At the recently held conference on Building Infrastructure–Challenges and Opportunities at Vigyan Bhavan, the Prime Minister underscored the importance of infrastructure in India being able to sustain high growth, above 8%. What was remarkable was his statement that current policy and regulatory risks have prevented private capital flows into infrastructure. He was, thereby, admitting that much was wrong with current policy and regulation. A very bold admission to make, though the language was not widely understood even by the business press. Mercifully so, since otherwise the admission would have been exploited by the opposition.

We have been arguing since 1998 that policy and regulatory risks have been the root cause of infrastructure’s inability to take off. But then it was ill understood by regulators and policy makers at the highest level, who tended to blame private capital. Not only have sectors with policy and regulatory problems tended to stagnate (for example, oil marketing, electricity, food storage and buffer stocking, water, gas transport, and intra-city public transport, and other urban infrastructure), but where even the correct approach has been put in place – such as ports, highways, telecom, overnight courier services, airlines, low income housing in Andhra Pradesh, and oil exploration – things have moved at a furious pace to deliver the economy from the constraints that hampered these sectors.

There is much learning that is possible and cross-sectoral perspectives help develop the correct focus. Perhaps the most important understanding is that no reform is possible unless it is politically rewarding as well. Thus, the advice of the World Bank and others based on the notion that in reform “some gain and some lose” has been most damaging than any other initiative. It has set the clock back in electricity in Andhra Pradesh, Madhya Pradesh and Maharashtra owing to the political backlash that followed from undersupplying farmers. Direct subsidies to the farmer could have allowed reform to proceed while creating political capital for the politician since there are no losers in a reform that changes the mode of subsidies to tradable endowments of electricity. Much the same can be said of water, food storage and buffer stocking, and the oil sector. Since the costs here are large (in food, as large as six times, and in kerosene, three times) in relation to the amount of subsidy delivered, correctly crafted direct subsidy can set the sectors right to create strong incentives for performance by incumbents in the sector and bring in hordes of new entrants (private capital). The fiscal gains could be huge as well.

Another learning is that the power of the inefficient incumbent can be great, and rather than frontally attack it, the creation of competition is the key, because that makes the entrenched party responsive, and gives it the space to change. Nothing creates competition as much as light and incentive regulation. Cost-plus typically acts as a dampener allowing the incumbent to prevent entry in various ways. Indeed, the CERC rejecting price cap regulation in transmission and wires business, and more generally in generation, is the biggest mistake in power. While the Electricity Act 2003 veers towards cost-plus regulation, the tariff policy is in the right direction — urging the SERCs to go multi-year in their approach and to allow utilities to keep the reform gains (efficiency gains), which goes against cost-plus! 

The third lesson is that the problem is never political. It seems so only because ideas have not been good enough. After all, no politician wants waste. He would merely be interested in gain (even private and illegitimate) and these can always be “provided” or compensated for with the large scope for political capital since we start from a situation where is so much wastage and denial.

The power of vested interests is always overstated and is nothing more than the fig leaf behind which the uncreative policy maker hides. Much of the networks in infrastructure lie in the future, and in some cases, like electricity or energy, the current levels are less than a tenth of what the final network would be.

That gives the space to grow out of virtually all problems, and this understanding takes on a new and urgent meaning now that growth in excess of 8% is not seen an unacceptable to the Reserve Bank.

How does one grow out of problems? The Chinese show us the way. The Chinese did not reform the stock of their public enterprises. They merely allowed all new investments and recruits in the public sector to work under strongly incentive compatible systems that made possible a new and commercially oriented shell around the old public sector that soon grew large enough to cage in the waste and the older mode of working. Similar options exist in all the infrastructure sectors that are currently stalled.