Infrastructure

Introduction

 A framework for infrastructure development was devised in 2000. Some aspects of this reform remain incomplete, while many of its elements have been implemented in form but not in substance! This process needs to be completed.

Public Goods Infrastructure

     For the purpose of Public policy it is important to distinguish between Public goods infrastructure and private goods (infrastructure).  Public goods infrastructure is identified by two important characteristics: Large economies of scale (relative to potential market size) and/or Natural monopoly (due to uniqueness of location).  The most important examples of the former are Roads & highways, power/electricity (transmission & distribution) and railways (tracks/lines & signals).  Important examples of the latter are Ports and Dams where each location is unique and Airports where location interacts with spatial scale economies.  Thus transport infrastructure (Roads, railways, ports and airports) is characterized by significant public goods characteristics.  Other noteworthy sectors are Agriculture/rural (dams, canals, drainage systems, water pipes) and Energy (electricity distribution & transmission, oil & gas pipelines, LNG/LPG terminals). Telecom is an interesting case of elimination of natural monopoly (land lines) through technological change (mobile telephony) which eliminated economies of scale and made the industry competitive.

Unbundling

In earlier eras whole sectors were defined as having “natural monopoly” characteristics, if any part of it had them. In the modern world each sector can be un-bundled to separate the public goods infrastructure having natural monopoly (with or without economies of scale) from the private goods infrastructure in which competition is feasible (as any economies of scale or scope are small relative to potential market size).  Thus the power sector has been gradually unbundled to allow independent power producers, while several states have created power generation companies by hiving off power generation plants from State electricity boards. In complete contrast the railways remain a monopolist monolith awaiting unbundling of railway train services (passenger & goods trains) from the rail track and signaling infrastructure.

Reform

   Therefore one critical element of infrastructure reform is to unbundle the “natural monopoly” elements from the potentially competitive ones, allow free entry into the latter and promote competition. The second critical element is to create a professional, independent regulatory system to regulate the “natural monopoly” parts with respect to service quality & price and to promote benchmark competition.  This can be illustrated with respect to the one major sector that has seen no reform so far- Railways.  

Conclusion

 Without a fair and rational policy and regulatory regime no amount of infrastructure subsidies and Public sector bank lending to infrastructure will result in a sustained increase in infrastructure investment and supply. A Policy-regulatory regime that promotes competition in 'private goods infrastructure’ (e.g. Coal, electricity generation, rail services) is an essential prerequisite for eliminating infrastructure bottlenecks.    Benchmark competition in and open access to the distribution network is essential for effective competition in electricity generation.

A more focused push is also needed on ‘Public goods infrastructure’ The simplest, most effective way to promote social equity and inclusion is by building a permanent road network that connects every habitation in India, a drinking water and sewage/sanitation grid that provides every town and all its residents a healthy environment and an irrigation-drainage (water sustainability) grid covering every block/village.  More than finance, the greatest limitation is the lack of understanding and appreciation of the vital role that these simple public goods have played in the transformation of USA and Europe form poor unequal societies to rich and relatively equal ones.


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