in TamilNadu and Tripura respectively. In their cases, total villages include all Hamlets/small villages in the State. As aresult of this, total villages in the country are shown at a little over 6 lakhs.Source : Planning Commission/Basic Road Statistics of India 1998-99
VILLAGES UNCONNECTED (%) BY ROAD
01020304050607080
And
hra
Pra
desh
Bih
ar/J
hark
hand
Har
yana
Ker
ala
Man
ipur
Nag
alan
d
Raj
asth
an
Trip
ura
All
Indi
a
States
Per
cen
tag
e
Percentage Unconnected
68
From roads we move to transport services. State-promoted rural road transport services wereinstituted to make motorised transport more affordable, and these programmes areimplemented by the centre and states. A major state’s scheme is the operation of roadtransport services through state road transport undertakings. However, even thoughmoderately effective services have been provided these undertakings are incurring hugelosses. The financial performance of the 48 state road transport undertakings whose resourcesare assessed in the Planning Commission has been poor. Their losses have been increasing; atthe beginning of the Ninth Plan, net losses were Rs. 770 crore, which increased to Rs.1,196.08 crore in 1997-98 and to Rs. 1,576.60 crore in 1999-2000.
4.1.3 The Approach so FarThe government is committed to connecting all villages with roads, through variousdevelopment schemes. One of the most important schemes is the recently launched PrimeMinister’s Gram Sadak Yojana (PMGSY) which aims at providing rural, all-weather roadconnectivity to habitations with more than 1,000 people by 2002-3, and to habitations withmore than 500 people by the end of the Tenth Plan (2007-8). Besides providing connectivityto about 10,000 habitations, the program also aims to upgrade about 5,00,000 km of existing
Box 4.2: The PMGSY Scheme
The Prime Minister’s Gram Sadak Yojana (PMGSY) is a well-conceived scheme based on feeder-networkconnections and network prioritisation, and built through community participation. Management of theroads would be handed over to the local panchayats after a five-year period. However, there are severalareas in which implementation lags behind the initial intention of the conceivers: namely who shouldprioritise the road selection, how to ensure zero maintenance for the first five years before the panchayatstake over management, how to promote new infrastructure development resulting from good roads, and soon.In its centralised administration the scheme meets the objectives of administrative efficiency. The decisionon which project to choose among various competing alternatives is based on a road index that is biased infavour of an already developed infrastructure. Providing connections to the existing infrastructure may bethe most rational action from an administrative efficiency perspective. However, it fails to meet theobjective of social equity.The scheme envisages that the panchayats will be responsible for management after an initial period, butthere are numerous instances of government schemes in drinking water supply or social forestry wherelocal panchayats have been reluctant to take over. Often this is because projects are awarded tocommunities by autonomous centralised plans, and in many cases are not what the community needs, inwhich case maintenance is a huge financial burden.By not involving villagers in the planning process on decisions such as selection of road quality,maintenance expenditure and the like, the PMGSY scheme may face the same problems of long-terminsustainability faced by earlier schemes. It needs to have a mechanism that gives some importance to theviews of road users i.e. the villages that are to be connected. One method would be to invite proposals fromvillages and rank these according to socio-economic and technical considerations but subsidise themaccording to willingness to pay with a maximum cap on subsidy.The scheme also still does not have a clear time table for implementation which gives the sequence ofevents and the sources of funds. The project implementation unit (PIU) operates through district-levelapproval and state approval. It is a long decision chain and often leads to delays. The PIU also has no wayto ensure the quality of the constructed road over five years. It cannot hold a contractor accountable, apartfrom withholding the 10 percent payment at the end of the project. Some options could be: an annuityscheme which carries a maintenance clause, subject to certain criteria of traffic density; some provision forraising additional funds to repair damages to the road over the period based on assumptions about trafficgrowth; providing micro-finance for vehicle purchase to ensure traffic growth and thereby raise funds. Thiswould require establishing a baseline of current road usage according to a vehicle mix and their registrationwith the village authority.
69
rural roads. The major source of funding of the program is the CRF, which will allocateabout Rs. 2500 crore in 2001 to rural roads. The allocation will need to increase withincreasing consumption of diesel.
The central government directly finances theconstruction of black-topped roads in ruralareas, while funds earmarked for ruraldevelopment programmes go towardsbuilding roads which are not black-topped(look at Table 4.4). The main focus of thelatter has been employment generation andactual construction is often incidental.
Table 4.4 Central Budget Allocation For Rural Roads And Rural Development Schemes (Rs. crore)
Source: Central Budgets (Year 1990-2001)-Government of India
The operations and maintenance expenses of rural roads are borne by state governments,
which are also responsible for rural transport services. State governments finance the
operation and maintenance of roads and transport services through their budgets and revenues
generated from the sector. (Table 4.5).
Box 4.3: User fees
It is possible to work out user fees for differentvehicles for new roads created under the PMGSY.Costing models exist that can calculate user feesper vehicle/passenger trip that would raisesufficient funds to maintain the road through itslifetime. Thus the cost of maintaining a black-topped road for low-density vehicle usage maybecome economically viable with a capital assetsubsidy. The challenge is to create a system thatwould recover user fees and plough the funds backfor maintenance.
70
Table 4.5 State Revenues Over Time (Rs.)
Year Revenue From StatesTaxes
(Current Prices)
Revenue From StatesTaxes
(91-92 prices)1990-91 30344.81991-92 35756 357561992-93 39868.3 363801993-94 46424.1 394071994-95 55734.5 429781995-96 63865.3 446851996-97 71101.5 455301997-98 81229.4 486041998-99 93530.7 494761999-00 111317.6 56959Source: State Finances –published by RBI 1999-2000,2000-01 and Report on currency and finance:volume 2-statistical statements by RBI (1990-91 to 1998-99)
In theory, roads are supposed to be built through community participation and local
management, but in practice the government takes a centrally directed, supply-based
approach to road provision, which uses population and social infrastructure density criteria to
allocate resources to these schemes.
The construction of rural roads is basically unregulated in the sense that individuals can
construct mud tracks and small private roads without seeking permission. However, no
private agent is allowed to charge tolls. In practice around 99% of roads in rural areas are
constructed by the government. The government usually contracts out the job of construction
to a private contractor. The contract amount varies from Rs 1 crore to Rs 5 crores with a
performance guarantee up to five years. However, a major drawback is that the issue of
contractors’ qualification is not addressed. Anecdotal evidence seems to indicate that the
performance guarantee clause is not evoked even when performance standards are violated. It
is because of this issue that the role of rural communities should be strengthened in
monitoring the quality of rural roads.
4.2 CRITIQUE OF THE TRADITIONAL APPROACHThe government’s approach to rural connectivity has not ensured good quality rural roads.
Financial constraints have been a major problem: central funds for building roads have not
been increasing at the desired rate, and state governments have not been able to expand their
revenue base to meet the operation and maintenance costs of even the existing roads.
71
Though central government’s budget allocation has gone up about three times in real terms
during the decade of the nineties the total rural road length in the period 1990-97 has
increased by only 15 percent. This can be attributed to two facts. First, the funds at the
disposal of the state government for operation and maintenance have been inadequate. Most
state governments do not have the funds for proper road maintenance, since much of the
funds are diverted towards looking after state highways and other district roads and paying
staff salaries. Only around 5 percent of state public works department budgets is spent on
road maintenance (Interview with ex-PWD engineers at the Rural Roads Committee Meeting
in Mumbai, 3 March 2001). This has led to poor maintenance of roads and poor services.
We now turn to the criteria adopted for road construction. The central government’s approach
to building roads based on population density has provided roads to the main settlements of
most villages, but not to the hamlets of these villages. Thus, intra-village connectivity is
poor.
State transport services are the major providers of rural transport. The huge losses incurred
by state transport undertakings can be explained by their uneconomic tariffs and routes, high
staff to bus ratios, low staff productivity and poor management practices (see table 3.6).
These losses have been growing over time. The total losses at the All India level amounted to
Rs. 344 crores in 92-93. By 1999-2000 the losses had jumped to 1,823 crores. In the year
2000-01, barring the state transport undertakings of Andhra Pradesh, Calcutta and Karnataka
not a single state transport undertaking registered a positive profit. The factors listed above
which are responsible for these huge losses need to be remedied.
State passenger buses have a low frequency of operation and a substantial carrying capacity
of 30 to 40 people, but because they operate on fixed routes at fixed times, their regular users
are usually people in the service sector, and not the poor. Their operations are based on scale
economies and intend to subsidize for long-distance travel at the expense of short distance
travel. However, given that only a small number of commuters use the buses to typically
travel short distances, such a system of cross-subsidy has not been financially viable (Table
No. of Rural Households 1993-94 No. of Rural Households 1994-95
No. of Rural Households 1995-96
80
Thus, it seems that to attain full coverage through a rural road network one has to supplement
rural road building with other means of constructing roads. Attention also has to be paid to
the maintenance of rural roads, given the woeful historical experience in this regard. The
perception of roads as a public good, with free and open access has to change because this
has resulted in their not being managed according to economic principles. Rural roads can be
converted into limited access goods, with user fees linked to access.
Box 4.4 suggests that it might be
worthwhile to encourage the formation of
village level road associations. These road
associations will finance the construction of
village roads through contributions from its
members and subsidies from the
government. Because the association will
own the road, it will be able to collect user
fees and ensure that its contributing
members are adequately compensated.
The design of user fees is discussed in a separate section. The government by financing the
purchase of motorized vehicles can increase the potential user revenue generated from a
stretch of village road. This will, in turn, lead to an increase in the amount of contribution
that a village road association can raise which will eventually lead to more and better quality
village roads.
4.4.1 Development of Rural Road Network on the basis of Need, Benefits and
Demand/Decentralisation of Road Building and Maintenance
The government has a limited budget for spending on rural roads in a given jurisdiction, say a
district. Potential road projects can be ranked according to the economic benefits generated
and the social equity weights. The social equity weight reflects the poverty in the community
(set of habitations) affected by the rural road project. The greater the poverty the greater the
social equity weight. Thus, the desirability of a rural road project is given by
Di = Si Bi Ni
Box 4.4: Roads as Pseudo-private Goods
Worldwide, rural roads that are district/tertiary roadsserve many villages and are as close to public goodsas possible. They are therefore almost always entirelyfinanced by public funds. The very lowest level ofrural road, the ‘dead-end’ type’, which typically isthe last two or three Km. of the access road to avillage is closer to a ‘pseudo-private’ good andtherefore suitable for community ownership. In somecountries, communities have been allowed to acquirelegal ownership of these roads and in some caseshave even received public grants to cover part of themaintenance costs. In Sweden and Finland, forexample, more than two-thirds of the roadnetwork (rural and urban) is owned by privateroads associations.Source: Personal communication, 11 June 2001: ChristinaE. Malmberg Calvo, Senior Economist, Transport andUrban Development Division, INFTD .)
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Where the subscript i refers to the road project i, S to the social equity weight, B refers to the
economic benefits generated and N refers to the population affected by the rural road project.
Once the desirability measures for potential road projects have been computed these can be
ranked according to their desirability. The communities involved can then be asked to bid for
the various projects and reveal their willingness to pay. The government then proceeds as
follows: It selects the project ranked 1 first for implementation and provides the village
community a subsidy equal to the difference between the cost of maintaining the road and
willingness to pay. If the latter is greater than the former then no subsidy is provided. The
government then selects project 2 for implementation and provides a subsidy according to the
same principle. In this manner it keeps selecting projects and providing subsidies till the
entire budget is exhausted. How does one ensure regional equality in the selection of
projects? Note that there are three or four grades of roads, which can be provided to a
community. While envisaging the building of a road for a community all grades of roads
should be considered as potential road projects. If this is combined with a maximum cap on
subsidy then a project involving a huge subsidy may not be selected even if it ranks very high
on the priority list and another project for the same area with a lower rank and a lower
required subsidy might be selected. This enables the government to subsidise the maximum
number of projects in a year if not more than one project is selected per community.
The village community can undertake the cost of constructing the road. Alternatively, two or
three private contractors could be identified to maintain an entire taluka/ district. This would
work in regions where the size of the contract is large enough to attract large contractors, who
would franchise with local contractors. Funds for construction and maintenance can be made
available by the government in the form of an annuity (public funds apportioned over time,
which includes capital costs, operations and maintenance costs and interest on capital). Here,
the 'risk' is shared equally by the contractor and the government. Contractors could be
selected through competitive bidding on the basis of the lowest annuity required for the
project. The National Highway Authority of India (NHAI) has successfully used competitive
bidding for annuity for nine highway construction projects, which are part of the golden
quadrilateral (IDFC presentation at CII Seminar 2000 December).
As a supplemental effort, permits to operate small and tiny passenger transport services may
be given to contractors who would also maintain roads. This would serve to regularise the
informal services and promote them along routes with higher demand. Increased and
82
improved transport service will in turn fuel the local demand for building and maintaining
good quality roads.
4.4.2 Finance to Stimulate Demand for Vehicles
A large proportion of the rural population does not have adequate income to purchase
vehicles on their own. This often implies that they are not able to take advantage of the
benefits provided by rural roads. A major objective of the new strategy would be to promote
vehicle ownership among individuals and small operators, which are as competitive as the
large public undertakings in providing small volumes of transport (appendix II). This could
be done through the provision of micro-finance. The use of roads will increase, and if
competition increases among small transport operators, transport costs for passenger traffic
will fall, which will in turn trigger a second round of increase in road use. The indirect
positive consequence would be a demand for better quality local roads by daily commuters.
Vehicle ownership can be increased through provision of credit (see section below for
providing finance)
4.4.3 Encouragement to Small
Operators
Field studies undertaken for this
project indicate that the operating
costs of small operators are very
high. First, the informal nature of
their operations is associated with
the payment of 'private rents' to the
local police and transport authorities
to keep operating. Further, they pay
higher fuel prices because they operate in areas that are far from petrol pumps. The poor
condition of rural roads on which their vehicles ply raises vehicle maintenance costs; they
also face more frequent breakdowns resulting in more non-operating days. All this results in
high operating costs and poor vehicle maintenance, which leads to unsafe and expensive
travel (Box 4.5).
Box 4.5: Informal Rural Transport Operators: Gadchiroli
In this village in Maharashtra, each taluka usually has 6 to 8jeep operators, who run services on all the village roads fromthe taluka headquarters. Each operator makes 6-8 trips a day,and their monthly operating costs are around Rs.12,000,which cover salaries, vehicle maintenance and ‘rents’ ofapproximately Rs. 1,200 to local regulators, such as the policeand traffic authorities. Fuel, which costs Rs 27 a litre in theurban areas, costs at approximately Rs 35-45 per litre (2001prices). With the current low volumes of demand, they cannotafford to pay for regular permits that would allow them tooperate services connecting small villages.
Source: NCAER Case Study of Gadchiroli in Maharashtra, SRTTProject
83
These informal providers can be
regularised by having them to register
for a nominal fee, which would ensure
their legal status. Registration would
reduce their operating costs and perhaps
increase demand for their services. The
reduction in operating costs will
encourage the entry of more operators.
4.4.4 Better Financial Management
The need for better financial management cannot be over-emphasised given the paucity of
funds for constructing rural roads, the unavailability of funds for rural road maintenance and
the enormous losses being incurred by state transport undertakings.
Studies in Kerala and Andhra Pradesh show that villagers are willing to raise money for
village roads as they realise the importance of better road connectivity. There are examples of
sugar factories is Maharashtra funding road building to collect sugarcane during the crushing
season, and sabzi mandis in Punjab, Haryana and Tamil Nadu charging a cess to raise
finances for building rural roads. Thus, private sector financing of some rural road
construction is possible. However, much of the village road network might however have to
financed by the beneficiary village communities. These can be subsidised by the government
on the basis of the principles listed later in the concluding chapter.
State transport undertakings have been incurring huge losses in all states, and the subsidies
they receive have not targeted the poor. A 'sun-set’ time limit on the subsidies given to these
enterprises may force them to become more competitive, by unbundling and downsizing.
Another option would be to auction the routes and collect a fixed license fee, where possible,
from a local consortium of operators for, say, an entire district. For this to work there should
be no stipulations on technology or vehicle-mix. Where services are necessary but not
financially viable, a subsidy can be given to the bidder who needs the lowest subsidy to
operate the route. Subsidies may continue to be necessary to keep transport services afloat,
but they should be provided up-front, and should be targeted and have a sunset time limit.
Box 4.6: Using Subsidies to Attract Funds
In the annuity scheme set in place by the NationalHighway Authority of India (NHAI) to build the nationalhighway network,' the government pays a contractingcompany to build and operate a section of the highway.For this, the company receives an annual amount overthe life of the project, which covers the capitalinvestment, a reasonable rate of return on this capital,and the operation and maintenance costs. Thus the riskof ensuring the quality of the road is equally shared bythe provider and the funding agency and the consumersget better quality roads.
84
4.4.5 Development of Simple User FeesHalf the villages in the focus group discussions conducted for this study were willing to pay alittle extra as passenger fares. In the Swajal scheme monthly user fees are as low as Rs. 20per household. User charges, at least initially, should recover only the marginal cost ofproviding services. Marginal cost represents the cost of producing an extra unit, and in therural transport sector should be calculated for intermediate public transport and motorisedtransport users and not for households.
It is possible to set up simple, easily communicable, transparent and sustainable per capitauser fees for rural roads. Sustainable fees would mean that the per capita charges cover thefinite life of the rural road, its replacement or upgradation costs, charging or input costs andmaintenance expenses. The challenge is therefore not how to charge the user fees but to'collect’ and ‘manage' the amount collected, which requires setting up institutionalmechanisms.
We now look at some of the finer details for designing user fees. In this case quantity denotesthe number of trips and p determines the user fee. Consider the case where a unique fee p ischarged per trip. Though this is slightly unfair because of the heterogeneity of means oftransport it is easier to administer.
Estimation of individual demand functions can be done for villages in which toll roads arealready functioning. A short example illustrates how this is done. Suppose a person makesfour trips by bus in a month. If the capacity of a bus is 100 persons and a bus in a rural area isaround 60 percent full then he will be responsible for “ 1/15th of a bus using the road”. It ispossible to obtain his demand for bus trips for each individual use , say business or visitingrelatives etc. This is necessary since each use has a different price elasticity. Taking the usewise demands for different people in the village we can obtain a use wise demand curve.The market demand curve for trips is given by :
iii
jj
nypqpQ ).,()( ∑∑=
where qj is the individual demand for use j. Following these the usual pricing rules can beapplied. If separate tolls for different means of transport are to be levied then the use wisedemands for each mode of transport is estimated and used to find an aggregate demand forthat mode of transport. We now illustrate rate of return pricing in this case:
)1)(,.......()( 1 rQQCppQ Mjjj +=∑
85
where Qj is the number of trips using the jth mode of transport that are demanded and m isthe number of varieties of transport.For viable collection of user fees the jurisdiction of responsibilities among different tiers ofthe Panchayati Raj will need to be redefined. One suggestion is to make the ksherta
panchayat, the middle tier of the Panchayati Raj institutions that cuts across several villages,responsible for collecting user fees, while the 2-3 kilometre dead-end road to the villagecould be managed by the village panchayat.
4.4.6 Local governanceA fairly decentralised governancestructure will be needed for contractingwith builders or project developers,collection of user fees, and monitoringroad maintenance. Regulation at a locallevel may also be needed to prevent
collusion and 'capture' by the small operators. Setting up a decentralised regulator to overseethe operations of several small providers may be too expensive, so it may be possible toextend the role of Panchayati Raj institutions to cover regulation and resolution of localdisputes. This will first require resolving the issue of the jurisdiction of different PanchayatiRaj institutions. A dual strategy would be required for the jurisdiction of community-basedorganisation (CBO)-managed roads that end at the village and those that cut across severalvillages. The other alternative to toll charges (which are somewhat difficult to collect) is asystem of registration charges for vehicles.
CONCLUSIONThe development of the rural road network is plagued by a shortage of funds for roadconstruction and an even more dire inadequacy of funds for road maintenance. In thischapter we have proposed part financing of roads by village communities, some financing ofrural roads by the private sector and the levy of user fees to provide for operation andmaintenance expenditure. It is recommended that the government play a larger role instimulating vehicular demand through micro-finance and thus help in diffusing the benefits ofrural roads. It is also felt that informal operators, who often provide valuable transportservices, should be legalised and provided incentives.
Box 4.7: Roads: Recommendations
• Use needs, benefits and demand as basis for roaddevelopment
• Encourage the formation of village level rural roadassociations
• Micro-finance to stimulate demand for vehicles• Encouragement to small transport operators• Development of simple user fees
86
IINNDDIIAA
RRUURRAALL
IINNFFRRAASSTTRRUUCCTTUURREE
RREEPPOORRTT
DDRRIINNKKIINNGG WWAATTEERR &&
SSAANNIITTAATTIIOONN
87
CHAPTER 5
DRINKING WATER AND SANITATION SECTOR
OVERVIEW
In rural India the problem is not one of scarcity of drinking water sources. Around 95% of thepopulation has access to some sort of drinking water source. However, the state governments, whichare responsible for operation and maintenance of these sources, are unable to do so because of ashortage of funds. Moreover, low water charges which do not vary with the quantity consumed andpoor collection of these charges imply that the funds necessary for operation and maintenance are notrecovered from the consumers. Fixed charges also result in wastage of drinking water, increase inwaiting time for drinking water and inequitable distribution.
This chapter therefore suggests the collection of per unit user charges, which prevents wastage ofdrinking water while at the same time ensuring enough water supply to the people at the lower end ofthe income distribution and helps recover the operation and maintenance charges. All this is to bedone in a framework of decentralised regulation and governance where the regulator at the district orthe circle level fixes the tariffs.
As far as sanitation is concerned the problem unlike drinking water is one of poor coverage with theper capita investment in sanitation being Rs 6.7 in 2000-01. The 80% subsidy scheme of thegovernment is not for the BPL families workable on an All India basis and should be replaced by asystem of recognition and awards.
Thus, the objectives of the government in devising a strategy for drinking water and sanitation shouldbe - (a) devising a scheme of consumption dependant user charges which prevents wastage, isaffordable to all and provides for operation and maintenance expenditure and (b) increasing thecoverage of sanitation facilities by increasing the budgeted expenditure on these facilities.
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5.1 STATUS OF RURAL DRINKING WATER AND SANITATION
5.1.1 Economic Benefits and Costs of Drinking Water and SanitationThe literature on rural drinking water indicates a positive relationship between a wellperforming distribution system and rural development, growth and poverty reduction. Well-developed, safe rural drinking water and sanitation facilities improve the health of ruralinhabitants, and consequently result in better utilisation of education facilities and access toemployment opportunities. This, in turn, supports agricultural and rural development. Theenvironment is also improved through better drainage.
A well-developed water distribution system requires large capital investments, but its long-term benefits accrue only when supported by an effective system of maintenance which canprove expensive. At the same time, drinking water is seen as a merit-good and its supply isgenerally maintained regardless of the magnitude of cost recovery. The resultant impact isusually poor maintenance of the distribution system and its consequent deterioration. Such asituation, besides contributing to a reduction in the operative life of the distribution system,has also stifled the development of more efficient, low cost options for service delivery anddenied users as consumers the opportunity to demand better services.
5.1.2 The Current SituationThe government has performed creditably in setting up drinking water sources all over thecountry. However, the number of problem villages often increases over time because of poormaintenance of assets. Panchayats in most states have not been able to collect user fees tofinance Operation and Maintenance Expenditure (O & M). Moreover, the pumpsets providedby the government often break down and facilities to repair them are inadequate. The powersupply needed for operating the pump sets is often unreliable and of poor quality.
The demand of the rural population for quality surface water has not been adequately met.Small private operators in the rural water sector face entry barriers. They also suffer pricebarriers as government water is mostly supplied free. Despite these obstacles, many informalproviders exist in the rural water sector. Tariffs for informal services are set according to thevolume of supply, irrespective of quality, and range from Rs 5-10 a bucket to Rs 1,200 for atanker9. The revenues generated by informal service providers indicate that there is a large,untapped potential market for rural domestic water supply. Availability of additional funds islikely to improve the quality of supply and produce a demand push for better maintenance of
9 Vaijayati Pariyah, Water Sector Workshops, April 2002
89
assets. Most localised water supply schemes can be launched with very small investmentswith the possibility of these being recovered within a short period of time. But as no formalwater markets have developed for these projects, the number of private providers of waterservices is not adequate.
By 2002, all the habitations were expected to be covered. However on the basis of existingnorms, the coverage of drinking water supply as on 1.4.2002 to the 1.42 million habitations inIndia was 89.5 percent ‘fully covered’, 9.4 percent ‘partially covered’ and around 1 percent‘not covered’. There are, however, some inter-state variations in the coverage as is evidentfrom figures in table 5.1
Table 5.1 Status of Habitations as on 1.4.2002 (Provisional)
Status as on 1.4.2002 (Provisional)Sl. No State/UTNC PC FC Total
Total 15798 133305 1273561 1422664NC= Not covered, PC=Partially Covered, FC=Fully covered.*In case of Uttar Pradesh FC habitations include 125 habitations merged in urban areas (as per information received fromUP Govt. vide letter no. 392/20 point program/rural-1 dt.9.4.2002
90
The status of coverage of rural habitations with drinking water facilities as on 31.12.2003 is
as under :
Type of Coverage No. of habitations % of total habitations worked(upto 31.12.2003)
States with regard to the slippage of fully covered habitations getting into partially covered to
not covered categories, and the partially covered are becoming not covered inhabitants is not
reflected in the coverage. Hence coverage figures may vary at any given point of time. This
can be seen from a perusal of coverage figures listed for the period 1996 to 1999.
The Overall scenario in regard to
drinking water supply is provided in
Box 5.1
It may be pointed that the problem in
the context of drinking water in rural
areas is not one of achieving the
coverage alone but in also sustaining
the supply network. Also despite the impressive coverage of provision of safe drinking water
facilities in the rural areas, there is a great deal of concern about both quality and
sustainability. For example, almost 2.17 lakh habitations in India have water quality
problems. Excess fluoride, arsenic, nitrate, iron and salinity are causing health hazards. The
Government has launched programs on mission mode to mitigate these water quality
problems.
Box 5.2 set out respectively the strategy to
mitigate the drinking water quality problems
Box 5.1: Drinking Water and Sanitation: CurrentScenario• High coverage of habitations with drinking water
sources but problem villages keep cropping up• High subsidy in sanitation but poor coverage; very
low total outlay• Average amount paid by households for drinking
water is very low• States unable to maintain protected drinking water
sources• Inadequately developed private sector because of
entry and price barriers
Box 5.2 Strategy for tackling water quality
• Treatment systems for the household orcommunity
• Alternative problem free zones ingroundwater
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Since the beginning of the Sixth Five Year Plan (1980-85), and the launch of the International
Drinking Water Supply and Sanitation Decade (1981-90), India’s commitment to water
supply and sanitation sector has increased. Presently sector investments constitute a
significant percentage of the national budget ( about 3 percent of which nearly half is
allocated to the rural areas). Central government funding constitutes about 40 percent of total
investment in the sector. About 5 percent of the investment comes from External Support
Agencies (ESA). It is estimated that since independence, Central and State governments have
together spent over Rs. 36000 crores for rural drinking water. During the Tenth Plan (2002-
07) it is estimated that nearly Rs. 28000 crores would be spent. The Central government’s
share in this is around R.13500 crores for the five-year period, the remaining is expected to
come from the state governments and external funding/support agencies10. The following
table taken from the Tenth Five-year Plan Working Group Report gives an idea of the total
Plan outlay in the public sector, as well as on water supply and sanitation in rural areas (Table
5.2)
Table 5.2 Plan Wise Investment in Water Supply and Sanitation Sector
(Rs. in crores)Plan outlay for Rural Water Supply and sanitationPlan Period Total Public sector
plan outlay Amount Percent of public sectoroutlay
1st Plan (1951-56) 3360.00 6.00 0.182nd Plan (1956-61) 6750.00 28.00 0.413rd Plan (1961-66) 8573.00 16.33 0.193 Annual Plan (1966-69) 6664.97 6.00 0.18IV Plan (1969-74) 15902.00 155.00 0.97V Plan (1974-79) 39303.49 481.24 1.22Annual Plan (1979-80) 12549.63 232.29 1.85VI Plan (1980-85) 97500.00 2280.32 2.34VII Plan (1985-90) 180000.00 3556.72 1.982 Annual Plan (1990-92) 137033.15 2705.92 1.97VIII Plan(1992-97) 434100.00 10728.79 2.47IX Plan (1997-2002) 859200.00 20914.00 2.43Source: Report of the Working Group on Water Supply & Sanitation for the Tenth Five-Year Plan (2002-2007).
10 From Keynote Address : Indian Reform Initiatives in Water Sector, by M. Venkiah Naidu, Minister for RuralDevelopment GOI, May 6 2002 at Water Forum 2002, World Bank, Washington DC.
92
Table 5.3 shows statewise allocation on rural water supply programs for the year 1996 to
1999. The allocations are shown separately under the Accelerated Rural Water Supply
Program and the Minimum Needs Programs.
Table 5.3 Financial Allocation In Rural Water Supply Programs(ARWSP and MNP)
Source: Ministry of Rural Development Annual Reports 1996-97, 1997-98, 1998-99, 1999-2000
Upto December 31, 2003 project cost of Rs. 2060.45 crore was sanctioned of which the share
of the Government of India was Rs. 1922.85 crore.
The responsibility in India for rural
water supply is currently with the
State and local governments. A
major programme of sector reform
has been launched in at least 67
districts since April 1999. This
sector reform involves a shift from a
Box 5.3 Sector Reform Program for Rural DrinkingWater Supply Sector : Salient Features
• Adoption of a demand-responsive and adaptable approachbased on empowerment of villagers to ensure their fullparticipation in the project through a decision making rolein the choice of scheme design, control of finances andmanagement arrangements.
• Shifting role of Government from direct service deliveryto that of planning, policy formulation, monitoring andevaluation and partial financial support.
• Partial capital cost sharing either in cash or kind or bothand 100% responsibility of O&M by users.
93
centralized supply driven programme to a decentralized demand driven programme which is
shaped by targeted beneficiaries of the programme. The features of the programme are an
integrated approach to water, sanitation and hygiene, partial cost recovery of capital costs and
full recovery of O&M costs and groundwater conservation and rainwater harvesting.
In view of the experience gained from the sector reform projects, the reform initiative in the
sector got expanded as the Swajaldhara Program during 2002. Swajaldhara Scheme is a
special effort to provide drinking water to all the rural areas by March 2004. A
distinguishing feature of Swajaldhara scheme is that this is to be implemented, maintained
and owned by the community. The community makes 10% contribution and the remaining is
the contribution of the Government of India. The O&M costs is met by the community.
Rural sanitation is a major challenge in India. Here sanitation is defined as a package of safe
handling of drinking water, disposal of waste water, safe disposal of human excreta, solid
waste disposal, and personal and domestic hygiene. Only about 22 percent of rural Indians
have access to some form of latrine (surveys indicate that many of these latrines are not used
for the purposes they were designed), and perhaps more critical are the poor hygiene
practices in most parts of the country. Despite subsidies aimed at the poor, there is very little
improvements in the sanitary conditions in the villages in India.
Recently under the Sectoral Reform
Program, the Total Sanitation Campaign
(TSC) was launched in April 1999. The
outlay for this programme is 417 million
dollars. Out of these 58 million dollars
had been released by May, 2002. This
programme involves a shift in focus
from subsidies to a demand based
approach. The objectives of this
programme are impressive: 16.5 million individual household toilets, 163000 school toilets,
19910 sanitary complexes for women and 1549 sanitary marts.
Total Sanitation Campaign Principles
• Demand driven• Community driven & people centred• Campaign mode approach• Focus on IEC• Alternative delivery mechanisms (RSM/PC)• Strong focus on school sanitation & hygiene
promotion• Involvement of co-operatives, women groups, self
help groups, Youth clubs, NGOs, PRI etc.• Cost sharing in construction of sanitation facilities
and O&M.
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During the Ninth five year plan, the government spent nearly Rs. 921 croes on rural
sanitation under the Central Rural Sanitation & Minimum Needs Program. The allocation
under the Tenth five year plan (Central Contribution) is Rs. 955 crore.
Review of Field Studies
The average distance of a rural household from a drinking water source is less than a km in
all the states. In Kerala this figure is nil whereas it reaches its highest level in Maharashtra at
0.74 km. Our findings suggest that with the recent increase in the number of drinking water
sources accessibility of rural households to drinking water sources no longer a very major
problem. As far as the average number of hours of piped water supply per village per day is
concerned Kerala again tops the list with 10.25 hours. West Bengal has no piped water
supply at all. Most of rural India is characterised by the absence of water markets. The only
states where they have their presence are Punjab (78% of villages) and Uttar Pradesh (16% of
villages). Sustainability of drinking water sources through charges for drinking water is not
observed in the rural areas of most study states. In only three states (Kerala, Punjab and Uttar
Pradesh) the charges for drinking water collected from the people can be said to be on any
significant scale. Water taxation is common only in Madhya Pradesh, Tamil Nadu and
Maharashtra.
As far as sanitation is concerned, the situation is rather dismal with less than 50% of
households having functioning latrines in 8 out of 10 states (Table 5.4). Kerala and Punjab
are the only satisfactory performers. The situation is particularly serious in Orissa and
Madhya Pradesh where the percentage of households with functioning latrines is less than
Since 1951, state governments have been responsible for supplying drinking water to rural
areas. The government’s stated goal is to provide all villages with drinking water throughout
the year. The most recent objectives of the Rajiv Gandhi National Water Mission
(RGNDWM) are to set up a rural drinking water source within 200 meters of all habitations.
This was intended to be done through community participation and local management, but in
reality funding decisions were made at the Centre, which used population density as the
Box 5.4: Calculation of household expenditure ondrinking water
Households were sampled in selected villages in theten states listed above and information on monthlyexpenditure on drinking water was collected. The statelevel sample in each of these states was used tocalculate the average amount spent by a household ondrinking water in that state. A weighted average ofthese estimates was then taken with the weights beingthe number of rural households in each state. This wastaken as an estimate of per household expenditure ondrinking water in India. This per household estimatewas then multiplied by the actual number of ruralhouseholds in India to arrive at an estimate for totalmonthly expenditure on drinking water by rural Indianhouseholds.
NCAER : Field Survey
98
criterion for allocating resources. Funds for various rural water supply schemes are allocated
directly to Panchayati Raj institutions through departments of rural development, while
public health engineering departments are responsible for their maintenance.
States are responsible for operating and maintaining these drinking water systems, which,
because of the high rate of deterioration of the capital assets is a challenging task in villages.
Rural inhabitants usually have little involvement in the village water supply schemes, which
has exacerbated the early breakdown of assets.
Sanitation
The government subsidises the building of latrines by households that are below the poverty
line. It provides the funds and materials (through its rural development departments) for
building latrines, while households contribute the labour for building and pay for upkeep. The
centre and state governments share the subsidy to households for constructing latrines, which
is around 80 percent of the unit cost, through the rural sanitation programme, the upper limit
is Rs. 500, households can meet their 20 percent contribution in cash, kind or through labour.
The programme also provides for conversion of dry latrines into sanitary latrines. Rural
people are slow to adopt modern sanitation practices. Great deal of effort is needed to change
the mind-set of rural population through communication.
5.2 CRITIQUE OF THE EXISTING APPROACHThe approach followed by the government in the drinking water sector has not helped much
in providing good quality, adequate rural drinking water supply on a sustained basis. One of
the main problems is that the construction of these systems is just based on criteria such as
population density and the distance between the source and the habitation and not the ability
to maintain these systems. Thus, while targets are met and ‘full coverage’ is provided in one
year, 'problem villages' (partially or not covered) can emerge in the next period (Table 5.7).
99
Table 5.7 Coverage Under Rural Water Supply Programme
(No. of habitations)1996 1996-97 1997-98 1999State
The low revenues imply that the rural drinking water sector is actually massively subsidisedby the government. A market structure has not evolved for the drinking water sector as thefunding has been through public finance11. The money is raised through multilateral aidagencies. A major source of finance is through the Water and Sanitation Program in the formof debt with a sovereign guarantee. The investment required for full coverage, as estimatedby the Planning Commission, is Rs. 3783 crores according to original norms and Rs. 4481crores according to revised norms (2000-01 prices). The average annual investment in thewater sector is Rs. 1798 crores. Thus, fast attainment of full coverage would require fundsfrom new sources (Table 5.10 & 5.11).
Table 5.10 Estimate I: Investment for Full Coverage Based on Past Trends
Source: Financing Rural Infrastructure: Rankings, Trends and Alternatives to Public Finance, Siddharth Mitra
5.3 TOWARDS A NEW APPROACH
5.3.1 The Overall Approach
The suggested new approach would encourage and give legitimacy to small private providers
of water which charge user fees. The legalisation could be through registration for a nominal
fee. These providers would be helped through the provision of soft loans on the basis of
socio-economic criteria. The government could introduce annuity schemes, where operations
and maintenance costs are built into the life of the project. Here, the government would make
an annual payment to a contractor over the life of the project to build and operate a water
supply distribution system. The payment amount would cover the capital, ensure a reasonable
rate of return on the capital and operation and maintenance costs. In return the contracting
company builds and maintains the system and ensures drinking water supply for the duration
of the project. Thus the provider and funding agency share the risks of service supply equally,
and consumers receive better quality drinking water. This would be especially useful in
villages where the quality of drinking water is an issue. Another option would be to provide
micro-finance for households to set up water supply systems from traditional water sources
within the village. These schemes could be routed through local financial institutions, which
104
could be given low-interest loans to provide the micro-finance. Low-interest loans could also
be given to private water supply companies to set up water distribution systems. Options here
include instituting a one-time capital asset subsidy to entrepreneurs or a subsidy with a sunset
time limit of 3 to 5 years; where the subsidy is provided to the bidder who needs the least
amount of subsidy. This encourages better planning by bidders.
The monitoring of contractors and the overall implementation of water provision schemes
could be entrusted to the village panchayat.
The government would also subsidise village level drinking water projects on the basis of
socio-economic criteria such as the level of demand, the potential benefits from the drinking
water project and the level of poverty in the beneficiary community. Note that the
government has a limited budget for spending on rural water supply in a given jurisdiction,
say a district. Potential projects can be ranked according to the economic benefits generated
and the social equity weights. The social equity weight reflects the poverty in the community
(set of habitations) affected by the rural water supply project. The greater the poverty the
greater the social equity weight.
Thus, the desirability of a rural water supply project is given by
Di = Si Bi Ni
where the subscript i' refers to the water project i, S to the social equity weight, B refers to
the economic benefits generated and N refers to the population affected by the rural water
supply project. Once the desirability measures for potential water projects are computed,
these projects can be ranked according to their desirability. The communities involved can
then be asked to bid for the various projects and reveal their willingness to pay. The
government then proceeds as follows. It selects the project ranked first for implementation
and provides the village community a subsidy equal to the difference between the cost of
constructing the water supply project and willingness to pay. If, however, the WTP exceeds
the costs then no funds are provided. The government proceeds to select the next rank project
for implementation and provides a subsidy according to the same principle. In this manner it
keeps selecting projects and providing subsidies till the entire budget is exhausted. How does
one ensure regional equality in the selection of projects? Note there might be three or four
types of alternative water supply schemes, which can be provided to a community
105
(handpump, gravity, tubewell e.t.c.). While envisaging the construction of a water supply
scheme for a community all alternatives should be considered as potential schemes but only
one should be selected. If this is combined with a maximum cap on subsidy then a project
involving a huge subsidy may not be selected even if it ranks very high on the priority list and
another project for the same area with a lower rank and a lower required subsidy might be
selected. This enables the government to subsidise the maximum number of projects in a
year.
The safe drinking water
supplied by the government
also needs to be managed
more efficiently. One way this
could be done is to make
Panchayats responsible for the
management of funds
collected through user fees.
Even if these are not fully
utilised during the year, project funds should be allowed to accumulate. Rather than focussing
on ensuring minimum sustainability of a project, what needs to be done is to ensure that
projects are maintained throughout their life by raising and depositing funds in an escrow
account and making sure that it is efficiently managed. This is largely a governance issue and
requires training of Panchayats in fund management.
However, these schemes are
never going to be in a position
to provide more than
minimum drinking water
supply in the near future. A
strategy of stratification needs
to be followed which
distinguishes between the
more precious drinking water
and the water for non-
Box 5.5: Drinking water – A limited-access public good
In India rural drinking water sources that serve many habitations invillages are as close to a public good as possible. They are thereforealmost always entirely financed by public funds.The most basic system of rural water supply, however, which istypically a dug well with a hand pump, is closer to a "pseudo" privategood and therefore suitable for community ownership. In Kerala,some communities have been allowed to acquire legal ownership ofthese drinking water sources, and in some cases have received publicgrants that cover part of the construction and maintenance costs.In Olavanna more than two-thirds of the drinking water wells areowned by private water supply associations.
Source :WSP News Letter
Box 5.6: The Olavanna Project Sets Precedence
The Olavanna Gram Panchayat in Kozhikode district decided to initiateits own water supply system instead of relying on the state government.It organised itself into groups to collect money for small piped waterschemes. The system is highly responsive to demand and manages ruralwater supply at the lowest appropriate levels; More importantly, it isabout a rural community treating drinking water as an economic good. Ithas self-regulatory community-based checks to match water availabilitywith usage to prevent overdrawing, and ensures the quality of the watersupplied through regular chlorination. It is sensitive to social concernsby having different forms of capital share payments. The user committeedecides on tariffs, changes in quantity and timing of water supply, newmemberships and so on. A premium is charged on new membership andthis amount goes to the buffer for meeting larger investments likereplacements, up-gradations etc. It’s initiative has become so successfulit is a model for village water supply schemes in the state.This could be the first rural initiative in the country where the usercommunity pays for the capital, operations and maintenance costs of adrinking water scheme. Approximately 60 such schemes are inoperation since 1987, some financed fully by the community andsome with the help of the panchayat.Source: Presentation by Mr. James Verghese Seminar II on Governance,
106
drinking purposes. The safe drinking water from government sources can be provided at a
high price whereas the water for non-drinking purposes can be provided by private suppliers
at lower prices. These could be tankers maintained by local/ private contractors. Even
community-based projects are possible. Such a focus on pricing water leads to sustainability
of the resource. It also leads to financial sustainability and removes the burden of subsidy on
the government. Financial resources for maintenance of water projects are also generated.
We now address the problem of how user charges should be designed.
5.3.2 User Charges – Getting the Price
Right for Drinking Water
Studies on devising user charges for public
goods have been extensively carried out in
the area of drinking water supply. The
literature in this field indicates that tariffs
should cover three costs: capital recovery,
exhaustibility, and operations and
maintenance. However, at a more practical
level, marginal cost pricing is advocated to ensure social equity. Marginal cost is the
incremental cost of producing an extra unit of the good, and this approach recommends that
user charges, at least initially, should recover only the marginal cost of supplying water. (The
Swajal scheme – which is based on this principle – charges monthly user fees of about Rs 20
per household.) It is possible to set up simple, transparent and sustainable user fees for rural
drinking water. The challenge is in managing collections, which will require setting up of
institutional mechanisms.
In rural India most people obtain drinking water from tapstands. Each household is charged a
fixed amount every month. This policy leads to a lot of wastage as any consumption in excess
of the requirements does not cost anything additional to the household. Moreover, it leads to
an increase in queuing time and is an obstacle to timely availability of drinking water. The
wastage of water also leads to a lowering of the water table. The Capital Development
Authority of Pakistan has attempted to tackle the problem of water wastage through a process
of monitoring, fines and education of people.
Box 5.7: The Swajal Project - Emphasis onCommunity
This project surveyed 20 tubewell schemes withdistribution systems in 20 villages in Uttar PradeshThere are on average 214 households per village,each paying a monthly tariff of Rs. 20 for stand-postconnections and Rs. 22 for household connections,which guarantees an average daily supply of 40 litresper capita. The up-front cost of a householdconnection is Rs 6,000, while the stand-postconnection is free.
Source: NCAER Field Study.
107
However, these methods depend on information and monitoring which are bound to be far
from perfect. An alternative method is to undertake water rationing. In this case one would
have to keep a check on the number of trips made by a person to a tapstand and the amount of
water collected by him in each trip.
It is possible however to ration water on the basis of price signals. In order to do this one has
to estimate the individual demand for water. Estimation of the demand function should be
based on an experiment where people are given money close to their daily income and
different prices are quoted for drinking water to different persons. The persons should not
have access to drinking water from other sources. And they should be exposed to the same
product variety as they get in normal life. A small heterogeneous sample of people is enough
to estimate a demand curve for a district.
Let the demand curve be denoted by p(q,y). The first type of rationing ensures that the non-
poor person with the lowest possible income (the person whose income is close to the poverty
line level) is able to get a subsistence level of water consumption. The subsistence level of
water consumption is calculated assuming non-sedentary life and taking into account
climate/weather. Thus, the price is fixed such that
S = q(p ,P)
where S is the subsistence level of consumption of drinking water, p is the price of water and
P is the poverty line level of income. Let this price be denoted by Sp . The total amount of
water that will be consumed is given by
SnnypqQ piis += ∑ ).,(
where pn is the number of poor people ( income below the poverty line) who are provided
subsistence water rations as a part of a food for work programme. If this total consumption is
felt to be still above the amount consistent with conservation of the water table then the
government can resort to rationing – providing non poor people the subsistence quantity at
price ps and the poor the same quantity as a part of the food for work programme.
A tariff based system in rural areas has to be implemented differently. First the existence of
common stand posts rules out the possibility of metering water consumption by different
households. Use of a measuring bucket while taking water and the presence of a monitoring
108
agent of the Panchayat might be an alternative to metering. The people below the poverty line
can get financial assistance from the government which covers the cost of subsistence
water consumption at the going tariff rate.
5.3.3 Regulatory Issues
Regulations in the drinking water sector are biased in favour of public health engineering
(PHE) departments. One reason why operation and maintenance costs are high is that since
the schemes are owned by the PHEDs, repairs can only be carried out by their own
technicians, while hired local technicians could be less expensive. Community ownership
experiments tried recently were not able to create sustainable maintenance funds, which
worked as a barrier to minimum sustainability of the project.
It is true that commercially viable water supply schemes will need financial assistance.
However, the government can help by using government money to attract private providers.
(This was done in the USA in 1963 when legislation was passed allowing one-time, zero-
interest loans up to $50,000 to be given to small water supply companies.) Sustainable rural
drinking water coverage, given the usage patterns of rural drinking water, will require the
entry of small providers of rural water supply services. Fewer legislations are probably most
likely to entice them to enter the sector.
Local construction and maintenance of rural drinking water systems can be promoted through
various incentives. Fiscal incentives would include matching contributions of grants, an
initial capital asset subsidy or the use of a fixed-rent model to determine user charges by
small local operators. Non-fiscal incentives could include simplifying procedures such as
registration of company, improving transparency, and so on.
5.3.4 Local Governance
If a multi-operator water supply system is
instituted, then there is a need for a local
mechanism to help resolve conflict. To
reduce administrative costs of having a
decentralised regulator oversee the
functioning of several small providers, it
Box 5.8: Drinking Water And Sanitation:Recommendations
• Legalisation of small private providers of water• Subsidisation of villages on the basis of social
equity criteria• Policy of price stratification with respect to
drinking and non-drinking water• Use of willingness to pay estimates for
estimating water demand• Use of incentives and awards instead of
subsidies for sanitation• Decentrlisation of regulation
109
may be possible to extend the role of Panchayati Raj institutions to cover regulation and
resolution of local disputes. This would first require a resolution of the legal issues regarding
the jurisdiction of Panchayati Raj institutions. A dual strategy would be required to regulate
the jurisdiction of community-based organisation (CBO) managed drinking water schemes
that end at the village level and those that cut across several villages. The financial accounts
of water supply providers (CBOs, NGOs or commercial) will have to be made more
transparent to the users.
CONCLUSIONThe creation of capital assets for provision of drinking water has been satisfactory. However,
these assets have suffered from poor maintenance12. Previously investment allocation for
drinking water assets was based on population density. Such allocation did not take into
account need, demand or potential benefits. In order to remedy this situation it is
recommended that new asset creation should be done by village communities. They would be
subsidised by the government on the basis of need, potential benefits and willingness/ability
to pay. Taking into account the fact that water is demanded for drinking as well as for non-
drinking purposes and that drinking water is a scarce commodity, a strategy of stratification is
recommended. Drinking water would be provided through government schemes (or
government subsidised village community schemes) at a higher price. Non-drinking water
would be provided by private / informal operators at a lower price. The high price of drinking
water would discourage its usage for non-drinking purposes Privatisation would result in a
need for regulation. It is recommended that such regulation should be done by Panchayati
Raj institutions.
12 Also little attention is paid to the service delivery aspect.
110
IINNDDIIAA
RRUURRAALL
IINNFFRRAASSTTRRUUCCTTUURREE
RREEPPOORRTT
CCOONNCCLLUUSSIIOONNSS
111
CHAPTER 6
CONCLUSIONS
OVERVIEWRural infrastructure study has focussed on four sectors: Telecom, Power, Roads &Transport, and Drinking water supply & Sanitation. The underlying objective of the studywas to assess the current status of rural infrastructure in the above-mentioned four sectors inorder to:
• Ascertain the coverage attained in each of the four sectors and hence the "gap" as measured bythe percentage of population without access to these basic facilities
• Estimate the corresponding investment required for full coverage for each sector• Make policy recommendations, which will help in bridging the gap.
The infrastructure sector has both backward and forward linkages with the agricultural and
the industrial sectors and therefore the development of the infrastructure sector is a pre-
requisite for the overall development of the economy. Infrastructure, in general, and rural
infrastructure in particular, contributes to economic development both by increasing
productivity and by providing amenities which enhance the quality of life. However, in India
the lack or inadequacy of basic infrastructure continues to remain a major constraint to
progress in numerous villages and their habitations and consequently in the country as a
whole. According to the study findings, the rural populations not covered by basic
infrastructure facilities like telecom, power, and roads is as high as 91%, 46% and 44%
respectively. As far as drinking water is concerned, while most rural inhabitants have access
to some sort of water source, the quality and maintenance of these sources leave a lot to be
desired. Even during the last decade of economic reform process, started in 1991, the dismal
state of rural infrastructure has hardly improved. This implies that five decades of
development planning in India has been unable to ensure a decent living for a large number
of people residing in rural areas. Despite many large-scale rural development schemes, the
absolute number of people in poverty has not declined substantially; abject poverty still
remains pervasive in rural regions.
In India, investment in the infrastructure sector is predominantly the responsibility of the
public sector. However, the government has not been able to accomplish a great deal in this
112
sphere as is evident from the coverage figures for each sector. Table 6.1 gives a broad idea of
the expected investment required for full coverage on rural infrastructure.
Table 6.1 Total Investment for Full Coverage (revised norms)
Source: From data collected by networking organisation and Planning Commission norms
The central government provides capital for new asset creation, whereas the states are
responsible for the operation and the maintenance of these assets. The capital needed to build
infrastructure is a small percentage of the total expenditure incurred by the states, the rest is
spent on administrative expenses and subsidies.
Public finance available to rural infrastructure from the Central government funds is limited
and is not increasing over time. The funds available through budget allocation for
infrastructure have increased marginally from 3.2% of GDP to 4.8% of GDP over the last ten
years. However, the proportion of Central Budget Expenditure on rural infrastructure shows
fluctuations with no clear upward or downward trend. Additionally, state revenues have not
been able to increase at a rate so as to be able to finance operation and maintenance costs.
Thus it is imperative for the state governments to supplement its resources by charging user
fees in order to meet the O & M costs.
The problem of inadequate infrastructure in rural areas can also be interpreted in terms of
access rather than availability of services. In order to increase access, new ways of managing
finances with different models of risk-sharing arrangements between financiers and providers
of infrastructure facilities need to be used. All these models are based on cost recovery
through charging of user fees. As of now, user fees have been levied in all states only on
power and telecom services. The tariffs that the incumbent public sector provider can charge
are fixed by the government. But there is a need to extend user fees to all the infrastructure
sectors. Moreover, the user fees will have to be on cost based principle.
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The quality of existing public sector delivered services is generally poor because of which
consumers are reluctant to lock up money in rentals. In order to improve the quality, the
public sector should either make way for private and informal providers or enter into quality
and coverage enhancing partnerships with the private sector. In the face of limited public
funds available for rural infrastructure, private-public partnerships might be needed. Private
players in some cases should be provided with incentives to undertake investment in rural
infrastructure by removing entry barriers and by allowing them to recover costs through user
fees. However, as privatisation is in an experimental stage in rural infrastructure, the role
initially to be played by the private sector should be at a limited scale and privatisation should
be gradual. In remote areas where the demand is for small volumes of services, alternate or
informal providers may be encouraged to take over these services. There is also a need to
decentralize fund management to local institutions, which would create an environment that
is favourable to the new entrants, which are small and mini-service providers.
The government of India has adopted the economic reform agenda that included privatisation
and commercialisation of infrastructure sector as a whole. Liberalisation is happening but
competition has been introduced at the top and the accompanying policy changes to allow the
new players to stay on board are not happening. Thus competition has not reached at levels
lower than state levels, conducive to small regional providers of infrastructure service. State
governments need to promote small-localised providers of the services. Local governments
will have to play a more pro-active role in promoting, monitoring and enforcement of these
new service providers.
India is a very regulated state with little enforcement of regulations. In the case of rural
infrastructure, the regulatory framework will have to consist of light-handed regimes. Ideally,
regulators should be small entities in close proximity to users and providers.
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6.1 POLICY RECOMMENDATIONS
6.1.1 Promoting a new approach
In India, apart from telecom, all the rural
infrastructure is owned entirely by the
government. Resources are allocated to
infrastructure and other developmental
activities through planning process on the
basis of criteria such as growth rates,
population size and backwardness of the
state. This report recommends a change in the approach to providing rural infrastructure.
These are listed in the box 6.1.
The first three strategies are meant to encourage local solutions to existing infrastructure
problems. This results in solutions which are tailored to local tastes and help to generate
incomes for local people. The infrastructure providers are also accountable to the local
population. The fourth strategy is geared to maintaining some uniformity in prices across
regions. The fifth strategy ensures that the infrastructure sector remains financially
sustainable. This involves limiting access to only those among the non-poor who are willing
to pay for the infrastructure service. The consumption of infrastructure services by the poor
will continue to be free or largely subsidized by the approach. The last strategy envisages
making use of new technologies, which are cost effective even at low volumes of provision.
For example, a watershed can be developed only for one or two villages. Small hydel plants
can be built to utilise the flow of small mountainous streams and generate 0.1-30 megawatts
of power. These technologies can be used in remote and sparsely populated areas.
6.1.2 Financing of infrastructure
The government has a universal service obligation towards the rural population, but it is
finding it difficult to mobilise resources needed to finance the projects. Therefore investments
made in rural infrastructure should be recovered to the extent possible, as the existing sources
of finance cannot sustain the assets created. Depending on the type of service, it would be
possible to go in for minimum sustainability, full cost recovery or cost recovery with
Box 6.1: The New Approach
• Build on existing infrastructure and promotelocal initiatives for small network development
• Give small, private, informal providers (whoare currently unlicensed) legitimacy to operate
• Intervene sparingly especially for small,informal private providers
• Allow formal providers to define the base price• Convert an open access regime to a limited
ownership regime• Make use of “new technologies”
115
exhaustible resource premium. This will ensure that new capital assets become financially
sustainable and the areas not yet serviced have more resources for investment.
A multi - pronged strategy is needed to make the existing assets sustainable:
• In sectors such as telecom and power, technology allows private providers to be as competitive as
the public wired providers. Roads, drinking water and sanitation, however, have few private
providers, and they should be encouraged through legitimising their claims, through incentives for
limited ownership of the created assets, and by providing them with opportunities to recover costs
through user fees.
• Subsidies need to be better targeted to the poor and to producers.
• Fund management needs to be decentralised to local institutions. This would create an
environment that is friendlier to the new entrants, which are the small and mini-service providers.
• There should be micro-finance schemes for consumers that will create a demand push for better
quality services.
• Mutually beneficial Public-Private Partnerships should be encouraged
6.1.3 Regulation and Governance
A common thread runs through the policy recommendations for regulation in all the
infrastructure sectors. The specific common recommendations are discussed briefly below:
Dismantling of Legal Barriers
The current norms have been set up to protect and encourage large providers of services.
Thus, the laws are biased against the setting up of smaller networks, which may be
financially more viable for private providers. There are legal barriers that prevent local
investments in rural areas: providers are not allowed to roll out local-level networks and have
to work on a much larger geographic scale, which increases the costs of fixed-line services.
The new approach calls for experimenting with different models in each area to see which is
viable; viability is situation specific, and cannot be formalised into law.
116
One of the biggest non-financial legal
barriers at present is the negative
interpretation of the law. If no law exists
to explicitly allow a course of action, the
default is usually to treat the action as
illegal.
6.1.4 Fixing Tariffs
Regulations governing pricing of services are another barrier to entry. While price regulation
has been introduced ostensibly to help the poor, such regulation actually benefits only users
of services from regulated providers. These users are typically non-poor. Regulated tariffs are
also often set at levels below the cost of supply in remote or high-cost locations, which
destroy incentives for providers to expand access to these services.
Prices that are determined autonomously, with no linkages to costs and quality, have to some
extent discouraged private providers from entering service areas. The situation-specific
models proposed in the new approach will not work if they are based on predetermined
prices. Prices should take into account the needs of both consumers and providers.
A related issue is the licence fee that operators pay. High license fees that are charged upfront
discourage the operators from providing services especially in remote areas. The experience
with liberalising basic telecom services has shown that the high licence fee of Rs 20 crore has
prevented operators from fulfilling their rural roll-out commitment, because introducing
services in these essentially non-lucrative areas is not economically viable given the high
fees. Instead of giving licenses it may be worth considering collecting annual registration
charges which would in effect imply removing restriction on the entry of the limit on service
providers in the market.
Box 6.2 : Barriers to smaller networks
Under the current norms, small, local, region-specificservice providers with investment potential of Rs 10-12 lakhs do not find it economically viable to operateat state level. For example, someone who wants tostart a local transport service with a few vehicles cando so only if s/he has a license to operate within theentire state. A statewide license is expensive, and it issometimes cheaper for operators to pay a private “rent”to police and transport authorities, than to follow theletter of the law. The situation is the same for thesmall drinking water supplier who wants to distributewater to around 20 households or the smallprovider of power who assures households of 24hours of power. Small telecom networks, too, arenot allowed to enter into a franchisingarrangement with the local rural exchange.
117
The solution to these problems consists in scientific pricing techniques, which make prices a
function of production costs and demand. The license fee can then be linked to the expected
revenue.
The various tools of regulatory pricing are rate of return pricing, benchmark pricing and
sustainable pricing (pricing that just covers costs). The first two concepts have been
discussed in the introductory chapter.
We now illustrate the application of these regulatory pricing tools.
Let the demand function for an individual consumer with income yi be given by q(p, yi). The
market demand curve is then given by
ii
i nypqpQ ).,()( ∑=
where ni denotes the number of people with income yi.. The total revenue function is then
given by pQ(p) and denoted by TR(p). Table 6.2 gives the construction of the aggregate
demand function for an illustrative economy.
Table 6.2 Construction of the aggregate demand function
Income level Number of Consumers Demand function10 100 416.1+118p20 200 824.4+236p30 300 1224.9+354p40 400 1617.6+472p50 500 2002.5+590p60 600 2379.6+708pAggregate 2100 8465.1+2478p
Let r be the rate of return allowed by the regulator in benchmark pricing and rate of return
pricing. The following are the conditions for different pricing regulations:
)()1()(()(
)()1()(()(
)())(()(
pricingreturnofRaterpQCpTR
pricingBenchmarkrpQCpTR
pricingeSustainablpQCpTR
+=
+=
=−
Note that C(Q(P)) gives the cost of producing quantity demanded at price p and therefore is a
diminishing function of price p. C denotes the cost of an efficient firm. Figure 1 illustrates
118
the use of the regulatory pricing tools. If we use the assumption of linearity in estimating
demand the total revenue increases initially with price, reaches a maximum and then
decreases again. The cost function or the cost function inflated by the rate of return intersects
the total revenue function at two points. Since the regulator is interested in lower prices and
higher quantities the point lying to the left is chosen for price determination. The quantity to
be produced can then be read off from the market demand function. This can be set as the
target to be met in the performance clause of the regulatory agreement.
Because CC ≤_
for any given quantity, benchmark pricing results in a price which isnever greater and often less than rate of return pricing and a quantity which is never less and
often greater. Similarly, sustainable pricing would result in a lower price and higher quantity
than rate of return pricing. Sustainable pricing is generally only practiced by public sector
firms whereas the other two are strategies for private sector firms. The comparison between
sustainable pricing and benchmark pricing does not yield clear results. The assumption of
efficiency reduces costs and thus tends to reduce revenue requirements but the rate of return
to be generated increases the same. If the degree of inefficiency in a public sector firm is
large then benchmark pricing will result in a lower price and higher quantity than sustainable
pricing. All the comparisons made in this paragraph are illustrated in Figure 1.
Demand analysis can also be used to make choices
between two alternative technologies. It is quite
possible that no technology is clearly more efficient
than the other. While cost under one technology may be
lower than the other for low quantities (e.g. alternative versus conventional providers) in the
next range of quantities, the second technology might provide lower costs. In this case the
choice of technology would depend upon the position of the total revenue curve. Figures 2
and 3 illustrate the choice of technologies 1 and 2 under benchmark pricing and different
positions of the total revenue curve. The technology, which leads to a lower price and higher
quantity, is chosen.
Box 6.3 :Pricing Techniques
• Sustainable Pricing• Benchmark pricing• Rate of Return Pricing
119
`Fog
Figure 2
)1))(((2 rpQC +
)1))(((1 rpQC +TR(p)
P
Figure 1
Ps Pb Pr
TR(p)
)1))((( rpQC +
))(( pQC
)1))((( rpQC +
P
120
6.1.5 Lowering Entry Barriers
Effective market liberalization strategy may require scrutiny of public barriers, such as
zoning restrictions, technical standards and import tariffs or taxes on essential equipment.
There may be concern that private barriers erected through collusive market-sharing
arrangements or other anti-competitive behaviour will replace state-sanctioned barriers to
entry. In India, without an existing anti-trust regime a pragmatic response may be to include
key norms within industry-specific regulatory frameworks.
6.1.6 Decentralisation in Regulation
The regulatory role can be assumed either by decentralised or centralised agencies, and there
are advantages and disadvantages to both. Decentralised regulators have the advantage of
proximity to users and service providers. This allows for a regime that can be adapted to local
conditions and provides for more effective monitoring of service conditions. However, they
Figure 3
)1))(((2 rpQC +
)1))(((1 rpQC +
TR(p)
P
121
face the major disadvantage of "capture" by firms and local politicians. Centralised
regulators, in contrast, benefit from economies of scale and have reduced vulnerability to
“capture” but are less sensitive to the local needs of users and providers.
In a multi-operator regime, the administrative and legal costs needed to set up district-level
regulators for each rural infrastructure sector could be prohibitively high. A single multi-
utility regulator might be preferred at the district level for dispute resolution through the legal
system.
Assume that we want to make the regulation as responsive to local tastes as is possible. The
degree of decentralisation should be consistent with the budget constraint. Centralisation is
associated with economies of scale. The regulatory expenditure can be expressed as E (D)
where E, the regulatory expenditure is an increasing function of D, the degree of
decentralisation. This function can be obtained through computation exercises carried out by
the government. The optimal level of D is the one, which solves the following equation:
E (D) = B
where B is the regulatory budget. A more sophisticated analysis can take into account the net
expenditure on decentralisation i.e. the expenditure less the benefits in the form of reduction
in corruption. Attempts in the literature on corruption have not been able to theoretically
determine the direction of the effect of decentralisation on corruption. Centralisation, it is
argued, leads to more bribery because of lower accountability. On the other hand
decentralisation leads to more ‘capture’ by the local elite. However, Fisman and Gatti (2002)
have found empirically that decentralisation has a negative effect on corruption. Their
estimates of the effect of decentralisation on corruption can be used to determine benefits
from lower corruption brought about by different degrees of decentralisation. The optimal
degree of decentralisation in this case is given by the solution of the following equation:
E (D) + b (D) = B; b (0)=0
Where b (D) gives the monetary benefits from decentralisation in the form of corruption
reduction. Note that these benefits are zero for D=0 which denotes complete centralisation.
It may be noted that decentrlalisation can only be successful in the presence of certain
favourable conditions. It is imperative that steps be taken for the eradication of illiteracy and
122
reduction in income and wealth inequalities. Universal representation in major decision
making bodies should be ensured and people should be made aware of their rights. Unless
these steps are taken the chance of success of decentralisation will indeed be extremely
limited.
6.1.7 Fiscal Decentralisation
Fiscal decentralisation is necessary to guarantee that Panchayats have enough autonomy to
allocate funds to different types of infrastructure. Rajaraman (2003) opines that this is not
possible despite the 73rd Amendment of the Constitution unless Panchayats are given the
option to generate enough funds on their own. She comes up with the idea of a crop specific
levy. Data on yields, market prices of crops and estimates of labour and non-labour costs can
be used to come up with expected taxable surpluses per hectare. A specific tax rate gives rise
to different levies per hectare for different crops in different areas13. The data necessary for
crop specific levies have to be obtained through field surveys. The table below gives
estimates of revenue, which can be generated through crop-specific levies for 11 major states
in India and selected major crops. The crop distribution corresponds to that of 1998-99 or
1997-98. While the table suggests that the crop specific levy can generate sufficient amounts
of revenue one major flaw is that larger amounts of revenue will be generated for the
infrastructure abundant states like Punjab, Haryana and Gujarat. Very low levels of revenue
are expected in the relatively infrastructure deficient states such as Orissa, West Bengal and
Madhya Pradesh. Unless there is a mechanism to redistribute a specific portion of the
revenues generated among states inequalities will widen and large deficiencies in
infrastructure will remain (table 6.3)
Table 6.3 Estimates of Revenue from Crop Specific Levy*
(Rs crores)Crop-Specific levy Own Revenue (1997-8)State
Aggregate Per district Aggregate Per districtAdditionalrevenue (%own revenue)
Andhra Pradesh 41.93 1.82 137.80 5.99 30.00Gujarat 35.42 1.86 40.36 2.12 88.00Haryana 41.13 2.16 53.01 2.79 78.00Madhya Pradesh 22.60 0.37 32.04 0.53 71.00Maharashtra 12.39 0.41 112.17 3.74 11.00Orissa 10.88 0.36 6.99 0.23 156.00Punjab 50.20 2.95 53.87 3.17 93.00Rajasthan 33.93 1.06 31.25 0.98 108.00Tamil Nadu 4.98 0.17 34.03 1.13 15.00Uttar Pradesh 108.66 1.31 46.65 0.56 233.00West Bengal 39.44 2.32 19.56 1.15 201.00Source: Rajaramn, Indira (2003), A Fiscal Domain of Panchyayats Oxfort University Press, New Delhi (Table 10.2 p 153)Note: It may be pointed out that crop specific estimates are subject to data availability in the cost ofcultivation surveys and exclude paddy for example in Tamil Nadu, a major crop in the state.
13 For additional technicalities and details refer to Rajaraman, 2003.
123
Decentralisation has not helped local governments to broaden their revenue base in India. The
devolution of funds has increased and so have own-revenues for most PRIs, but the ratio of
own-revenues to total revenues has declined in most states, including Kerala and West
Bengal. The strategy to attract multiple providers of infrastructure service to rural
communities may actually widen the revenue base and in the process strengthen the
administrative efficiency of local governments.
6.1.8 Better Targeting of Subsidies
A major aim of subsidies is to reduce social inequality, but commercial organisations
(including those in the public sector) are not the best entities to take on this responsibility. In
any case, the subsidies that exist in rural infrastructure services need to be better targeted
towards the poor, and the safety nets need to be better managed. The best people to identify
the poor are those who live in their close proximity and are involved in their daily activities.
A local association (or non-government and community based organisations) that has worked
with the community over a long period of time and has members from poorer communities
could ideally identify and review 'poor' families annually, with some monitoring from
outside. A fairly successful experiment on the transfer of direct subsidies to the poor has been
tried in Chile through the reimbursement of bills paid by poor people for drinking water.
Further in the changing environment, which includes multiple providers of a service, public
transfers can no longer be monopolised by the incumbent public sector provider. These
transfers could be used to attract other sources of funding into the sector. This could take the
form of interest subsidies to small service providers or as micro-finance to consumers.
Ensuring that this is properly done could be a major challenge to local governments who
could act as a conduit for these funds. The alternate is to have a one-time subsidy in the
competitive bidding process to attract private providers to set up services.
It may well turn out that rural infrastructure provisioning will always have to be subsidised,
but over time, as the local economy grows, efforts need to be made to rationalise these
subsidies and reduce the gap between costs and subsidised prices.
6.1.9 Development of Competencies
While regulations will vary across sectors and geographic areas, local governance institutions
will need to develop three types of competencies to promote effective rural infrastructure
create/promote institutions that can implement the laws), and project development
competence (to develop projects based on local priorities).
Legal and regulatory competence: This refers to the legislation, policies and regulation that
need to be in place to allow the creation and maintenance of infrastructure. Legal policies in
rural areas have a socio-political dimension as they have to incorporate pro-rural and pro-
poor strategies.
Institutional competence: refers to the capacity of local governments and other statutory
bodies to effectively monitor and implement the provision of infrastructure services. The
local body will decide how stringently to implement policing and apply rules in their
localities, so that the spirit of the law is not violated. The administrative set up will mainly be
a conflict-resolution mechanism, for which the regulator needs to be a neutral arbitrator.
At present, administrative and regulatory capacity in rural areas is either weak or non-
existent. In such an environment, regulation is often an excuse to create opportunities for
corruption. Payoffs to traffic and power utility inspectors for ignoring illegal operations are
common knowledge. Constraints such as these affect the basic calculus of the extent to which
regulatory intervention will provide social benefits, as well as the design of particular
interventions. Weak administrative and regulatory agencies coupled with stringent
regulations, which is the situation in rural areas at present, work against ‘poor’ users and
small operators because they promote high levels of corruption.
While a regulatory agency will set up guidelines for the normal functioning of rural
infrastructure services, administrative responsibility for implementing policies may be given
to the local agency. In such a case, the structure and functioning of local government could
have a crucial role in effectively monitoring rural infrastructure providers.
Project development competence: This competence includes the ability to plan a project
within the stated policy, set up an administrative mechanism to promote projects based on the
needs of local clients and conditions, and use economic criteria to evaluate new projects. A
good way to strengthen the administrative and regulatory capacity is to make sure that project
is based on local priorities arrived at through a consensus. This level of consensus building
125
ensures transparency and effective planning and implementation of existing and future
projects.
Good governance also means the involvement of local communities in effective project
planning and implementation. This requires mobilising local communities and helping them
identify their priorities at the project development stage. In addition it requires imparting
technical training to the lowest level personnel in implementing departments within PRIs so
that they can assist the community in designing say an engineering project.
At present the capacity for project development lies exclusively with the state. Rural
development planning has focused on increasing the purchasing power of rural inhabitants
and their access to basic services. This has essentially been promoted through funds for wage
employment, self-employment and area development. Through its Minimum Needs
Programme, the central government identifies needy states and advances funds for one or
more programmes.
Till now rural development programmes
have covered two sectors: safe drinking
water and sanitation and rural connectivity.
However, the major problem in project
development is the mismatch between
schemes for which funds are sanctioned and
the perceived priorities of villages, resulting
in the neglect of completed projects. Further,
the bulk of the funds are spent on
establishment expenses and salaries rather than on developing new projects. These funds
could be more efficiently used if the local communities were involved in the project planning
and implementation stages. This has recently been tried in the water and sanitation sector
where the government has developed demand-driven projects based on extensive consultation
with local communities at the stage of design and implementation.
Boxt 6.4 : New Initiatives give locals moreresponsibility
The Swajal model of local communityinvolvement (from the planning stage) for newprojects is an ideal model for the water andsanitation sector. Other market-oriented strategiesto promote sanitary marts also exist, such asinitiatives by IREDA for promoting local energymarts to meet the needs of rural residents. InAndhra Pradesh, the Janma Bhoomi Projectencourages local projects implemented by localpeople which cater to local needs. Care has beentaken to maintain a certain level of transparencyand accountability.
126
6.1.10 Changes in Regulatory
Structures
Given that regulators ideally should be
entities in close proximity to users and
providers, an appropriate agency for
daily administration could well be the
Panchayati Raj institution.
Liberalising the rural services system
will, in some areas, result in the
provision of services by many parallel
bodies, such as existing public providers, private providers, NGOs, etc. The proximity of the
PRI to the local providers makes them suited to take on the role of monitoring local service
providers to ensure that they are providing quality service at a fair price, a role which can be
reinforced by the regulator. Or the regulator may delegate only some of the monitoring and
other roles to PRIs. An alternative to the PRI would be the involvement of a local NGO in
monitoring.
Apart from decentralisation in regulation there needs to be some decentralisation in provision
as well. The financial ability and the administrative powers to provide certain infrastructure
services need to be transferred from central and state governmental bodies to local bodies
such as the gram panchayat and the gram sabha. This will ensure greater accountability of
the providers and schemes, which could be better tailored to local tastes. Successful examples
of such decentralisation in provision are Madhya Pradesh and West Bengal.
6.2 LIMITATIONS OF THE STUDYThe study has several limitations. First the data, which could be obtained through the primary
survey, were not always tailor made for demand analysis. For example, the monthly tariff for
drinking water consumption was fixed irrespective of the amount of water consumed.
Therefore, the true responsiveness of water consumption to price was not obtained to the
extent that households within a given area had to pay the same amount as tariff.
Box 6.5 : Devolution of power to the Panchayati RajInstitutionsThe 73rd and 74th
amendments to the Constitution in 1994gave considerable powers to the Panchayati Raj systemand emphasised people’s participation in the process ofdevelopment and governance. The amendmentsstrengthened three main arms of governance - political,administrative and financial. At a political level theamendment mandates a three-tier elected structure at thedistrict, block and village levels to bring administrationcloser to the people. At the administrative level theadministrative bureaucracy reports to electedrepresentatives and at the financial level the devolution offunds from the Centre to the Panchayati Raj Institutions(PRIs) is crucial. Success in the devolution of power toPRIs has varied across states; power and functions havebeen devolved in some, but not in others.
127
The second problem with the demand analysis is that the range of variation of prices
(especially in the case of telecom) is too small. This means that the estimates obtained from
demand analysis are robust only for that small range.
Another limitation of the study is that it could
not take into account the spread of infrastructure
facilities within each state. This is especially
important because the development of
infrastructure facilities varies immensely within
a large state like Uttar Pradesh or Maharashtra . Western Uttar Pradesh, for example has
good infrastructure the same cannot however be said of Eastern Uttar Pradesh. Our
illustration of pricing methods such as benchmark pricing remained incomplete in the
absence of specific data on costs at different levels of output. These could have been used to
estimate cost functions which could then have been combined with the results of demand
analysis to fully illustrate the choice of price and quantity in different infrastructure sectors.
These could have served as a useful guide to the regulatory authorities for setting prices and
targets to private providers of infrastructure.
The study has suggested how the objectives of eliminating wastage of water and yet
providing for subsistence consumption of water for the person at the poverty line could be
met. However, estimates of subsistence consumption of water in different climatic zones are
not provided.
Finally, the present legislative structure might not be able to accommodate some of proposals
made in the study. For example, many states do not yet provide for collection of toll charges
on roads by private providers and village communities. The study in this case serves as a
pointer for the direction which future legislations may take.
The limitations of this study suggest what the future road map for research in rural
infrastructure should be. First, future research should ascertain the distribution of rural
infrastructure facilities both within and across states. Something like a geographical mapping
(e.g. GIS mapping) of rural infrastructure facilities would be useful.
Box 6.6 : Limitations of the Study
• Data not ideal for demand analysis• Small variation in prices• Intra-state distribution unaccounted• Recommendations entail legislative change
128
In order to generate greater variability of price-equivalent variables for demand analysis a
willingness to pay survey is advisable. Even experimental methods for estimating the
demand function can generate a large variation in prices. These two methods also help to
overcome the problem seen in demand analysis for the drinking water sector where the tariff
is fixed irrespective of the amount of water consumed.
More work needs to be done in estimating the cost functions in various infrastructure sectors.
This needs a lot of assistance from engineering experts who would be able to ascertain the
costs incurred at different levels of production when a technology is used efficiently. If cost
functions for different technologies can be ascertained then we can achieve two objectives:
determine optimal prices and quantities for each technology under each pricing method (rate
of return pricing, benchmark pricing etc) and determine the best technology for a given
demand situation.
Estimates of the subsistence consumption of drinking water should be arrived at for different
climatic zones. This requires talking into account the temperature and humidity patterns in
each zone.
As we have said some of the proposals made by the study may not be possible under the
current legislative framework. Charting the future changes in the legislative framework and
determining how far they accommodate these proposals might be another area for further
research.
129
Appendix 1
Table A1: Status of VPTs (on March 31, 2000)
Connected VillagesState/UT Total No.of Villages With multiple
access rural radioWith VPTs onOverhead Wire
TotalUnconnected
Villages
A & N Is. 282 146 128 274 8Andhra Pradesh 29,460 12,399 10,980 23,379 6,081Assam 22,224 9,293 4,888 14,181 8,043Bihar 79,208 14,281 10,642 24,923 54,285Gujarat 18,125 7,413 6,510 13,923 4,202Haryana 6,850 3,624 3,173 6,807 43Himachal Pradesh 16,997 2,842 7,522 10,364 6,633J & K 6,764 2,601 1,192 3,793 2,971Karnataka 27,066 14,692 11,109 25,801 1,265Kerala 1,530 32 1,498 1,530 0Madhya Pradesh 71,526 25,553 20,945 46,498 25,028Maharashtra 42,467 18,848 12,693 31,541 10,926North East 14,446 3,622 714 4,336 10,110Orissa 46,989 11,542 11,386 22,928 24,061Punjab 12,687 6,195 5,889 12,084 564Rajasthan 38,634 17,703 6,024 23,727 14,907Tamil Nadu 17,991 7,229 10,616 17,845 146Uttar Pradesh 1,15,249 41,103 28,920 70,023 45,226West Bengal 38,805 12,185 8,233 20,418 18,387Delhi 191 0 191 191 0Total 6,07,491 2,11,313 1,63,253 3,74,566 2,32,886Note: By March 31, 2000, about 61.66 percent of the villages had been covered by this schemeSource: Mid-term Appraisal of the Ninth Plan, Planning Commission, New Delhi 2002
Table A2: Telecom: Roll-Out Plan For Village Public Telephones, 2000-02
Note: *provisional data - excludes MTNL from 1987 onwards Source: Profit and Loss Account, Department of Telecommunications, Government of India, New Delhi
131
Appendix 2
Janmabhoomi Yojana
The Janamabhoomi Yojana started in Andhra Pradesh for the last five years. The two mainobjectives are providing good governance and strengthening rural infrastructure in thecountryside. The program thrust is on participation, accountability and transparency increating rural infrastructure. In Andhra Pradesh there are 23 districts and 1125 mandals. Theaverage population size of blocks is 1 lakh to 1.25 lakhs and that of mandals is 40 to 50thousand. There are 67, 505 habitations. Attempts are being made to make the PanchayatiRaj Institutions functional in Andhra Pradesh. Therefore elections are held regularly. TheGram Sabhas are organised every six months where the local bureaucrats are expected to bepresent to address the grievances of the local communities.
Under the Janmabhoomi Yojana the community has a major role to play in creation ofinfrastructure. They identify and prioritise the needs. Then there is an element of costsharing between the people and the government. Cost-sharing ensures that they come outwith actual demands. If people pay for it then they have an interest in managing it. Toensure equity in infrastructure availability, road infrastructure is provided free to allschedule castes and tribal areas.
Sharing of experiences, weighing of different cost effective technical solutions to makeinformed choices by the people, are tried and technology is effectively used to bring aboutaffordable rural development.
The first efforts is for building rural roads and even concrete rural roads in some plakhsesthrough village level committees. The second effort is for drinking water. Water userassociations are formed and these collect a revenue of Rs. 450 crore. The engineering staffassists the water user association and the associations take care of maintenance. Canals are
132
Appendix 3
Performance of SRTU in the recent past
The physical performance of SRTUs has improved in first three years of the Ninth Plan;vehicle and staff productivity and fuel efficiency have increased substantially. There ishowever, variation in the performance of productivity parameters among the SRTUs.Undertakings in Andhra Pradesh, Gujarat, Karnataka and Uttar Pradesh have exceeded thePlan target for vehicle productivity, while Bihar, Jammu & Kashmir, Madhya Pradesh, WestBengal and North Eastern States remain deficient and are not likely to reach the target. Bus-staff ratio maintained by SRTUs in Punjab, Haryana, Arunachal Pradesh , Andhra Pradesh,Karnataka, Rajasthan, Uttar Pradesh and Himachal Pradesh are satisfactory. State RoadTransport Corporations in Bihar , Madhya Pradesh, West Bengal and North Eastern States,however, maintained a very high staff-bus ratio and are not likely to reach the Ninth Plantarget. The SRTUs in Andhra Pradesh, Gujarat, Karnataka, Kerala, Goa, Punjab and UttarPradesh have achieved the Plan target in respect of staff productivity but Bihar, J&K,Madhya Pradesh and North Eastern States performed poorly and may not achieve the target.In respect of fuel efficiency, all SRTUs are likely to achieve the target of the Ninth Plan.SRTUs in Andhra Pradesh, Gujarat, Karnataka, Kerala, Maharashtra, Punjab and UttarPradesh have already exceeded the target.
At the time of formulation of the Plan, the contribution to plan assessed for 48 SRTUs puttogether was Rs. 3,026.42 crore of which Additional Resource Mobilization (ARM) throughpassenger fare revision was estimated at Rs. 10,189.79 crore. These projections are not likelyto materialise.
The World Bank aided SWAJAL project in Uttar Pradesh has the following objectives:
• improve sustainability by adopting a demand responsive approach which introduces partialrecovery of capital costs and full recovery of operation and maintenance costs;
• develop community participation so that communities play a major role in identifyingplanning, building and operating and maintaining their water supply and sanitation schemes;and
• Create institutional structures to facilitate decentralised decision-making and in so doing to testan alternative to the supply driven approach to service delivery. For operations andmaintenance, mere handing over of assets to Panchayats may be counterproductive unless thePanchayats/water user groups are adequately trained, and prepared to take on operations andmaintenance. The project emphasizes community involvement from the very beginning evenin planning and design and in choice of technology. The village community is involved withthe help of NGOs and community-based organizations (CBOs) from concept tocommissioning and its operations and maintenance.
• Establish one NGO/CBO for 5-10 villages.• Heavy emphasis on promoting off-farm activities through training.• 10 percent capital cost and 100 percent operations and maintenance cost to be borne by the
community• A minimum of 22 months of preparatory activity for mobilising community support.• Village committee decides technology and plakhses order
NB: Evaluation of the project with regard to success of community participation is yet to be done.The state government has been requested to do the evaluation before this model could be replicatedelsewhere.
136
Box A-4.2: Sanitation – Reports from the Rajiv Gandhi National Drinking Water Mission
The Rajiv Gandhi National Drinking Water Mission conducted studies in some states and its findingswere not encouraging. Most villagers were unaware of the importance of sanitation because ofpoverty and illiteracy. In Hoshiarpur and Bhatinda districts (Punjab) 42 percent of the households hadprivate latrines, 1 percent used community latrines and 57 percent went for open defecation. In thedistricts of Panipat and Hissar (Haryana) 34 percent of the households surveyed had private latrines, 1percent used community latrines and 65 percent went for open defecation. In Hissar 18 percentlatrines were constructed through government funds and 19 percent with private funds. In Panipat, 16percent latrines were constructed through public funds while 15 percent with private funds. InMaharashtra, sample survey revealed that 19 percent of households had sanitary latrine facilities ofwhich 16 percent were constructed under CRSP and 3 percent with private efforts. In Karnataka only8 percent of the surveyed households had latrine facilities of which 7 percent were constructed underthe CRSP and 1 percent with private funds.
An ORG study of Madhya Pradesh showed that 21 percent of the households had sanitary latrines, ofwhich 63 percent used the latrines regularly and about 20 percent did not. A large number ofrespondents who were owners but non-users (93 percent) said that lakhs of adequate water preventedthem from using the facility. In Uttar Pradesh, 16 percent of surveyed households were covered by asanitary latrine facility, of which 39 percent households used them regularly and a large proportion(45 percent) never used the facility.
More than 90 percent households in a Bihar sample survey were using open fields and banks of riversfor defecation and very few families have their own toilets.
Box A-4.3: Audit Review by Accountant Generals (AGs)
In 1998 the accountant general of states reviewed documents from rural water supply departments in304 divisions across 24 states, to estimate to what extent the objective of providing safe drinkingwater in a cost-effective manner had been achieved. The audit review raised a number of seriousconcerns involving the misuse of substantial amounts of public funds. These are• The re-emergence of habitations with no sources of drinking water, negating the impact of the
scheme.• Financial achievements were inflated to include advances and the funds diverted to other
schemes or kept in personal or revenue deposits.• Physical achievements were consistently over-reported.• Large expenditure requirements were funded through ARWSP funds, rather than through state
plan funds.• The government has failed to take corrective action on the misappropriation of funds/stores
reported by AGs.• Mis-directed application of funds without adequate planning or scientific identification of
water sources resulting in time and cost over runs.• Schemes were abandoned mid-way or became inoperative after large amounts of expenditure.• Poor maintenance led to defunct and non-operative water-sources.• Material that had been purchased in excess of requirements was lying idle in stores or was not
accounted for.• Water-quality testing laboratories had inadequate facilities, several vacant posts through non-
creation or non-recruitment, and poorly trained manpower.• Water treatment plants installed to control fluorosis, and remove excess iron and salinity were
non-functional, which resulted in the supply of unsafe drinking water to the rural population.• Gross under-utilisation of rigs.
137
The guidelines of the Accelerated Rural Water Supply Programme (ARWSP) indicate that
water should be first supplied to SC/ST localities, and when schemes are formulated,
coverage of these habitations should be given first preference. From 1990 onwards, a
minimum of 25 percent and 10 percent of the programmes’ funds have been earmarked for
supplying water to the SCs and STs respectively.
Monitoring and Evaluation
The centre monitors its programmes through monthly, quarterly, half yearly and annual
progress reports from state governments that record financial and physical progress.
Performance is also reviewed in the periodical meetings of the rural development secretaries,
project directors and other officers of the state governments.
To improve the monitoring mechanism, the Ministry of Rural Areas and Employment
introduced a scheme under which senior officers are allocated specific states/union territories,
whose performance they have to evaluate (particularly the qualitative aspects, of rural
development programmes). Inspections and field visits have been included so that officers
can ensure that construction work has been done according to prescribed guidelines and that
the rural community has been involved in implementing the programme.
138
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