1. As per the World Bank: “Infrastructure is an umbrella term for many activities referred to as “social overhead capital” by such development economists as Paul Reosentein Rodan Nurkse and Albert Hirshman. Neither terms is precisely defined, but both encompass activities that share technical features (such as economic of scale) and economic features (such as spillovers from users to nonusers), like ·Public utilities power, telecommunications, piped water supply, sanitation and sewerage, solid waste collection disposal and piped gas. ·Public works roads and major dam and canal works for irrigation and drainage ·Other transport sectors- Urban and inter-urban railways , urban transport, ports and waterways and airports." 2. As per the India infrastructure Report: "Infrastructure is generally defined as the physical framework of facilities through which goods and services are provided to the public. Its linkages to the economy are multiple and complex, because it affects production and consumption directly, creates negative and positive spillover effects (externalities) and involves large flow of expenditure Infrastructure contributes to economic development both by increasing productivity and by providing amenities which enhance the quality of life. The service provided lead to growth in production in several ways. ·Infrastructure services are intermediate inputs to production and any reduction in these input costs raise the profitability of production, thus permitting higher levels of output , income and or employment They raise the productivity of other factors including labour and other capital. Infrastructure is thus often described as an “unpaid factor of production” since its availability leads to higher returns from capital and labour. The physical infrastructure sector covers a wide spectrum of services : transportation (roadways, railways, airways and water transportation) power generation, transmission and distribution telecommunications, port handling facilities, water supply and sewage disposal, urban mass transportation systems and other urban infrastructure The social infrastructure includes medical, educational and other primary services. Some of these services have direct impact on the working of a business enterprise while others are more important 3. The finance ministry recognizes the following sectors as infrastructure for a variety of a fiscal benefits. From April 1995, Roads, New Airports, Ports, Railways from April 1996, Irrigation, Water supply, Sanitation, Sewerage system from February 1997, Telecom. The benefits offered to these sectors are (a)Five consecutive year tax holiday to be claimed within 12 years of operation, for the balance years, a 30% exemption is available (b)Income tax credit for investments upto to Rs.70000 (c)Increased limits for External Commercial Borrowing (d)Concessional import duties and port charges for project related imports (e)Exemption from Minimum Alternate Tax 4. In a recent analysis by Business Today (October 22 - November 6) on “How Bad is India's infrastructure?". While not trying to define infrastructure, an attempt is made to see what sectors constitute infrastructure “The choice of sectors was guided by just one consideration, which elements of infrastructure are most important to investors planning to conduct business in a particular country? The six sectors that emerged as automatic answers were used for constructing the infrastructure indices. The choice of power, telecom and transportation- roads and railways were axiomatic. For starters all of them are vital inputs to production with their costs and efficiency directly impacting the cost structure and affecting income, profitability and returns on investment. Moreover, cost arising from inefficiencies in these sectors lead to under-utilisation of production capacity, and constrain short-run productivity and output. And insufficient infrastructure needs users to invest in alternative sources, raising their capital costs. But these sectors are important for other reasons too. For instance, a poor power infrastructure not only discourages investment but also hurts economic output. In India total production losses owing to power shortages were estimated to be 1.5 per cent of Gross domestic Product in 1984. Likewise, telecom which is now crucial for monitoring operations, facilitating information flow, and enabling networking activities is of vital strategic importance to business. And poor transportation infrastructure in the form of roads and railways compounds costs in many ways. For example, studies in Latin American countries show that each dollar not spent on road maintenance increases vehicle operating costs by $3 besides costing an additional cost $3 for premature reconstruction. In addition two other areas of infrastructure are vital for investors. Ports, ensuring access to international markets for both inputs and outputs, which is paramount in today's age of global marketing and sourcing. And real estate, without which business cannot function. Is Infrastructure Important ? As per the World Bank: 5. “Infrastructure can deliver major benefits in economic growth, poverty alleviation, and environmental sustainability but only when it provides services that respond to effective demand and does so efficiently". Service is the goal and the measure of development in infrastructure. Major investments have been made in infrastructure stocks, but in too many developing countries these assets are not generating the quantity or the quality of services demanded. The costs of this waste in economic growth forgone and lost opportunities for poverty reduction and environmental improvement are high and unacceptable.” 6. As per World Bank “Developing countries invest $200 billion a year in new infrastructure 4 per cent of their national output and a fifth of their total investment. The result has been a dramatic increase in infrastructure services for transport, power, water, sanitation, telecommunications, and irrigation. During the past fifteen years, the share of households with access to clean water has increased by half, and power production and telephone lines per capita have doubled. Such increases do much to raise productivity and improve living standards. These accomplishments are no reason for complacency, however. One billion people in the developing world still lack access to clean water and nearly 2 billion lack adequate sanitation. In rural areas especially, women and children often spend long hours fetching water. Already inadequate transport networks are deteriorating rapidly in many countries. Electric power is yet to reach 2 billion people, and in many countries unreliable power constrains output. The demands for telecommunications to modernize production and enhance international competitiveness far outstrip existing capacity. On top of all this, population growth and urbanization are increasing the demand for infrastructure. 7.As per the World Bank: “Coping with infrastructure's future challenges involves much more than a simple numbers game of drawing up inventories of infrastructure stocks and plotting needed investments on the basis of past patterns. It involves tackling inefficiency and waste both in investment and in delivering services and responding more effectively to user demand. On average, 40 per cent of the power generating capacity in developing countries is unavailable for production, twice the rate in the best performing power sectors in low, middle, and high-income countries. Half the labour in African and Latin American railways is estimated to be redundant. And in Africa and elsewhere, costly investments in road construction had been wasted for lack of maintenance. This poor performance provides strong reasons for doing things differently in more effective, less wasteful ways. In short, the concern needs to broaden from increasing the quantity of infrastructure stocks to improving the quality of infrastructure services. Fortunately, the time is for change. In recent years, there has been a revolution in thinking about who should be responsible for providing infrastructure stocks and services, and how these services should be delivered to the user.” To summarize: Because past investments in infrastructure have not had the development impact expected, it is essential to improve the effectiveness of investments and efficiency of service provision. Innovations in the means of delivering infrastructure service along with new technologies point to solutions that can improve performance.” Produced by public or private providers. Governments also are responsible for developing legal and regulatory frame works to support private involvement in the provision of infrastructure services. As per the India Infrastructure Report: “The availability of adequate infrastructure facilities is imperative for the overall economic development of the country. Infrastructure adequacy helps determine success in diversifying production, expanding trade, coping with population growth, reducing poverty and improving environmental conditions. In recent years, much research has been devoted in estimating the productivity of infrastructure investments. Many studies examining the link between aggregate infrastructure spending and GDP growth show very high returns in time series analysis. However, does infrastructure investment cause growth or does growth cause infrastructure investment? - has not been fully established. A strong association nevertheless exists between the availability of certain services telecommunications (in particular), power, paved roads, and access to safe water and per capita GDP. Research indicates that total infrastructure stock increase by 1 percent with each 1 percent increment in per capita GDP.” Principles for Reform: As per the World Bank: Manage infrastructure like a business, not a bureaucracy: The provision of infrastructure needs to be conceived and run as a service industry that responds to customer demand. Poor performers typically have a confusion of objectives, little financial autonomy or financial discipline, and no “bottom line” measured by customer satisfaction. The high willingness to pay for most infrastructure services, even by the poor, provides greater opportunity for user charges. Private sector involvement in management, financing; or ownership will in most cases be needed to ensure a commercial orientation in infrastructure”. Introduce competition- directly if feasible, indirectly if not: Competition gives consumers choices for better meeting their demands and puts pressure on suppliers to be efficient and accountable to users. Competition can be introduced directly, by liberalizing entry into acitivities that have no technological barriers and indirectly, through competitive bidding for the right to provide exclusive service where natural monopoly conditions exist and by liberalizing the supply of service substitutes. Give users and other stake holders a strong voice and real responsibility: Where infrastructure activities involve important external effects for good or bad or where market discipline is insufficient to ensure accountability to users and other affected groups, governments need to address their concerns through other means. Users and other stakeholders should be represented in the planning and regulation of infrastructure services and in some cases they should take major initiatives in design , operation and financing. Public private partnerships in financing have promise: Private sector involvements in the financing of new capacity is growing. The lessons of this experience are that governments should start with simpler projects and gain experience, investors returns should be linked to project performance, and any government guarantees needed should be carefully scrutinized. Governments will have a continuing if changed role in infrastructure: In addition to taking steps to improve the performance of infrastructure provision under their control, governments are responsible for creating policy and regulatory frameworks that safeguard the interests of the poor, improve environmental conditions and coordinate cross-sectoral interactions whether services are produced by public or private providers. Governments also are responsible for developing legal and regulatory frameworks to support private involvement in the provision of infrastructure services. Issues in infrastructure 15. The key issues in infrastructure development in the Indian context are: a)privatization (b)unbundling and project structuring (c)project appraisal and financing (d)Project implementation 16. Privatisation: It is first important to recognize the rationale for private sector participation. The usual arguments are (a) resource additionality and (b) improved managerial efficiency in asset creation, asset utilization and customer service leading to better financial health, due to increased stakeholding. In the case of Indian infrastructure, resource additionality as a rationale for private participation is tenuous. The private parties in any case have to go to financial institutions and the capital markets for bulk of their funds, which would also be available to government at the same returns. The problem is more in the use of the funds and the appropriate management of the organization. For this, stake holding needs to be increased and private participation is one solution. (increased competition) could be another solution. While competition could also be brought in among government owned companies, the managerial response to it would be better if there is private participation) 17. Unbundling of the infrastructure: A necessary condition before attracting private participation is unbundling the infrastructure into logical sub-activities which can each be privatized separately to enable private parties not to have to bite more than what they can chew. The recent example of the unbundling of the British Railways could be a model. A framework to do this is given in the box below The broad activities are infrastructure creating and service provision, which itself consists of maintenance operation and customer service. For each activity, one can again envisage a possible separation between owner and contractor (in the case of infrastructure creation) and principal and agent (in the case of service provision) This separation as well as the overall unbundling strategy has implications on liability, risk management and contract practices Private Infrastructure Owner Contractor 1. Asset Creation - Right of way - terminals -Rolling stock and Equipment -- -- Services Principal Agent 1. Maintenance - Right of way - terminals -Rolling stock and Equipment 2. Operation - Right of way - terminals-Rolling stock and Equipment 3. Customer Services - Basic Services - Special Services -- -- Regulatory Reform: To enable unbundling , say in the case of Indian Railways, the Indian Railways Act would need to be overhauled. Similar regulatory reform would be essential in the case of ports , roads etc. The telecom and power sectors have made some progress in this direction. Regulatory reform would also be essential to provide increased autonomy , especially for capital investment , even as a precursor to unbundling. Another reason for regulatory reform would be to exercise controls over implicit monopoly situations. Project Structuring: This is a key issue since projects have to be structured small enough to make it investment friendly, while at the same time commercially viable For example while structuring projects for express ways, should ideal project be Ahmedabad to Baroda or Ahmedabad to Bombay or (if the homework is not done properly) kilometer 386 to Kilometer 526?. Similarly should cellular bids be for a city or a region or a pair of cities along with the corridor in between? Project appraisal and financing: The key issue here is one of appraising the project against future cash flows rather than on asset base or collaterals. Various forms of revenue, control over revenue and risk guarantees would also be related concerns. A vital banking infrastructure to complement all this would be essential. Project Implementation: Speed of project implementation would be imperative in the context of environmental and other regulatory issues.

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