Infrastructure

What is infrastructure?
· In simple terms, things like roads, dams, power-plants,schools, etc. help you in your life and business = this is infrastructure.
· “infrastructure” is defined in dictionary as “the underlying foundation or basic framework”
· Broadly, infrastructure includes all public services from law and order through education and public health to transportation, communications, power and water supply, as well as irrigation and drainage systems.

Classification

What’s the use of Infrastructure?
Why infrastructure in important?
How does it help in economic Development ?

Infrastructure contributes to development both directly and indirectly.

· When Govt. opens more polytechnique, IITs,IIMs you'll get better trained people to work in factories and business.thus,
Quality of labour is enhanced by human capital improvements via Social infrastructure


· Suppose you're running a cybercafe. So, the shop, the computers and internet connection is your 'capital' (=something that generates money.) But what if there is no electricity in 3 days per week?/ slow internet connection? = your business will be ruined.
· So, When Govt. opens more powerhouses, lays more telephone cables, sends more Satellites = your cybercafe will earn more money.
Thus,
productivity of physical capital is improved by power and transportation etc economic infrastructures.


If you're a truck driver. If the roads are bad then? Truck's tyres,engine will need more servicing.
If the roads are good then? you'll be able to drive your truck faster and make more trips.
Thus,
Infrastructure lowers the cost of producing a given level of output or, alternatively, can increase the amount of output produced by all other inputs for a given cost.

• Infrastructure enables markets to work better. Transactions are made less costly and this increases the benefits of trade. For example, advances in transport and communications have considerably lowered storage costs by permitting producers to respond rapidly to changing consumer demands
even in international trade. (this is referred to as “modern logistics management”).

If you're running a factory, and there is no electricity 3 days per week, then you'll waste lot of your money buying & running diesel generators & then you'll sell your products at higher cost, to recover that money you wasted in diesel.
Thus,
Unit costs tend to rise due to unreliable or inaccessible public infrastructure.
Both small and big firms spend a significant portion of their expenditure on buying infrastructure services and suffer when these are not available.

Now lets take a look @ some very important segments of infrastructure.
Physical Infrastructure
Roads

Roads are divided into five categories for administrative purposes.
1. National highways,
2. State highways,
3. major district roads,
4. other district roads
5. village roads

· Central Govt. is responsible for maintaining the National Highways, other 4 types of roads are maintained by State Govt.
· Before LPG in 1991, only Govt. could invest in making roads. but after LPG, National Highways Act was amended in 1995 to allow private sector participation.
· NHAI (National Highways Authority of India) was created to build and upgrade national highways.
· Funds have been made available to the NHAI for its capital base through a tax on motor spirit and cess on diesel.
but yet
NHAI isn't working @ its full potential because
1. Frequent change of officers ( 5 chairmans in last 3 years)
2. Environment ministry clearance (you want to chop down trees to make roads then you need permission from Forest Dept.)
3. Land Aquisition
Sam Pitroda has pointed out the difficulty -
· In old times (60s to 90s) when the land was cheap, Govt. didnot acquire it,
· so now it has to buy the land and pay very high prices per square meter + other compensation. (+ the pseudo-environmentalists)

Railways
· Railways provide energy efficient form of transportation compared to roads.
· i.e. you want to send tonnes of wheat/coal from one state to another, it'll consume more dieasel if you do it via trucks.
· railway services are intermediate inputs to production; any reduction in these input costs raises the profitability of production.

CROSS SUBSIDISATION

· Traditionally, railways are seen as part of essential public service
· =railways should not be denied to even those who are unable to pay fully.
· (=poor people should also be allowed to enjoy railways= Garib Rath / Student concession pass etc.)
· But it doesn't fall from sky, if someone is enjoy something then somebody has to pay money for it, right ?
· so, freight charges* and upper class passengers ticket prices are set high, to cover that cost.
· this is called "Cross subsidisation"

Railway's earning
· 30 % from Passenge tickets
· 70 % from Freight traffic.*
· <*when you send physical items like wheat / coal = this is 'Freight'>

Problem for Railways
as you saw, 70% of Railway's profit comes from Freight traffic but nowadays it's facing high compitition from other sectors. like road sector the four-laning of the “Golden quadrilateral” and tnew expressway stretches.
use of pipelines for the transportation of petroleum products
coal and cement have started moving via coastal shipping.
+ Cheaper airplane tickets so those previously moving via 1st class AC Railways, switch to Airlines when prices are low.

But above 4 are also 'infrastructure' (roads, pipelines,shipping ports, airports!) so any
Development of one infrastructure may degrade the Development of other infrastructure
But, ultimately the common people benefit from it.+ Compitition lowers the prices

To solve the problems, Railway had taken some steps

· Gauge conversion,
· doubling of existing single lanes,
· electrification projects,
· allowing Private companies to make wagons and passenger coaches
· running Duranto Expresses
· and many more.


Seaports
· India has coastline of 7,000+ kms and
· 12 major ports (managed by Central Govt.| account for over 75 % of total cargo)
· 185 minor ports (managed by State Govt. |25% Cargo transported via them)

· After LPG, Private companies are allowed to participate in Development of these ports.

· If you want to export Wheat to S.Africa, then it'll be expensive if you do it using aeroplanes.
· but cheaper via sea-routes.
· But first of all you've to transport the wheat grown in Punjab / UP/Haryana to Mumbai's port via Railway/Trucks.
· Thus,
· Ports require good inland connectivity (via rails/roads)

so Efficiency of one infrastructure depends on other infrastructures.

That's why, Government is investing in improving the road connectivity to major ports through the NHDP.

REGULATION of sea-ports
· as you know, there is TRAI (Telephone regulatory Authority of India) as 'judge' for telephone related matters. (otherwise BSNL will act as monopoly and pvt players like Vodaphone, Airtel won't get level playing field in spectrum allocation etc.)
· same way, for level playing field in sea-port operations Tariff Authority for Major Ports (TAMP) has been set up.

‘landlord’ ports
· when cargo handling is done by private players, such ports are called landlord ports. (just like airport Management given to pvt players.)
· but in India all major ports are run by Port Trust made by central Govt.
· the concept of Landlord ports is not yet implemented in 'Major Ports'.
· but A wholly private owned port of Pipavav is setup in Gujarat = this is Landlord Port.
· port of Sika ( Gujarat) accounts for the largest cargo handling among all ports in the country. (its connected to Reliance Refinery @ Jamnagar.)

Airports
· Airports are under the management of Airports Authority of India.
· Private investments are to be drafted for the upgradation of the four major airports (Delhi – Mumbai – Kolkata and Chennai).
· ‘greenfield’ airports under private ownership are coming up at Bangalore
· and Hyderabad.
· new airport promoted by Kerala State Government has come up in Kochi with private investor participation.

Problems
· Tax on Aviation fuel = air-tickets costly.
· Big burden on tax payers, known as Air-India.

Energy

estimated 80,000 villages yet to be electrified,
Problems in Electricity supply
· Uneconomic tariffs charged from the priority sectors,
· Factories have to pay higher bills per unit of electricity so that Govt. can give free/cheaper electricity to farmers. (again cross subsidisation)
· High transmission and distribution losses (T&D losses) because of bad equipements.
· Electricty theft.
· Financial constraints to undertake systems improvement schemes
· = since you're supplying electrictity @

communication
· New Telecom Policy (NTP) was introduced in 1999.
· its aim is to provide connectivity to all rural, hill villages & remote parts.
· + level playing field for pvt players.(against BSnL)

· over 2,00,000 villages were unconnected’ (as of June 2002)
· Many rural / hill areas don't get adequate telephone/mobile connectivity because they're "high cost service areas "
· =mobile companies don't earn enough revenues (income) to cover costs of operating in that area.
· Thus it falls on Govt's shoulders to do that work. (that's why Govt. PSU BSNL exists.) --> this is one of the arguments in favor of public sector undertakings
· = to serve the people where pvt players are not interested to work in. anyways, back to the topic:-

Universal Service Obligations: (USO)
· in short Govt. says it'll try to give phone connectivity to rural areas.
· for this they created a fund called USO fund. so when pvt players do something in rural areas, they'll get money from it.
· Govt. is trying to increase the teledensity in rural areas via 3 strategies

Niche Operators

It is assessed by TRAI that despite the USO support, existing big service
providers would not be interested to serve about 50 per cent of the villages. To
address this issue, TRAI in its Unified Licensing recommendations envisaged
that the Short Distance Charging Areas with teledensity less than 1 per cent be
notified as telecom-wise-backward areas. In these areas, niche operators,
defined as ‘the telecom service providers whose services are restricted to these
backward areas only’ will be inducted. These operators are entitled for
concessions of zero entry fees, lower license fees and funds. The scheme is aimed to promote local entrepreneurs who have the technical competence to provide communication solutions but cannot compete on equal footing with large operators.

Creating Mobile Telephone Infrastructure
means if you're setting up mobile tower / need land in backward area then Govt. will give you subsidy. but after 1 year you'll have to share that tower with other players by taking some fees from them.


Subsidising the Rural Household DELs
in short it means if you're the Tata/ Airtel/Vodafone and if setup phone lines in rural areas then Govt. gives you subsidy for that work.

Banking Infrastructure
What does the Bank do?
it saves your money, give you interest on it and it'll give that money as loan to someone else to buy home/start business.thus,
Banks transfers the savings into productive investment.
But its not just the banks- but share market as well that transfers savings into investment.

Inter-State Difference in infrastructure
In Bihar only 10% of households have access to electricity, While in Andhra its 67% (2001 Census )

(we’ll have to go to Development administration, polity ,centre –state relations, history etc things to understand this inter-state difference in infrastrucutre.) so not writing much on that here.

until now we talked of Physical infra. now lets see the
Social infrastructure

Health
Human Develpoement index has 3 components
· Income
· Knowledge
· Health.
Some Facts-
· 10th Plan talked about effectively using traditional Indian medicine system consisting of ayurveda, yoga, unani and siddha.
· These combined with homeopathy is named as AYUSH (was asked in mains 2009.)
· Generally Govt. funds are mostly spent on preventing the of communicable diseases.(AIDS, Cholera,Polio etc) + family planning schemes.
· But in 10th plan they talked about National Mental Health Programme (for 'mentally challanged')
· India has 1/6th of humans living in this world.
· By 2050 we'll be the country with largest population on earth.
· large population has its problem- drinking water, food etc.

Total Sanitation Campaign
= making toilets in the rural areas = sanitation
= people don't fall ill in water-bourne disease
= their productivity increases (since they're not in bed and doing work (=earing money)+ their savings saved from being wasted in medicines.)

Education
In today’s speech, Obama said
“the best poverty removal program is world class education”

You can find the data regarding Sarva-Siksha Abhiyaan + Mid day meal from yearbook or similar books/magazines. So I’m not writing much on it here.

Now the last part for this article

Who should create infrastructure?
· Govt. made a huge bridge on sea in Mumbai called Warli-Bandra sea link.
· Now every car passing from it has to pay about 25-50 Rs.
· But Govt. spent crores of rupees making the bridge + they’ve to maintain staff to collect those fees from cars , and pay that staff the salary.
· So it’ll take almost 100 Years to ‘recover’ the money Govt. invested it.

Second case
· We get water from Narmada dam, every morning for 2 hours. For that we’ve to pay about 450 Rs. A year. Again- as the same reason given above-- So it’ll take almost 100 Years to ‘recover’ the money Govt. invested it making the dam.

· But we cannot deny the fact the bridges and dams are important.
· But private players won’t be interested in making them because it takes long time to recover the money invested = long gestation time.
· That’s why the physical infrastructure like heavy industries, dams, roads, bridges etc. is considered to be responsibility of the Govt.

· Problem when Govt. starts doing something = red tape, inefficiency, corruption. + nowadays Govt. doesn’t have lot money to make new project.
· That’s why they talk about keeping the private players
· So we get PPP = public pvt partnership project.
· Then we’ve BOT= build operate transfer type of project. I’ll talk about this two (PPP/BOT) in detail in another article.

by mrunal