Regulatory reform and competition policy

Economic survey of India 2007: Removing infrastructure bottlenecks

 

Contents | Executive summary | How to obtain this publication | Additional info

The following OECD assessment and recommendations summarise chapter 7 of the Economic survey of India survey of India published on 9 October 2007.

 

Contents                                                                                                                            

How can infrastructure bottlenecks be removed?


In some of the former fully government-owned infrastructure sectors, such as telecommunications and domestic civil aviation, the opening to the private sector has produced exemplary results. In both sectors, new private entrants now have market shares of over three quarters. Since the easing of regulatory constraints in 2004, the telecommunications network has become the third largest in the world. In both sectors, choice has expanded and prices have fallen. Even so, more needs to be done to promote competition in the fixed-line market, given the possibilities offered by broadband technology.


Electricity is one sector where public enterprises are still dominant and demand consistently outstrips supply, representing a major constraint on growth, particularly in electricity-intensive sectors such as manufacturing. On the basis of current plans, electricity generating capacity will rise by 6% annually over the period 2007 to 2012, double the rate of the past five years and the second largest absolute increase in capacity in the world. However, this is still well below the likely growth rate of GDP. The under investment in this sector is caused by low profitability. In 2000, as much as 40% of electricity was not paid for due to poor management of distribution enterprises and a failure to eradicate theft. Revenues were further limited by a legacy of political constraints on pricing policy at the state level, such as extensive cross-subsidisation in favour of farmers and households at the cost of industrial and commercial firms. In 2003, the government introduced a new policy framework that addresses distribution problems, mandates a more competitive electricity market with more private-sector involvement and progressively lowers the extent of cross-subsidies. In addition, there is a programme that gives financial incentives to states that meet specific milestones in the reform process. In states where implementation of the new framework is more advanced, some progress has been made, but still only a few areas have an uninterrupted electricity supply. Overall, there has been only a modest increase in the proportion of electricity that is paid for since the programme started. The government should encourage speedier implementation of reforms, consider reducing transfers to states that do not advance sufficiently rapidly and rewarding those that find ways to reduce losses, and increase private participation in the sector to a greater extent than in existing electricity reform programmes. The development of the electricity sector is also influenced by the coal sector, which is controlled by two public enterprises whose output is allocated to users by an inter-ministerial committee, with prices set on cost-plus basis. The government should auction coal mining concessions to the private sector and allow coal to be allocated by the market mechanism.


A significant start has been made in involving the private sector in the provision of transport infrastructure. By end 2006, the outstanding value of public-private partnerships (PPPs) had risen to an amount equivalent to 3½ per cent of GDP, with most contracts having been awarded in the previous two years. The government encourages private involvement in the construction and operation of ports and airports. Here there is a need to change the tariff-setting process in a way that encourages productivity improvements, moving away from a cost-plus basis system of price determination. Private involvement in the road sector is increasing, enabling a marked improvement in the quality of the national network; this will include an 18 000 kilometre long national network of tolled dual-carriageway roads by end 2009. States are also improving their networks. The government has introduced model PPP concessions, which are awarded on the basis of competitive bids for subsidies, or payments if the concession is estimated to be commercially viable. Early experience with private involvement in these areas is generally positive, but outcomes under contracts need careful monitoring. A significant implementation problem has been the need to obtain cabinet approval for road contracts that are sufficiently large to attract private-sector interest. Greater authority should be delegated to the Highways Authority to speed up the process.

 

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations. The complete edition of the Economic survey of India 2007 is available from:

Additional information                                                                                                  

 

For further information please contact the India Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat’s report was prepared in the Economics Department by Richard Herd, Paul Conway and Sean Dougherty, under the supervision of Willi Leibfritz. Research assistance was provided by Thomas Chalaux.

 

 

 

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