Rural Infra Report Draft

8/3/2019 Rural Infra Report Draft

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FOREWORD

The India Rural Infrastructure Report, sponsored by the Sir Ratan Tata Trust and prepared by

the National Council of Applied Economic Research (NCAER), New Delhi, documents the

status of rural infrastructure in India and makes policy recommendations on different aspects

of rural infrastructure. The need to undertake this study stems from the empirically

established fact that access to infrastructure can have very important positive implications for

economic development and poverty reduction. Given the fact that rural areas differ from their

urban counterparts in terms of per capita income, population density and average size of

agglomeration, infrastructure-related problems in rural areas are different from those of urban

areas. Thus, for example, complicated and expensive piped water supply and sewerage

systems are inappropriate for rural areas. Given that the solutions to rural infrastructure

problems would necessarily be somewhat different, a study focusing specifically on rural

areas is appropriate. It is also important for the reason that the bulk of the poor in India is in

rural areas, and improved infrastructure would contribute to poverty reduction. Necessary

evidence is documented in the introductory chapter.

The report deals with four rural infrastructure sectors telecommunications, power, roads,

and drinking water and sanitation. The report makes concrete policy recommendations

regarding the mode of provision and financing, governance and regulation. Desirable policies

for different sectors have a lot in common. This commonality is stressed in the report.

A report of this kind has to be based on accurate statistical data. The report relies on both

primary and secondary data. Primary data was collected through a detailed nationwide

sample survey. The design of the survey is described in the Appendix to the report. Itemerged out of a brainstorming session with scholars from leading academic and research

organisations in India. Secondary data were culled from Government of India (GOI)

publications on infrastructure, National Sample Survey (NSS) publications and the Market

Information of Households (MISH) conducted by NCAER.

The introductory chapter of the report reviews research that suggests that access to rural

infrastructure has a strong positive association with rural economic development and a strong

negative association with the incidence of poverty. This underlines the need for improved

rural infrastructure from the point of view of both poverty alleviation and economicdevelopment. At present, rural infrastructure is largely owned and run by the government.

Access of the rural population to infrastructure facilities in most sectors is poor. This is

brought out by the statistics presented in the report. However, given the constraints on

government funds it is necessary to encourage private participation in the sector. This is

somewhat problematic, as private funds are attracted only in those areas where rates of return

are at least reasonable. This is possible in large cities and strategic rural locations

characterised by high population density and per capita income and possibly large


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agglomeration size. The report attempts to resolve these contradictions by proposing a public-

private partnership in which the government would subsidise the private sector at a rate,

which would vary positively with the backwardness and remoteness of the area. This would

ensure balanced regional infrastructure development and attainment of full access" to

infrastructure facilities.

Apart from advocating public-private partnerships, the report makes recommendations in thefields of regulation and finance. In regulation it proposes a decentralised system with a

regulatory office at the Zila Parishad level. The intention obviously is to take into account the

varying ground level realities in different regions in terms of the level of demand, per capita

purchasing power and the suitability of different types of infrastructure. It is envisaged that

the regulator would fix tariffs and ensure that contracts are completed within a specified

period of time and that these meet certain quality standards. Decentralisation, however, might

be associated with higher costs relative to centralisation. The report proposes a solution to the

problem of high costs in the form of multi-utility regulators.

The report also proposes micro-financing of electricity-powered durable goods, telephones

and vehicles. This would help to ensure that infrastructure facilities are used optimally,

especially in remote and low-income areas.

The Council would like to acknowledge the generous contribution by the Sir Ratan Tata Trust

to undertake this study. A number of reviewers went through the report, and their

contribution in the finalisation of the report is greatly appreciated

Suman Bery

Director General


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CONTENTSFOREWORD

RESEARCH TEAM

EXECUTIVE SUMMARY

LIST OF ABBREVIATIONS

1. INTRODUCTION

Overview1.1 Rural Infrastructure Investments, Economic Growth and PovertyAlleviation

1.2 The Deficiency of Rural Infrastructure in India1.3 The need for Reform in Rural Infrastructure1.4 Targeting of Rural Infrastructure Projects1.5 Context of the Study

2. TELECOM SECTOROverview

2.1 Status of Rural Telecommunications2.1.1 Introduction2.1.2 The Current Situation2.1.3 The Approach so far2.1.4 Critique of the Existing Approach2.1.5 Critique of Reforms

2.2 Critique of the Existing Approach2.3 Suggested New Approach2.4 Financing the New Approach

2.4.1 Increasing Demand through Micro-Finance2.4.2 Network Approaches though Semi-Privatization and Subsidies2.4.3 Efficient use of subsidies

2.5 Regulation and governance2.5.1 Regulators in a Multi-Operator Regime2.5.2 Decentralised Regulators2.5.3 Pricing Rules2.5.4 Legal Issues2.5.5 Decentralised Governance and Transparency

3. POWER SECTOROverview

3.1 Status of Rural Power3.1.1 Introduction3.1.2 Power situation in rural areas3.1.3 The approach so far

3.2 Critique of the existing approach

3.3 Towards a new approach3.3.1 A new approach: from availability to access3.3.2 A three-pronged strategy3.3.3 New connections3.3.4 New Technologies and New Statutory Provisions

3.4 Financing the new approach3.4.1 Increasing demand through micro-finance3.4.2 Network approaches though semi-Privatization and subsidies3.4.3 Promoting informal providers

3.5 Regulation and governance3.5.1 Regulators in a multi-operator regime3.5.2 Decentralised regulators3.5.3 Decentralised governance and transparency


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3.5.4 Combating Power Thefts4. Roads and Transport Sector

Overview4.1 Status of Rural Roads

4.1.1 Importance of Rural Roads4.1.2 The Current Picture4.1.3 The Approach so Far

4.2 Critique of the Old Approach

4.3 The Need for a New Approach4.3.1 Survey Findings4.3.2 Investment Required for Full Coverage4.3.3 Changing Profile of Rural Consumers

4.4 Suggestions for a New Approach4.4.1 Decentralisation of Road Building and Maintenance4.4.2 Finance to Stimulate Demand for Vehicles4.4.3 Encouragement to Small Operators4.4.4 Better Financial Management4.4.5 Development of Simple User Fees4.4.6 Local Governance

5. Drinking Water and Sanitation Sector

Overview5.1 Status of Rural Drinking Water and Sanitation

5.1.1 Economic Benefits and Costs of Drinking Water and Sanitation5.1.2 The Current Situation5.1.3 The Approach so Far

5.2 Critique of the existing approach

5.3 Towards a new approach5.3.1 The Overall Approach5.3.2 User Charges Getting the Price Right for Drinking Water5.3.3 Regulatory Issues5.3.4 Local Governance

6. Conclusions

Overview6.1 Policy Recommendations

6.1.1 Promoting a new approach6.1.2 Financing of Infrastructure6.1.3 Regulation and Governance6.1.4 Fixing Tariffs6.1.5 Lowering Entry Barriers6.1.6 Decentralisation in Regulation6.1.7 Fiscal Decentralisation6.1.8 Better Targeting of Subsidies6.1.9 Development of Competencies6.1.10 Changes in Regulatory Structures

6.2 Limitations of the Study

Selected Bibliography

Appendices

1. Tables for Village Public Telephones2. Janmabhoomi Yojana3. Performance of SRTU in the Recent past4. Rajiv Gandhi National Water Mission (RGNDWM)


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RESEARCH TEAM

Director General

Mr. Suman Bery

Project Advisor

Mr. S.K.N. Nair

RESEARCH STAFF

Project Coordinators

Dr. D.B. Gupta (August 2002-Till date)Dr. Jyotsna Bapat (Upto August 2002)

Project Consultants

Dr. Siddhartha MitraMs. Gopika Tondon

Dr. R.K. Mutatkar

Junior EconomistMr. S.K. Bathla

Research Associates

Ms. Ramneet GoswamiMs. Reeta KrishnaMs. Kanmani ChandranMs. Pooja MirchandaniMs. Rekha Bansal

Mr. Mohit ChaturvediMr. Koushik RoyMs. Anjali MalhotraMs. Alekhya DasMs. Manasi GroverMr. Vishal Handa

Editors

Ms. Anuradha BhasinMr. Sonu Mohanty


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EXECUTIVE SUMMARY

The importance of rural infrastructure is demonstrated by the positive influence that an

increase in its stock has on the promotion of economic growth and decline in the incidence of

absolute poverty. The objective of this study is to assess the status of rural infrastructure,

analyze the trends in investment and suggest such measures as would contribute to a better

flow of infrastructure services to the rural population. The study is confined to four sectors:

telecommunication, power, roads and transport, and drinking water and sanitation.

The current status of rural infrastructure in India leaves much to be desired. For instance,

Rural Tele-density is 1.90 per hundred of population though 98% of the villages, as of

November 2003 had public telephones. The Planning Commissions estimate (revised norms)

of the investment required for full coverage was Rs 92, 690 crores at 2002-03 prices. In

contrast BSNLs average annual budget over the decade of the nineties has been a meager Rs.

2700 crores. A comparison of the two figures suggests that reliance on government

investment alone will not achieve full coverage in the future. The story for the rural power

sector is not much different. 18% of the villages do not have access to electricity and around

46% of the households are not covered. The Planning Commissions estimate for investment

required for attaining full coverage is around Rs 1,07,823 crores at 2000-01 prices. This

figure seems very large in comparison to the average annual investment of Rs. 8,800 croresover the past ten years. As for the rural roads sector as much as 44% of the rural population

is not covered by the rural road network. The average annual investment over the past ten

years has been Rs 2,133 crores which is extremely small in comparison to the estimated

investment requirement of Rs 15,643 crores for full coverage (Planning Commission). The

situation in regard to rural drinking water and sanitation sector is however somewhat mixed.

Around 95% of the rural population have access to some sort of drinking water source.

However the state governments, which are responsible for operation and maintenance of

these sources, are unable to carry out their functions effectively because of shortage of funds.

As far as the sanitation sector is concerned the problem is one of poor coverage with also

very low average annual per capita investment as indicated by investment data during 1990-

98.


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This shows that the government alone will not be able to achieve the target of full coverage

on its own and it would be necessary to involve the private sector. Some already been made

to facilitate the participation of private sector in infrastructure development. Thus the

legislative structure for full participation of private providers in the power sector is finally in

place with the Electricity Act 2003. The act allows for private participation, distribution and

transmission. The Act also allows for provision of electricity by alternative providers. These

providers attain economies of scale at much smaller scales of operation than conventional

providers and are also able to supply electricity to small populations in remote areas at a

much lower price. It seems that power reforms have evolved to provide for private provision

of electricity in a manner suited to rural areas. In rural telecommunication sector, cellular,

fixed line and domestic long distance operations were opened up to private competition

through policies enacted in 1994 and 1997.

While legislation, which allows privatization in the power and telecom sectors, have been

enacted there still remain problems and unanswered questions. These are regarding pricing of

private services, ensuring profitability of private providers, and enabling potential private

investors to meet their investment needs and the design of a proper regulatory mechanism.

In practice the prices, fixed by regulatory bodies and the government, are sometimes

uneconomic and make it difficult for private telecom and power providers to supply their

services at those prices. In this study we describe how orthodox and proven techniques can be

used to fix prices. These are rate of return pricing, benchmark pricing and price cap

regulation. The study advocates the benchmark rule because it compels the private firm to

operate efficiently and prevents the exploitation of the consumer. Chile, a successful model

of telecommunication reform has adopted benchmark pricing. In contrast countries adopting

other pricing rules have not performed as well. The study describes how benchmark pricing

can be used in combination with demand estimates to fix targets for private sector companies.

Besides ensuring appropriate prices for private initiatives in the field of power and telecom

sectors there are other measures which can be taken to improve the profitability of private

enterprises. In the case of power, the efficiency of the existing distribution systems could be

improved through public-private partnerships where private initiatives piggyback on public

investments to increase efficiency. Last mile providers can receive the supply of electricity

from public networks at the periphery of the villages and distribute it within the villages.


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They can also run mini-hydel plants and generators to distribute the electricity in the

neighboring areas. In the case of telecom the public enterprise can set up wireless, cellular or

land line networks. Phone services can be provided by private companies. This should allow

adequate returns on investment as well as a fixed return on the leased capital asset. In telecom

the profitability of PCO operators can be increased by allowing them to provide other value-

added services such as Internet services. The direct synergy between telecommunication and

power can be exploited to increase profitability of private providers in both the fields. A way

to do that would be to permit the integration of the provision of telecom and power services.

Finally, besides improving the profitability of private providers through micro-finance for

telecom and power connections, the government can also facilitate better utilization of

infrastructure facilities in power and telecom sectors.

Potential private investors in the fields of telecom and power often fall short of fundsrequired for investment on their own. Government and development banks can perform an

important function by providing loans and subsidies to private investors. This is happening to

an extent the problem is in allocating a limited pool of funds for subsidy and credit among

numerous and potential investors demanding funds. The method proposed in the study

suggests and that banks and finding agencies rank potential projects on the basis of a

weighted average of potential efficiency gains and poverty levels of the affected area. Once

the ranking is done, then credit or subsidy as the case may be is provided in descending order

of ranking till the entire pool is exhausted.

Potential private investors in power are sometimes deterred from investing because of large-

scale power thefts and non-payment of bills. Power thefts could be discouraged by regular

inspection of grid lines, use of remote sensing meters to monitor consumption of electricity

and heavy penalties when such thefts are discovered. The problem of non-payment of bills

can be mitigated to an extent in case the use of penalties can be combined with incentives

such as discounts for advance payment.

Another important issue for telecom and power discussed in this study concerns the design of

the regulatory authority. A decentralized regulatory regime supported by appropriate

enforcement machinery may help in reducing corruption, take care of local tastes and needs

in taking decisions, and allows prices to vary according to the conditions of the local area.


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In regard to the rural roads, the problem is one of accelerating the attainment of full coverage

and improving the operation and maintenance of roads. One option is to allow village

communities and private providers to form rural road associations, build roads and recover

their construction/operation and maintenance costs - through user charges. The government

can help in this task through provision of capital subsidies. The government will however

face the problem of allocating its resources for capital subsidy among many competing

village communities. In this case the study proposes ranking the road projects according to a

weighted average of the estimated economic benefits and the poverty of the village

community affected by each project. The subsidy is then provided in descending order of

ranking till the entire pool of financial resources is exhausted. The amount of subsidy

provided to any project is given by the difference between the construction cost of the road

and the willingness to pay of the rural community.

The operation and maintenance costs of the village roads have to be recovered through user

charges by promoting community decision making processes. This will generate a sense of

ownership of the assets While legislation authorising the government of India and state

governments to collect tolls on roads constructed and maintained by them have existed for a

long time, only certain states like Rajasthan and Gujarat have legislation/policies which

permit private entities and communities to collect tolls on roads constructed by them.

Therefore, the legal structure in many states will have to be suitably modified before one can

initiate a plan for collecting tolls to finance operation and maintenance expenditure. In the

design of tolls one option is to adopt a policy of benchmark pricing based on demand

estimation. In order to enable the public to make best use of the expanded rural road network,

government and development banks may consider providing micro-credit for purchase of

vehicles. For roads too, it may be appropriate to adopt decentralized regulatory regime as it

makes it easier to monitor small operators. As decentralization is usually expensive its extent

should be determined by the regulatory budget

As far as the water sector is concerned, there are two major problems. These relate largely to

proper maintenance of water-providing assets and eliminating wastage of water. One possible

option to overcome these problems is to levy user charges based on water consumption. This

can be done through demand estimation of water and levying user charges, which provide the

subsistence level of consumption to consumers at the poverty line level of income. The anti-

poverty programs of the government can cover the people below the poverty line.


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Government subsidy on the creation of private water providing assets can be provided on the

same basis as the one for community provision of roads.

In the case of sanitation, while the governments existing subsidy scheme of providing 80%

of the costs (subject to a maximum of Rs. 500/-) of providing a latrine to the BPL families is

attractive, the low per capita expenditure suggests that this scheme has not made a significant

dent in the overall provision of sanitation facilities.

Thus, the problem facing all the four-infrastructure sectors considered in this study is one of

inadequacy of government funds devoted to rural infrastructure. The solution lies in looking

for alternative sources of investment in infrastructure. This study advocates the promotion of

partnerships between public enterprises and private and alternative providers in power and

telecommunication. In the case of roads it recommends the provision of roads by village

communities through provision of subsidies. In the case of both water and roads it stresses theneed to recover operation and maintenance expenditure through user charges. However, for

sanitation there is no substitute but to enhance the government spending.

The above policy recommendations are also designed to improve transparency and increase

participation by the people in decisions regarding infrastructure provision.


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LIST OF ABBREVIATIONS

ANERT Agency for Non Conventional Energy and Rural Technology

ARTI Applied Research Training Institute

ARWSP Accelerated Rural Water Supply Program

ASM Arthik Samata Mandal

ASTRA Center for Application of Science and Technology to Rural Areas

BHEL Bharat Heavy Electrical Limited

BSNL Bharat Sanchar Nigam Limited

CBO Community Based Organization

CEE Center for Environment Education

CII Confederation of Indian Industries

CRSP Central Rural Sanitation Program

CSP Cellular Mobile Service Provider

DELs Direct Exchange Lines

DESI Decentralized Energy Systems India

DOT Department of TelecommunicationsDRDA District Rural Development Agencies

ESA External Support Agency

FC Fully covered

GDP Gross Domestic Product

GOI Government of India

GRIDCO Grid Corporation of Orissa

GRWSSP Ghogha Regional Water Supply and Sanitation Project

GSS Grameen Sanchar Society

IDBI Industrial Development Bank of India

IDFC Infrastructure Development Finance Corporation

IFAD International Fund for Agricultural DevelopmentILFS Infrastructure Leasing and Financial Services

INEP Indo-Norwegian Environment Program

IREDA Integrated Rural Energy Development Authority

IT Information Technology

ITDA Integrated Tribal Development Agency

KPTCL Karnataka Power Transmission Corporation Limited

KREDL Karnataka Renewable Energy Development Limited

LIC Low Income Countries

MISH Marketing Information Survey of Households

MNES Ministry of Non Conventional Energy Sources

MNP Minimum Needs ProgrammeMVS Multi village scheme

NABARD National Bank Of Agriculture and Rural Development

NC Not covered

NCAER National Council of Applied Economic Research

NEDCAP Non-Conventional Energy Development Corporation of Andhra Pradesh

NGO Non Government Organization

NHAI National Highway Authority of India

NIRD National Institute of Rural Development


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NSSO National Sample Survey Organization

NTP National Telecom Policy

O&M Operation & Maintenance

OED Operations Evaluation Department

ORG Operation Research Group

PC Production Centre

PC Partially covered

PCO Public Call OfficesPEO Provincial Electric Authority

PHE Public Health Engineering

PIU Project Implementation Unit

PMGSY Pradhan Mantri Gramin Sadak Yojana

PRI Panchayati Raj Institutions

PWD Public Works Department

QP Quality Problem

RD Rural Development

REC Rural Electrification Corporation

REDA Rajasthan Energy Development Agency

RGNDWM Rajiv Gandhi National Water Mission

RSM Rural Sanitary Mart

SEB State Electricity Board

SELCO Solar Electric Light Company

SERC State Electricity Regulatory Commission

SEWA Self-Employed Women's Association

SKDRDP Shri Kshethra Dharmastala Rural Development Program

SPV Solar Photo Voltaic

STC State Transport Corporation

SUTRA Sustainable Transformation of Rural Areas

TIDE Technology Informatics Design EndeavorTRAI Telecom Regulatory Authority of India

TRANSCO Transmission Corporation

TSC Total Sanitation Campaign

UNICEF United Nations Children's Education Fund

USAID United States Agency for International Development

USO Universal Service Obligation

VPT Village Public Telephone

WSP Water & Sanitation Program


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CHAPTER 1

INTRODUCTION

OVERVIEW

The study was commissioned by Sir Ratan Tata Trust to analyze four infrastructure sectors in rural

India telecom, power, roads and drinking water supply and sanitation. As per the terms of

reference, the study focused on detailing the current status of infrastructure, estimation of investment

requirements, evaluation of programs implemented by various agencies and identification of feasible

policy options in the four study areas of rural infrastructure. Inter alia the progress in

decentralization in various states and its impact on the provision of rural infrastructure, the changingneeds for subsidies, and the alternative methods for financing infrastructure form part of the study.

The issue of the provision of rural infrastructure is particularly relevant for India which is

predominantly rural. Further, as we see later, the findings of various empirical studies clearly

indicate the positive impact that infrastructure development has on economic growth, poverty

alleviation and human development. Some of these issues are discussed later in this report. A

related issue is the existing regulatory framework which is in need of reforms.

Given the low per capita income of rural households, and hence their low affordability, there

is a clear need for government intervention in taking suitable initiative for improving access

to infrastructure services, with a view to eventually moving towards achieving the objectives

of universal coverage. This implies gradually improving physical proximity for all to the

sources of infrastructure services. Thus, through universal access, the residents of every

village should be able to access a common telephone. Each village should be able to connect

to wired network/electricity grid, have access to a road and be close to a drinking water

source. However, it may be noted that universal access does not necessarily imply universal

service. Universal service implies ensuring that each household consumes the infrastructure

service. In other words each household has an electricity connection and is physically and

economically able to make phone calls and use roads for motorized transport. Thus, universalservice is something more than universal access.

We now try to answer the question as to why issues concerning the provision of rural

infrastructure services should be tackled in a manner different from those concerning urban

infrastructure. The need to draw this distinction arises from the fact that urban areas have

characteristics which are vastly different from those of rural areas. These differences are


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largely in respect of population density, per capita incomes, and sparsely distributed

populations.

The population density in rural areas is much lower than that in urban areas. Urban

population density as a multiple of rural population density varies from 3.79 in Kerala to

41.91 in Maharashtra. For the country as a whole, the figure is 15.75. Rural population

density is greater than 500 per square km only in three Indian states Delhi, Kerala and West

Bengal. In 12 out of the seventeen states captured in table 1.1 it is less than 300 persons per

square km. Such low density, for example, implies high per capita cost for setting up wired

networks. In a situation like this, say for power sector, it might be a good idea to use mini-

generators instead of wired networks connected to the main grid. Similarly, in the case of

telecom, phone services based on wireless technology might turn out to be a more

economical option than say landlines.

Table 1.1 Urban and Rural Population Density in Indian States in 1991

State Populationdensity (Rural)

Population density(Urban)

Urban populationdensity as multiple of

rural population densityKerala 603 2283 3.79Bihar 441 3033 6.88Orissa 179 1665 9.30Delhi 1190 12361 10.39Tamil Nadu 297 3089 10.40West Bengal 576 6079 10.55Assam 257 3003 11.68

Uttar Pradesh 386 4927 12.76Punjab 292 4160 14.25Haryana 287 4194 14.61Madhya Pradesh 117 1940 16.58Andhra Pradesh 180 3459 19.22Gujarat 142 2773 19.53Himachal Pradesh 85 1665 19.59Karnataka 166 3257 19.62Rajasthan 101 2070 20.50Maharashtra 117 4904 41.91India 214 3370 15.75Source: Census of India, 1991

The other major difference between urban agglomerations (towns) and rural agglomerations

(villages) is their size. Average town population as a multiple of average village population

varies from 4.55 in Kerala to 253.73 in Delhi. Kerala is an aberration in this respect as in all

other states considered in table 1.2 this figure is greater than 20. The average population of

an Indian village is 1070 persons. For 14 out of the 17 states considered here the average

village population is less than 2000 persons. When the population of an agglomeration is so

small the solution to infrastructure problems will necessarily have to be different. For


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example, setting up of large water treatment plants and modern piped water supply and

sewerage networks in thinly populated agglomerations are ruled out. Instead it would suffice

to have small water treatment plants, or stand posts and sanitised pit latrines 1. Again our

recommendations do not hold for the large villages in Kerala (15,470 people) and Delhi

(4,770 people).

Table 1.2 Average Town and Village Size in Indian States in 1991

States Average town

population (000s)

Average Village

Population (000s)

Town Population /

Village Population

Kerala 70.46 15.47 4.55

Haryana 45.06 1.83 24.62

Tamil Nadu 73.37 2.83 25.93

Himachal Pradesh 8.16 0.28 29.14

Assam 28.60 0.80 35.75

Uttar Pradesh 39.32 0.99 39.72

Gujarat 63.32 1.50 42.21

Punjab 49.94 1.15 43.43

Andhra Pradesh 83.98 1.82 46.14

Karnataka 54.76 1.15 47.62

Bihar 53.81 1.11 48.48

Madhya Pradesh 35.42 0.71 49.89

Rajasthan 46.82 0.90 52.02

Orissa 35.59 0.58 60.94

West Bengal 116.25 1.30 89.42

Maharashtra 104.96 1.15 91.27

Delhi 1210.28 4.77 253.73

India 58.36 1.07 54.54Source: Census of India, 1991

Another characteristic which distinguishes the urban areas from rural areas is the average

purchasing power of people, with the urban dweller being much wealthier on the average

than the rural dweller. The excess of urban per capita income over rural per capita income

varies from 22% in Haryana to 180% in Orissa. Only in three states is this figure less than

50%. In 13 out of the 17 states listed in table 1.3 the level of rural per capita income is less

than Rs. 12,000. The low level of rural per capita income (as opposed to the much higher

levels of urban per capita income) implies that in most rural areas pricing of infrastructure

services cannot always be structured so as to recover the entire capital and operating and

maintenance cost over the lifetime of the capital asset. Irrespective of whether the service is

provided by the government or the community or the private sector, there is a clear need for

provision of a subsidy to the consumer of rural infrastructure services. The extent of subsidy

so designed will need to take into account the consumers willingness to pay for the

1 In multi-village water supply schemes (MVS), house connections are being provided.


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concerned service. This can take place either through direct or indirect means. Exceptions to

this generalization exist in the case of Punjab, Gujarat and Haryana, which have per capita

incomes greater than Rs. 14,000. It must be remembered that Uttar Pradesh and Bihar are the

only states which have urban per capita incomes less than this figure.

Table 1.3 Rural and Urban Per Capita Incomes (1999-2000)

(Rs.)

States PCY (Rural ) PCY(Urban ) % Difference

Orissa 5704 15993 180.38

West Bengal 8792 23892 171.75

Meghalaya 9284 20714 123.12

Madhya Pradesh 7079 14719 107.92

Maharashtra 11769 23747 101.78

Tamil Nadu 12888 24246 88.13

Himachal Pradesh 10816 19881 83.81

Uttar Pradesh 6738 12257 81.91

Bihar 6976 12404 77.81Andhra Pradesh 11033 19143 73.51

Kerala 10342 17372 67.98

Karnataka 11300 18394 62.78

Goa 11017 17440 58.30

Gujarat 14574 22742 56.05

Assam 11109 17231 55.11

Rajasthan 10693 15850 48.23

Punjab 16540 21413 29.46

Haryana 14855 18134 22.07 Source: Indian Market Demographics Report, NCAER

1.1 RURAL INFRASTRUCTURE INVESTMENTS, ECONOMIC

GROWTH AND POVERTY ALLEVIATION

The increase in the level of rural infrastructure has two effects: the promotion of economic

growth and a decline in the incidence of absolute poverty. A study by Jocelyn A. Songco

(2002) points out that rural infrastructure investments help to raise the economic status of the

rural poor through increased income and improved consumption levels (which can be

demonstrated in lower costs for basic goods, lower expenditure on energy due to use of new

energy sources, greater use of social services, etc.).

There are some empirical and econometric studies which illustrate the strong relationships

that exist between infrastructure and economic growth. According to the World Bank a one

percent increase in the stock of infrastructure is associated with a one percent increase in

GDP across all countries. Moving to specific sectoral studies, a study by Deichman et.al for

Mexico shows that a 10% increase in market access leads to an increase in labour


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productivity by 6%. A very recent cross-country study on the telecommunications industry by

Lars Hendrik Roller and Leonard Waverman (2001) shows that economic product increases

at an increasing rate with the density of the telecommunication network. According to this

study, not only does higher infrastructure spending result in higher income growth, the latter

might indeed lead to a more intensive use of infrastructure facilities with the possible

consequence of a rapid deterioration of facilities. This might call for larger spending on

infrastructure.

According to correlations listed in table 1.4 Indian States exhibit a positive correlation

between infrastructure and per capita income.

Table 1.4 Correlations of Per Capita Income withInfrastructure Deficiency Indices

Deprivation Indices Correlation Rank Correlation

Roads -0.68 0.612

Telecom -0.44 0.457

Power -0.75 0.635

Water -0.14 -0.028

Overall -0.77 0.597

It is seen that the deprivation measure corresponding to power has the strongest negative

correlation with per capita income followed by that for roads and telecom. Thedeprivation index for water has an extremely weak negative correlation with per capita

income. This merely implies that a scarcity of water leads rural people to pursue alternative

modes of development which yield substantial rates of return without relying heavily on

proximity to drinking water sources.

As far as rank correlations are concerned the results are similar. The correlations of course

are positive (as the states are ranked from 1 downwards in ascending order of deprivation)

except for water which shows a weak negative correlation.

The importance of infrastructure as a contributory factor to poverty reduction is illustrated by

some surveys. 50% of poor Ecuadorian families see the improvement of basic infrastructure

provision as the solution to poverty alleviation. A poor rural community in Nigeria regards

lack of basic infrastructure services as the cause of their poverty.


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Broadly speaking, it can be said that development of rural infrastructure has a five-fold

impact on the economy i.e.

Creating better access to employment and providing further earning opportunities.

Increasing production efficiency.

Creating access to previously inaccessible commodities and services.

Time saving which can be better utilized in productive activities

Better health and physical condition of the rural population.

The first and third channels correspond to better physical access facilitated by roads etc. The

second channel is due to the improvements in technology and mechanization facilitated by

the spread of electrification and telecommunication. The fourth channel corresponds to time

saving from faster physical access to employment opportunities, goods and services and in

creation of drinking water sources. The fifth channel results from the spread of quality

sanitation and drinking water facilities. These five channels correspond to mechanisms

through which incomes of the rural populations can be raised and economic growth can be

facilitated. When targeted to the poor sections of the population they tend to reduce the extent

of absolute poverty. Thus, the mechanisms through which the spread of rural infrastructure

assists economic growth or helps in a decline in poverty are largely the same. It is indeed the

targeting of the population that seems to determine the consequences.

Perhaps the most comprehensive study of the effect of infrastructure on poverty reduction is

by Fan et. al (2000). They estimate the effect of different types of government expenditure on

poverty in India. The infrastructure stock variables accounted for are electrification

(percentage of rural villages that are electrified), the literacy rate of rural population,

irrigation facilities and road density in rural areas. The model is one of simultaneous

equations and covers the period 1970-93. The results show that a million rupees (at 1993

prices) spent on roads would lift 123.8 people out of poverty. A similar effect on educationwould lift 41 people out of poverty.

Table 1.5 shows that the correlation of rural poverty with infrastructure deprivation is

positive for India less in the case of water and is highest for power followed by

roads/telecom. Correlation in case of water is seen to be very weakly positive. The results


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based rank correlations are very similar with positive and significant magnitudes in the case

of power, roads and telecom and a negative correlation in the case of water.

Table 1.5: Correlations of Rural Poverty with Different

Infrastructure Deficiency Indices

Deprivation Indices Correlation Rank Correlation

Roads 0.615 0.635

Telecom 0.655 0.724

Power 0.925 0.940

Water 0.034 -0.079

Overall 0.832 0.799

We now turn to an analytical discussion of the effects of specific types of infrastructure on

the economy. When population growth leads to more demand for food and traditional fuels,

electricity aided irrigation (such as electric pumps) reduces the overall cost of irrigation and

permits a more intensive cultivation of land, which helps to meet the increased demand. It

also helps to overcome the shortages of other conventional fuels such as kerosene as well as

provide better lighting. Thus, any further deterioration in living standards of the poor is

prevented and in fact possibilities for improvement are opened up.

Investment in the water and sanitation sector too has positive impact on the economy. A

UNICEF report highlighted the benefits (economic and non-economic) from investment in

improved sanitation:

Investments in rural roads can and often do

result in lower cost for goods and services

consumed. Beneficiaries of rural road

rehabilitation projects in Kon Tum and Dac

Lac Provinces in the Central Highlands

region of Vietnam noted that the cost of

goods in their village decreased to the same price as goods sold in the commune center

following the upgrading of roads to year-round access gravel or asphalt roads. An OED

(Operation Evaluation Department) evaluation of World Bank supported rural road

rehabilitation in Ghana and found that rural sellers profited from higher prices, as they were

now able to sell their goods directly rather than through middlemen. Shopkeepers noted that

bringing goods to the village was not only less expensive but also pushed up their sales.

Box No. 1.1 Benefits of Improved Sanitation

Lower rates of death and sickness

Savings in health costs

Higher worker productivity

Better learning capacities of school children

Increased school attendance, especially by girls

Strengthened tourism

Heightened personal dignity and national pride


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However, in order to allow the rural poor to derive of benefits from improved infrastructure,

it is critical to remove or at least minimize obstacles and create a supportive environmentfor

rural economic growth. For example, in rural electrification, obstacles may include high

connection costs, limited or no access to credit, or unfavourable loan terms that dissuade the

poor from borrowing. Limited skills may prevent villagers from maximizing the benefits

accruing from electrification, underlining the need for imparting relevant skills training. A

supportive environment for rural growth should build on the assets and capacities of the poor.

Cottage industries or small business initiatives may have limited benefit for the poor,

particularly when demand for such goods is low. There is a need to develop micro-enterprise

advisory services and pro-poor credit opportunities in order to promote off-farm employment

and diversified production.

1.2 THE DEFICIENCY OF RURAL INFRASTRUCTURE IN INDIA

For any country, development of rural areas is a pre-requisite for the overall growth of the

economy and it is particularly important for a developing country such as India, where 71%

of its one billion plus population reside in the rural areas. There is thus a serious thinking on

part of policy planners and implementing agencies that for a prosperous India, strengthening

of the network of rural infrastructure facilities is critical. It is therefore not surprising that in

1996 the United Front government under the Common Minimum Program gave utmost

importance to the development of rural infrastructure. The government had announced

special schemes for development of rural infrastructure from time to time. However the

implementation of these schemes has been generally very tardy. A major hindrance to rural

development has been a lack of access to safe, reliable power, telecommunications, water,

sanitation and transport services. On the average 89 percent of rural households do not own

telephones, 52 percent of households do not have domestic power connections. The average

brownout in India is 3 hours in non-monsoon months and 17 hours in monsoon months; 20

percent of rural habitations have partial or no access to safe drinking water supply; 2 Km is

the average distance from a village to an all weather road and 52 percent of people living in

habitations away from the main village do not have access to all weather roads.

In India the telecom sector has been characterized by poor teledensity (see Yatish Mishra,

2001), the power sector by poor access, long outages and excess demand (see Mallick and


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Murthy, 2001 for details), the road sector by the increase in road length but failing to keep up

with booming vehicular demand, and the drinking water and sanitation sector by both poor

availability and poor quality of services

Part of the reason for this poor performance may be the fact that the rural infrastructure sector

has been entirely government owned. There has been insufficient investment by the Central

government and inadequate maintenance expenditure by the state governments.

Infrastructure development has been largely supply driven with not much attention paid to the

needs of rural citizens. The demand for better quality of infrastructure arising out of a large

increase in the size of the middle class has not been met.

1.3 THE NEED FOR REFORM IN RURAL INFRASTRUCTURE

When policy makers are deliberating on which form of infrastructure restructuring to

undertake or how to design a regulatory agency, it is important that the right decisions are

taken. A key element of any decision making process should be a review of the evidence on

the impact of the various types of reforms.

The need for policy reform is brought out by a study by Carsten Fink et. al (2002). The study

is carried out for the telecommunications industry. The econometric results show that

Privatisation, competition and the introduction of an independent regulator lead to an increasein tele-density by 8 percent and an increase in labour productivity by 21 percent. Fink,

Mattoo and Rathindran (2002) claim that private ownership is likely to lead to greater internal

efficiency for a variety of reasons, ranging from lower costs of monitoring, more precise and

measurable targets and greater flexibility to devise incentive contracts. Many other studies

have come out in favour of Privatisation.

For example, Privatisation of Argentinea infrastructure companies yielded rich dividends in

terms of efficiency increase and price reduction in the period, 1993-95, as is documented by

Table 1.6.


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Table 1.6 : Changes in Performance Between 1993 and 1995 (%)

Industry Sector Electricity

Generation

Electricity

Distribution

Gas

Distribution

Water

Distribution

Telecoms

First year of private operation 1992 1992 1992 1993 1990

Efficiency gains

(measured as reductions inintermediate input purchases as a

share of total sales value)

19.51 6.26 8.84 4.86 11.28

Labour Production gains

(measured as GWh/staff forelectricity, 000m3 /staff fir gas,population served/staff for water

and lines in service/staff fortelecoms)

23.10 17.59 4.79 -27.58 21.25

Increases in Investment

(concession contracts for gas and

actual investments for the othersectors)

8.65 n.a. 4.56 75.97 28.10

Improvements in quality

(measured as reduction in losses:

net of consumption bytransmission/production forelectricity and gas, water

unaccounted for/production forwater, lines in repair/lines inservice for telecoms)

n.a. 10.00 27.80 6.12 4.56

Changes in real average tariffs

(defined as total sales value by aphysical indicator of production)

n.a. -9.5 -0.5 5.5 -4.9

Source : Table 4.1 Changes in Performance between 1993 and 1995 Chisari, Estache and Romero 1997.

However, there are enough documented failures of Privatisation as well. Two out of the many

examples are the case of Telecommunications of Jamaica and Lan-Chile, the Chillean

National animal. Pankaj Tandon (1997) makes the point that the efficiency of a firm is

determined not by whether it is public or private but by whether it is exposed to competition

or not. His hypothesis is consistent with the success stories and failures in the public as well

as the private sectors. An additional point made by him is that the success attributed to

Privatisation is often the result of general conditions of boom in the economy. However, a

certain amount of Privatisation might be necessary for the introduction of competition. On

the other hand total Privatisation might give rise to the formation of cartels which might

mimic a monopoly like environment.

Competition can be expected to bring benefits in productive, allocative and dynamic

efficiency. Regulatory regimes can be set up to mimic competition when this is absent from

the market, although this is likely to be an poorer alternative because of problems associated

with imperfect information. Furthermore, the costs of acquiring and analysing the data will


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ultimately have to be paid for by the consumer. In general, governments have differed in their

willingness to concede control to the market, and most have a penchant for gradualism.

Competition has been introduced, but the number of firms has been fixed by policy.

Privatisation has often been partial with limitations imposed on foreign participation;

autonomous regulators have been created but are rarely fully independent.

Commitment to Privatisation on paper without proper implementation is not enough. No

government, whether in developed or in developing countries, has been able to foresee every

pitfall and so no perfect model of reform exists. Countries in Latin America such as

Argentina and Chile, that have led the reform process, have had mixed successes and failures,

and despite these problems the reform process has been able to make a significant impact on

the performance of the economy. What is important, however, is to accept the fact that, while

these sorts of problems are bound to arise, a mechanism does exist which ensures sufficientflexibility to deal with these problems effectively and fairly. It should be recognized that

reform is an on-going process and that governments should treat initial major reforms as the

start of a process that is capable of yielding substantial benefits to the economy in question.

However, governments can take several steps to limit their exposure to conduct of regulation

risks. These include the introduction of:

The greatest degree of competition that is possible (although the cost-benefit trade-off should

always be considered); Thus, exclusivity agreements with any infrastructure provider as is

seen in many countries should be avoided.

Rules to ensure that vertical and horizontal ownership issues that make conducting regulation

even more difficult are limited (or hopefully non-existent);

Rules to ensure that all the information that the regulatory authority is likely to need is

available in a timely, consistent and accurate format.

Cross-subsidisation should be avoided as the section of the population, which is supposed to

subsidise the rest often takes recourse to avenues other than using the infrastructure. Subsidies

must be targeted towards the poorer consumers but must be financed by government tax

revenues or an infrastructure development fund.

Finally, it is also important to place the reform of the utility and infrastructure companies in

the context of broader institutional reform. Some of the successes of the utility and

infrastructure reforms may be diluted in case other broader reforms have not occurred. The


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impact of labor-shedding created by providing the private operators with incentives to

achieve the lowest costs of production is a good example. If the labor market still faces

rigidities and is consequently unable to handle the labor that is released from the utility and

infrastructure companies, then some of the benefits of the sector reform will be lost.

Another factor favouring Privatisation is the insufficiency of government resources to meet

the increasing demand for infrastructure. This is especially true in the case of rural

infrastructure development.

There are several aspects of reform that need to be considered. These include:

Industry structure structural reform which is primarily concerned with the introduction of

competition into a sector or the removal of barriers to entry to new players so that

contestability is a real option;

Operation conduct reform whereby a natural monopoly is constrained by rules covering

areas such as quality, pricing and access. The key to the successful implementation and

enforcement of these rules is an effective regulatory system which ideally requires the

establishment of an independent agency;

Ownership reforms are often associated with a change in the ownership of previously state-

owned enterprises to some degree or form of private sector ownership.

Decentralization in allocation mechanisms: These often play an important role in enhancing

the influence of economic forces and the participation of stakeholders in the infrastructure

sector. This is generally true for the water sector.

Change in regulations: Regulations can often have an adverse impact on welfare. For

example, regulation aimed at controlling prices and entry into markets is likely to reduce the

average standard of living (Guasch and Hahn, 1997). There are certain principles which

should be followed in changing or introducing new regulations :

(a) The choice of regulation should be based on cost-benefit analysis.

(b) Any regulatory policy should have a clear economic rationale.

(c) Evaluation of the regulation should be done by an independent agency which considers

the economy-wide impact and not by a sector-specific agency.

(d) Regulations should be simple and subject to careful scrutiny. These improve accessibility

to the public (transparency) and diminish the likelihood of capture by political groups.

While changing regulations, the objectives and instruments of regulation should be kept in

mind. Our discussion is based on the work done by Galal and Nauriyal (1995). Given scarcity


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of public funds for investment in an infrastructure sector, regulation has three objectives: to

attract high private sector investment, to assure reasonable rates of return to the producers,

and to provide improvements in consumer satisfaction. Common regulatory tools are pricing

rules, the degree of competition allowed and conflict resolution mechanisms. It may be in

order to briefly describe each of these regulatory tools.

Common pricing rules are of three kinds: rate of return pricing, benchmark pricing and price

cap regulation. Under rate of return pricing the firm is assured of a stipulated fair rate of

return on its cost. This allows the firm to inflate its costs and gain at the expense of the

consumer. Under benchmark pricing a benchmark is set (say the cost of an efficient firm) and

the firm is assured a stipulated rate of return on the benchmark. This forces the firm to reduce

its costs in order to maximize its profit. Under price cap regulation the price increase is given

by the increase in the retail price index minus a X factor reflecting technological or otherchanges. The adhocism in setting the X factor reduces the attractiveness of this pricing rule.

From the discussion it seems that benchmark pricing is the preferred pricing rule. This is

supported by the fact that Chile, a successful model of telecommunication reform, has

adopted benchmark pricing and countries adopting other pricing rules have not done as well.

We now turn to conflict resolution mechanisms. When there is a conflict between different

parties (firm, consumer and government) a resolution of the conflict is necessary to prevent

losses to parties. The sureness of neutral resolution of a conflict with rules for conflict

resolution spelt out in detail beforehand makes the infrastructure contract(s) more attractive

and secure to all contracting parties. Again this is demonstrated by the success of Chiles

conflict resolution mechanism in the telecommunication sector. In order to assure neutral

resolution of conflicts an independent regulatory agency with quasi-judicial powers is

needed. Another crucial aspect of regulation concerns the extent of competition which may

be permitted. Competition in an area replaces the need for price regulation as it promotes cost

as well as tariff minimization that is compatible with an acceptable rate of return. However,

the existence of economies of scale in certain infrastructure sectors implies that the decision

to allow competition within a certain area would depend upon the size of the consumer base

and the potential scale on which the various firms can operate.


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Apart from the above mentioned instruments, provisions may be included in regulation so as

to ensure that the firms perform. This is done by having clauses which state that the license

will be revoked in case the firm fails to meet stated targets.

1.4 TARGETING OF RURAL INFRASTRUCTURE PROJECTS

Rural infrastructure projects lead to efficiency gains as well as social equity gains through

reduction of poverty. Projects that provide a high rate of return might not have very many

favourable implications for social equity or the reduction of poverty. On the other hand

projects with lower rates of return may have more benefits in terms of social equity and the

reduction of poverty. Therefore, selection of projects on the basis of efficiency alone may not

necessarily be social welfare maximizing as they understate the importance of poverty

reduction.

Traditional methods for project selection especially in the road sector have been based on

cost-benefit analysis. Benefits consist of travel time savings, vehicle operating cost savings

and increases in agricultural production brought about by road investment projects. This

method of project selection therefore tends to bias investments for rich high traffic areas.

Thus, this method would tend to lead to a neglect of rural areas. In case there is a fixed

infrastructure budget for rural areas, the poorer rural areas get neglected. Dominique Van de

Walle of the World Bank has come up with a method, which effectively combines equity and

efficiency considerations. In later chapters we try to adapt this method to specific

infrastructure sectors.

1.5 CONTEXT OF THE STUDY

One of the goals of the study is to analyze the recommendations of previous reports such as

NCAERs India Infrastructure Report and refine these recommendations keeping in mind the

typical needs of rural areas. Among the many points made by the India Infrastructure Report,

two are particularly important in the context of rural infrastructure. In view of the massive

investment requirement arising from rising economic growth rates and fiscal stringency, in

many countries are looking for additional sources of financing infrastructure. This is certainly

true of rural infrastructure in India. Inadequate state funds have prevented the government

from achieving full coverage. The state governments, because of the precarious nature of

their finances have not been able to ensure even the maintenance of existing infrastructure.


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On the other hand, economic growth in rural areas and a reduction in persons below the

poverty line have pushed up the demand for infrastructure. The India Infrastructure Report

thus calls for allowing the entry of private players into the provision of infrastructure. This is

made even more feasible by the fact that new emerging technologies in infrastructure

encourage competition rather than monopolization.

Another objective of the present study is to find out whether the recommendations of the

India Infrastructure Report regarding regulation hold in the case of rural areas which are

characterized by the existence of sparsely populated areas and a much lower level of demand

for infrastructure per capita than urban areas. The potential suppliers are also inclined to

operate on a much smaller scale in rural areas. The India Infrastructure Report stresses that

the regulatory agency should decide the prices at which the service should be provided to

final consumers. It also views decentralization with skepticism.

The availability of rural infrastructure in India is poor. Given significant positive linkages of

infrastructure to economic growth and poverty alleviation, it is necessary to extend the

coverage of infrastructure. In the absence of sufficient government funds, Privatisation and

the introduction of competition in the provision of rural infrastructure may be required.

Similarly reforms in regulation may be called for. The ensuing chapters examine these issues

on a sector by sector basis.

The ultimate aim seems to be providing universal access to infrastructure. However, the

conceptualization of universal access needs to be changed from time to time. For example,

universal access in telecommunications might involve community access at first followed by

institutional access and then household access. Similar changing concepts of universal access

are seen in road and other sectors. Given the complementarities among different types of

infrastructure, their expansion in the pursuit of the goal of universal access should be

coordinated.

1.6 STRUCTURE

The report consists of four sectoral studies, each of which dwells on the subject of provision,

financing, regulation and governance. The concluding chapter then sheds light on the cross

cutting issues.


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CHAPTER 2

THE TELECOM SECTOR

OVERVIEW

The rural economy in India is characterised by a poor telecommunication network. Rural tele -density is 1.04 and only 62% of the villages have public telephones. Till recently rural

telecommunication was a public monopoly. As in other infrastructure sectors, lack of investible funds

has been an impediment to achieving a higher coverage. The Planning Commissions estimate of the

investment required for full coverage (rural tele - density of 4.2) was Rs 92, 690 crores at 2002-03

prices. In contrast, DOTs average annual budget over the decade of the nineties was around Rs 2430

crores at 2000-01 prices. Thus, it seems that public sector provision of telecommunication in ruralareas is grossly inadequate underlines and private sector participation the need for.

Fortunately, telecom policy and regulation have been moving in the direction of privatisation. The

first ever-public telecom policy in India was the National Telecom Policy of 1994. Objectives included

the availability of telephone on demand by 1997 and achievement of universal service at affordable

prices in all rural areas by 1997 (see Mani for more details). The financial requirement for achievingthe objectives of this policy was around Rs 23 billion. However because of the precarious financial

position of the government the objectives were far from met even though limited privatisation wasallowed after the announcement of this policy. As a result the government came out with another

policy in 1999 which was called the New Telecom Policy. This gave an impetus to privatisation. New

cellular and fixed line operators were to pay for a license on a revenue sharing basis and a one-time

entry fee. The one time entry was much lower than the old licensing fee. It was felt that this would

encourage the entry of new players into the market. Further, the domestic long distance market wasto be opened to competition from January 1, 2000.

While private operation of public telephone booths in rural areas was to be allowed, the lines and

telecommunication services were to be provided by BSNL. Small local private providers would save

the BSNL unnecessary expenditures. The United States has had a very successful experience withsmall and co-operative providers and recently West Bengal has successfully experimented with

public-private partnerships.

NCAER studies undertaken onbehalf of TRAI and USO Fund Administration point to surging demandfor rural telecom servies. Rural areas are characterised nowadays by a growing middle and upper

class This provides an opportunity for cross-subsidisation, with the wealthier villagers using the more

expensive private lines and the poorer villagers using the less expensive public telephone service.

Thus, the twin objectives of profitability and affordability could be satisfied.

Telecommunications have an important role in economic development and poverty reduction. The

econometric study cited in the introductory chapter supports this result. At the same time it was

pointed out that inadequacy of funds with the government means that it cannot on its own support thedevelopment of the sector. Therefore, the objectives of any strategy for rural telecommunications

should include (i) provision of incentives for privatisation keeping in mind the profitability of private

providers, and (ii) expansion of the rural consumer base for telecom services. These objectives can be

promoted through provision of micro-finance to villagers, who cannot otherwise afford telecom

services.


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2.1 THE STATUS OF RURAL TELECOMMUNICATIONS

2.1.1 Introduction

The situation in the rural telecommunication sector is generally very encouraging.

Technological changes in the last decade such as the switch to wireless networks has meant

that rural networks, which cover small low density agglomerations, are no longer less

economical than urban networks. Second, remote areas can also be covered by the network

because under the wireless technology distance is no longer a relevant factor unlike in the

case of cabled networks. The adoption of wireless technologies will result in huge reduction

in the number of telephone exchanges that would have been needed to service the entire rural

territory of India. Thus, because of these technological changes a very rapid spread of

telephony in rural India is possible. (For details see T.H. Choudhary, 2001)

The spread of rural telecommunication has the potential to promote economic growth and

reduce poverty. Telephone services can also result in considerable savings on cost and time

on travel. Business transactions can often be negotiated on the phone. This often makes it

convenient to enter into business transactions, which are otherwise difficult to negotiate

because of large physical distances. Wives of migrant husbands can consult their men folk

before taking important investment and production decisions. The spread of

telecommunication also generates employment opportunities as demand for telephone

operators is generated. The economic benefits of telecommunication are by now well known

as can be seen by the findings of several case studies. (See box 2.1 & 2.2).

There is a high benefit-cost ratio in telecom services, even if the average user makes only a

few calls a month, or in some cases in a year. An evaluation of the public pay-phone project

in several African countries indicated that 80-90 percent of calls from villages and 66 percent

from provincial towns in Kenya, Malawi and Zimbabwe were long-distance calls. While 60-

65 percent of the urban pay phone calls were for social reasons, 30-35 percent were related to

business and 5-10 percent dealt with family emergencies. The pattern often changes in rural

areas: In rural Malawi 50 percent of calls involved business or other money transactions, 10

percent were for family or personal reasons and almost 25 percent were made to arrange

visits and travel. The Senegal study showed that 34 percent of calls were for business or

monetary transactions and 37 percent were for urgent family or personal matters. The degree


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of importance placed upon calls is reflected in the fact that in Malawi and Zambia 40-50

percent of sampled callers travelled more than 5 Km. to make a call, an experience that is

shared by rural users in most developing countries. The large share of business calls in total

rural calls indicates the high potential benefit of rural telephony. In Botswana, where rural

communities have a lower degree of agricultural activity and rural-urban migration is an

important factor, over 75 percent of calls are for personal reasons and the effective catchment

area for most pay-phones was relatively small. 38 percent of users had only a primary

education or none at all and 78 percent were women, but well over 30 percent of calls had

economic benefits associated with travel substitution. Despite the very different situation in

Botswana annual revenues per pay-phone were still as high as almost $1,800 and the ratio of

overall economic benefits to costs was calculated at 8:1 for the first pay-phone in a

community and 2:1 for subsequent ones.

2.1.2 The Current Situation

Around 90% of villages in India had village public telephones as of November 2003. There

has been a massive increase in the spread of telecommunication in the last decade.

Nevertheless, the fact is that the rural penetration rate is abysmally low at 1.9. This is just

Box 2.1: Gramin Phones, Bangladesh

Gramin Phones, has started a pilot project to sell

telephone services in rural areas. Gramin Phones hasset up the infrastructure to connect cellular telephoneowners and members of the Gramin Bank are given

loans to buy phones. These members in turn sell 'airtime' to individual consumers. The project plans toeventually employ 40,000 operators and connect 950

villages and 65,000 people through GSM cellularphones.The project has had a tremendous impact on poverty-

reduction. First, operators incomes have risen by

around 24 percent. Second, as villagers have access totelephone services within their village, they save 2.6-

9.8 percent of travel costs. They have a further savingas they can call during off-peak hours and receiveincoming calls on demand. Many of these villages have

a high rate of male migration, so the improved andconvenient telephone services help in the safe deliveryof remittances from migrants and allow women to

communicate directly with their men-folk and consultand involve them in decision-making related tohousehold and agricultural activities.

Source: Richardson, Dr. Don, Ricardo Ramiraz and Moinul

Haq: Gramin Telecom's Village Phone Project in Rural

Bangladesh: A Multi-Media Case Study" 17/3/2000, CIDA

and Telecommunications Development Group, Canada.

Box 2.2 : Self-Employed Women's Association

(SEWA)

Ms. Puri Ben, a member of SEWA and resident ofBanaskana, Gujarat, spoke about how she hadbenefited from having a phone. The village is

underdeveloped and the residents have almost noskills, but the women take up embroidery work on adaily wage basis. They travel to nearby towns to

collect orders and to deliver the work when completed.The village of 4,000 families had only 30 telephonesfour years ago when she decided to invest in a

telephone line. She now receives orders for work by

telephone, saving travel time and money. She is alsoable to complete her orders on time, by staying in

touch on the telephone. Her average monthlytelephone bill is Rs. 150 to Rs. 200. Unfortunately, atany given time, half the village phones are usually out

of order.

Source : Presentation at seminar on Telecom, NCAER, SRTT

Rural Infrastructure Project 2002.


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around a quarter of the overall penetration rate in India and less than 1/50 th of the penetration

rate in the U.S.A. Thus, we can conclude that there is considerable scope for improving the

reach of the rural telecommunication system.

Table 2.1 Telecom Services: International Comparisons (1998)

Parameter Unit USA UK China Japan Korea India LIC * World

Tel. Lines M 178.80 32.80 80.42 63.58 20.09 21.59 33.94 844.03

Digital % 89.30 100 99.8 100 68.7 99 86.3 87.4

Growth rate % 3.80 3.7 29 1.3 2.6 21.7 17.1 6.9

Tele density Per 100 66.13 55.64 6.96 50.26 43.27 2.2 1.64 14.26

Public phones M 1.75 0.336 2.062 0.777 0.607 0.732 0.430 10.79

Cell phones M 69.21 14.87 23.86 47.29 14.02 1.2 2.35 318.89

Revenue/line US$ 1378 1128 235 1322 533 284 391 871

Lines / empl. 175 212 197 370 332 51 44 155

Total

Investment

US$ (M*) 24,218 7,454 18,127 35,403 8,096.5 2,405 4,591 175,655

Invst./line US$ 135 232 207 558 396 135 166 215

Internet M* lines 60 8 2.1 16.74 3.1 0.5 0.78 144.8

Note: *LIC: Low-income countries; M: million

Source: World Telecommunication Development Report 1998.

Table 2.2 Cost of Providing Village Public Telephones

Average cost of providing a VPT Rs. 80,000-1,00,000

Annual recurring expenditure per VPT Rs. 32,000

Annual recurring expenditure @ 24% per annum Rs. 24,000Maintenance cost @ 8% per annum Rs. 8,000

Average annual revenue Rs. 960

Annual subsidy Rs. 31,140

Total VPTs serviced by DTS (by 2002) 5,50,876

Total annual subsidy for DTS (by 2002) Rs. 1,715 crore

Source: Mid-term Appraisal of the Ninth Plan, Planning Commission, New Delhi 2002.

There are a large number of distinguishing features of the rural telecommunication sector in

India. First, it is heavily subsidised. The annual subsidy for a village public telephone is

more than Rs. 31,000 (table2.2). In 1999-2000, revenues were estimated to be Rs 613 crore

(if monthly rentals were assumed to be Rs. 75) as against an expenditure of about Rs, 3000

crores.


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Table 2.3 Rural Telecom: Gaps in Supply, 2001-02

Circle/District Rural HHDs Rural DELs Rural DELs as a % of Total

Rural HHDs

Andaman &Nicobar 49653 16984 34.21

Andhra Pradesh 12676218 1023734 8.08

Assam 4220173 89374 2.12

Bihar 12660007 253564 2.00

Jharkhand 3802412 53934 1.42Gujarat 5940835 667648 11.24

Haryana 2454463 303482 12.36

Himachal Pradesh 1097520 276355 25.18

Jammu& Kashmir 1161357 17952 1.55

Karnataka 6675173 753155 11.28

Kerala 4947901 1580192 31.94

Madhya Pradesh 8124795 220464 2.71

Chhattisgarh 3359078 40283 1.20

Maharashtra # 11134378 1070526 9.61

North - East $ 1674909 73727 4.40

Orissa 6782879 215307 3.17

Punjab 2775462 671526 24.20

Rajasthan 7156703 498943 6.97

Tamil Nadu 8346989 165242 1.98

Uttar Pradesh 20590074 514607 2.50

Uttaranchal 1196157 69462 5.81

West Bengal 11253593 434999 3.87

Delhi 0 0 0.00

All- India 138080729 9011460 6.53Source: Annual Report 2002-03, Dept. of Telecommunications; Census of India (1981, 1991, 2001)Notes# Maharashtra +Goa+ Mumbai$ Arunachal+ Manipur + Meghalaya+Mizoram+Nagaland+Tripura.

It was with a view to accelerate the spread of the telecommunication network that

privatisation was introduced in 1994. However, the targets for VPTs and DELs were not fully

met by private licensees in the ninth five year plan. As part of their agreements the six

licensees were to provide 20.18 lakh direct exchange lines (DELs) over a three-year period,

of which 10 percent were to be in the rural areas. Till March 2002 operators had rolled out

only 2.34 lakh DELs, mainly in urban centres.

Rural tariffs, connection costs and rentals for telephones are kept artificially low.

Connection costs range from Rs. 1000 to Rs. 3000. Monthly rentals are in the range Rs 50-

190. Tariffs vary from 0.50 Re to 1 Re for short distance calls. Long distance rates are used

to subsidise short distance rates.


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The projects field studies have found that rural dwellers typically own phones to access the

incoming calls. Those who make calls prefer to use the public call office in a nearby town

where services tend to be more reliable than the village phone. Most people are not interested

in owning telephones as the service is generally poor and they do not want to lock up money

in rentals.

It has been broadly assumed, based on

experience and case study data, that rural users

in developing countries collectively pay 1-1.5

percent of their gross community income for

telecom services. If this is assumed for India

then a rural household, which is in the richest 11

percent (of all rural households) and has an income of above $1 a day (at the current exchange

rate), can afford to own a telephone at a monthly rental of Rs. 70. Cross-country village-level data

collected for this project indicates that only 11 percent of households own telephones and pay

monthly rentals of around Rs 150. Around 10 percent of households who do not own telephones

typically make only four to five calls a month, incurring an average expense of Rs. 200. Thus

only those households whose per capita incomes are above a 'dollar a day' at the market exchange

rate (around Rs. 1350 per month) are regularly accessing these services (MISH, 1998 NCAER

data).

Table 2.4 Telecom Use in the Rural Areas

State Average

Sample

VillagePopu-

Lation

No of H

per

village

Number of

public

telephonesper village

Number of

Average

Publictelephones

perthousand

people

Number of

households

in a villagewith

telephoneconnections

% of HH

with

telephoneconnections

Number of

people

usingtelephones

% of

population

usingtelephones

Assam 776 123 0.40 0.52 6.34 5.15 134.21 17.30Kerala 25326 5117 8.50 0.34 1134.06 22.16 4688.81 18.51Madhya Pradesh 1244 194 0.51 0.41 2.9 1.49 32.63 2.62

Meghalaya 738 113 0.06 0.08 3.88 3.43 53.47 7.25Orissa 1048 182 0.05 0.05 2.18 1.20 26.41 2.52Punjab 2329 286 1.05 0.45 54.13 18.93 732.67 31.46

Tamil Nadu 615 160 0.26 0.42 3.92 2.45 15.37 2.50Uttar Pradesh 1941 305 0.90 0.46 23.13 7.58 154.98 7.98

West Bengal 2056 350 1.86 0.90 4.66 1.33 62.04 3.02

Maharashtra 1213 192 0.46 0.38 21.66 11.28 24.54 2.02Source : Surveys conducted by networking organizations for NCAER : Rural Infrastructure Study

Box 2.3 : Telecom : The Current Scenario

90 % of village covered

Low teledensity

Highly subsidized

Privatisation limited to cities

Regressive subsidy scheme


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The field studies (see table 2.4) show that people living in rural areas demand 'small'

quantities of telephone services. Therefore, options that promote access to small units of

consumption should be promoted rather those that increase DELs. Thus, it might be more

effective and economical to provide mobile phones and PCO services to people through

private vendors. Out of the ten states sampled only three states (Kerala, Punjab and West

Bengal) have on the average more than one public telephone per village. This implies that

there is scope to increase public telephones in other states. Again only West Bengal and

Assam have more than one telephone for every two thousand people. Low affordability forownership of private telephones is indicated by the fact that in only three states is the

percentage of households that own telephone connections greater than 10% (Kerala, Punjab

and Maharashtra). Our field surveys also show that the use of telephones is not very common

in many states. Only in three states (Punjab, Kerala and Assam) are telephones used by more

than ten percent of the population. These states incidentally are known to have large number

of their people working outside the state, thus requiring to be in constant touch with their kith

and kin. Hardly any initiatives either by the private sector or the community in rural

telephony seems to have been taken in many states. Maharashtra, Punjab, Assam and Uttar

Pradesh are however exceptions. In Maharashtra there either is private or community

intervention in 38 percent of the villages.

TELECOM IN RURAL AREA

0

5

10

15

20

25

Assam

Kera

la

Ma

dhya

Pra

des

h

Meg

ha

laya

Orissa

Pun

jab

Tam

ilNa

du

Uttar

Pra

des

h

Wes

tBenga

l

Ma

haras

htra

States

No. of public tel per village No. of public tel per 1000

% of hhds with telephone connection


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Table 2.5 Telecom Revenues

State Per capita telecom

expenditure per

month(Rs)

Per capita

telecom

expenditure per

year (Rs)

Rural Population Total telecom

revenue (Rs.

crores)

Assam 0.75 9.00 23681544 21.31

Kerala 0.35 4.20 23433224 9.84

Madhya Pradesh 0.22 2.64 62347065 16.46Meghalaya 2.60 31.20 1673586 5.22

Orissa 0.09 1.08 31788193 3.43

Punjab 0.23 2.76 17123954 4.73

Tamil Nadu 0.09 1.08 40868932 4.41

West Bengal 0.23 2.76 58160349 16.05

Maharashtra 0.17 2.04 59309127 12.10

India 0.24 2.94 752578757 221.14 Source: NCAER Surveys conducted by networking organisations

Table 2.5 is a further proof of the fact that the use of telecom services has still not become

popular in rural areas. This can be attributed to both demand and supply side factors -

inadequate income and insufficient supply of telecom services. The per capita annual telecom

expenditure in rural India is a mere Rs. 2.9 per year. In states like Orissa and Tamil Nadu the

figure is close to a rupee per year. West Bengal, Punjab, Maharashtra and Madhya Pradesh

also show lower per capita expenditure on telecom services than the national average. If the

use of telecom services is to be promoted then a two-pronged strategy needs to be adopted:

augmenting the supply of telecom services and increasing the affordability of telecom

services by providing capital subsidies to the service providers.

2.1.3 The Approach so Far

As in many countries world wide, the

government has been the main provider of

telecom services in India, including

services to the rural areas. While until 1996

the government made no separate

budgetary allocation for setting up ruraltelecom exchanges, telephone connectivity

however increased through its policy of

setting up village public telephones (VPTs).

In 1999 the governments telecom policy

included a universal service obligation, which was aimed at expanding rural services through

an increase in the supply of VPTs. Until liberalisation of the sector which began in the early

Box 2.4: Calculation of Telecom Revenues

Through a survey on number of people using

telephones, the average frequency of usage and thecost per incoming call were obtained for a sample ofvillages in the nine states listed in Table 1.4. It was

assumed that the frequency of outgoing calls was halfthat of the reported frequency of usage. The productof these three variables for each state sample divided

by the sample population gave the sample estimate ofthe per capita revenue (consumer expenditure) fromtelecom services. This figure multiplied by the actual

rural population of the state gave the estimate of ruraltelecom revenue in that state. The sum of theseestimates across sampled states divided by the share

of these states in All India rural population gave anestimate of rural telecom revenue at the All India

level.


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1990s, the main government agency supplying these services to both rural and urban areas

was the Department of Telecommunications (DOT).

The telecommunications policy changes commenced in 1999 allowed private service

providers to offer basic telecom services. The D

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