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India Infrastructure Report: Old Wine in Old Bottle By Prabir Purkayastha

In the never-never land Indian capitalism, all that is required to generate wealth for the people is to promote the market and invite in private and foreign capital. In infrastructure, private ownership will be more efficient and provide cheaper services than the state sector -- or so we are told by the so-called "experts". Why this did not happen in India in the initial years of after independence and why should power from Enron and Cogentrix cost twice as much as the power generated by the much-derided state sector is never explained. The report of the Expert Group on Commercialisation of Infrastructure Projects -- titled The India Infrastructure Report -- set up by the Union Finance Ministry provides all the stock answers of the Fund-Back economists who currently are in charge of our economy. In the process, the cost to the consumers of such policies is never mentioned.

The kind of answers you want flows from the question you pose. If you want an exercise on how to make private investments attractive in infrastructure, all you have to do is pose the question how can infrastructure be commercialised.  The fundamental premises that infrastructure underpins other economic activity and is intrinsic to equitable development of the country as a whole can then be conveniently forgotten with learned discourse on market capitalisation, debt market and the institutional framework required to support large, foreign and private investments. No wonder, the impact that such investments will have on the cost of infrastructure delivery to the consumers -- both current and future ones are not mentioned anywhere in the report. Instead, the “experts” recommend that a large number of tax incentives should be given to such investors. In other words, it is sinful under the current economic theology to extend state subsidies to the poor, but completely legitimate to extend tax breaks to the rich. This, according to the “expert” group is completely non-ideological. So much so for the current non-ideological economic theorists favoured by the Finance Ministry.

The pernicious aspect of this report is that it attempts a backdoor “reform” of the entire financial sector. Thus, if infrastructure is to be commercialised, the entire financial sector should be open to foreign capital -- insurance companies, Foreign Financial Investment companies, Foreign Private Pension Funds -- all these should be allowed free access, thus goes the report. It goes on to argue for even debt financing of infrastructure projects. Debt financing was proposed by Enron and Cogentrix. It means that the equity portion of the project will also be financed by debt -- 100% of the capital requirements of a project will be met through debt only. The interest burden of this will be met from the revenues of the project. The owners will thus borrow from the international market at 8-10% rate of interest, get a guaranteed return of 25 to 27% from the Indian state and earn the difference without lifting a finger. This is finance capital at its worst -- totally parasitic and living off the gullibility of the people who may not understand terms like debt financing. Since the returns are so lucrative, the owners of infrastructure projects need not even operate the plants. They can sell their shares at huge premium and make a killing on the financial markets even before the project has started operations. The India Infrastructure Report therefore reads more like what the international speculators want than a serious report.

The fundamental issues that have governed in infrastructure delivery in the past -- not only in this country but also elsewhere -- are as follows:

i) How can infrastructure be delivered at lowest incremental cost to the people

ii) Should infrastructure be looked upon as a commercial activity for making profits or a necessary requirement for other economic activities

iii) As these areas are largely monopolies, should they be private monopolies --  regulated or otherwise.

In other words, should communications, roads, railways, telephones, power, etc. be made available cheaply so that the economy can develop as a whole or should these activities be considered as profit making activities -- whoever owns them should maximise profits and make the users pay as much the market can bear.

This is by no means a new debate. The classic example of the view that the user must pay what the market can bear, is the case of the old toll roads. In medieval Europe, tolls were levied by each feudal lord through whose territory the roads ran. He was to provide the upkeep of the road from the tolls. Successive increase of tolls led to toll riots and smashing of toll-gates. Finally, the bourgeois state stepped in to provide a public road system leading to huge expansion of the market and rapid growth of economic activity. The state realised many times the investment in roads through taxes from the general economic activity that followed but not directly from levy of toll on the roads.

The belief that the state should provide the basic infrastructure had another rationale. Apart from such infrastructure being pre-requisite to other forms of economic activity, they are mostly monopolies. Private monopolies did exist in some countries, particularly in railways. The railways in US were private monopolies, run by Van der Bilt, Pullman and others. As each territory was a monopoly, they could rack up their charges till there was a virtual revolt from the users, particularly small rural communities. This was coupled with strikes that engulfed the railway industry in 1890 - 95. Much of the picture of robber barons of business owes its origins to the railway owners, whose rapacious greed was to see the demise of railways in the US.  The state stepped in, first as a regulator and later, for a brief period as owner.  However, the public's distrust of railways led to support for state funding of the parallel road system and virtually, the end of the railways in the US.

The argument currently being advanced is that technological development allows for "unbundling" (separating various elements of infrastructure) and competition between certain elements of the unbundled infrastructure.  Thus, power  generators  can compete with each other, if they are "unbundled" from  transmission and distribution;  similarly, cellular/wireless telephones can compete with land based telephone networks due to new technological developments -- these are the claims currently being put forward.

The unfortunate part of the current debate is that a number of countries have taken these arguments at face value and proceeded to dismantle their existing structures.  The facts, however, are that none of the much touted "unbundling" or "competition" in infrastructure has led to major changes in the monopoly status of these industries in advanced countries. Thus telecommunications, power, railways, etc., are still monopolies globally, the talk of competition not withstanding.  In UK, from where the competition myth originated, British Telecom is still the only domestic carrier.  Even Mercury, which had been subsidised by British Telecom under state pressure to provide competition to itself, is today financially sick. Incidentally, one of the co-owners of Mercury is Cable & Wireless, another government company.  In power, all studies of the UK reforms concede that instead of monopoly, the so-called competition engineered by the Thatcher Government, produced a duopoly -- two monopolies. The electric companies made windfall profits and at the same time, these newly privatised companies instituted savage retrenchment programs for the workers. To add salt to the wound, the management gave itself huge bonuses and stock options. No wonder that the public opinion in Britain has been overwhelmingly against this dismantling of CEGB, the earlier state monopoly.

Those who are pushing for competition in infrastructure (or commercialisation of infrastructure) are not telling the people the costs of such competition.   "Restructuring" these industries to provide competition will entail huge costs. If all generators are free to supply to all distributors, this means huge additional investments in strengthening the transmission systems. Not surprisingly, this is the part of the system suggested to be with the state after “unbundling” in most of the “reform proposals. If competition in telecommunications is instituted, there will be costly duplication in providing a parallel telephone network. To all this costs, we will have to add the   profits or profiteering of the privatised infrastructure entities.

What then will be the price to the consumer after infrastructure is privatised?  A number of foreign consultants have been employed to evaluate this issue, for instance, in the Power Sector. They have recommended that the price of electricity be raised to Rs  2.50- 3.00 for agriculture and Rs. 5-6 for industry and domestic consumers.  At these rates, Indian electricity tariffs will be one of the highest in the world. The recently privatised Philippines electricity costs are already more than that of Japan, which itself is one of the costliest in the world. And all this on per capita incomes that are one of the lowest in the world.

If the costs of a "commercialised" (read privatised) infrastructure are so high, why are people still proposing it?  The India Infrastructure Report gives the game away.  In the globalised world of today, there is an integration of the world's capital markets. Large funds are available globally for private investments in infrastructure in developing countries, provided attractive returns can be guaranteed. The "expert" group may believe this to be non-ideological, as it states in its Report. All that it means is that global finance capital is interested in investing in developing countries, particularly with the added attraction of acquiring much of their existing infrastructure. This, as Lenin would have pointed out, is old-fashioned imperialism. The India Infrastructure Report is therefore, a blatant plea for an imperialist take over India's a infrastructure.  It is not even new, just old wine in old bottle.

Last Updated on Thursday, 24 January 2013 07:01