Description
Linking Infrastructure Policy & Economic Policy
Linking Infrastructure Policy and Economic Policy
Plan of Lecture • Why is government in infrastructure?
• What are the various roles it plays?
– Direct provider – Indirect provider
• Demand-aggregator • Facilitator / Regulator
• What has been the experience over these roles? • What alternatives are available?
Why is Government in Infrastructure?
• Techno-Economic: Economies of Scale
– State monopoly better than Private Monopoly
• Social Responsibility for Universal Access
– The underprivileged cannot be “thrown to the wolves”
• Availability of Funds: Large investment required
– Private sector is incapable of mobilising resources
• International Experience
– Most other countries publicly provide for infrastructure
Why Change ?
• Techno-Economic: Technology has changed
– Monopolies are no longer required, as in power – Cost of telephone networks allows for duplication
• Social Responsibility for Universal Access
– Underprivileged can be served more efficiently by moving away from direct provision to “purchase of service”
• Public providers have no incentive to reduce cost or maintain quality
• Availability of Funds: Government is fiscally constrained
– Private firm can raise more and cheaper finances
• International Experience:
– Countries are moving to private providers of infrastructure (Latin America, Australia, Asia, US, Europe)
What Does this Change in Role Imply?
• The Public Provision Role involves:– Direct provision of facilities – “Efficient” provision of services – Estimation of demand and selection of least cost supply
• The Private Provision Role involves:– – – – Allocation of scarce resources Fiscal Framework “Efficient” purchase of services from the private sector Risk Allocation
• Guarantees, Design of regulation and contracts
– Ensuring universal access to necessary services
Scarce Resources
• • • • • Telecom Ports Roads Water Power Spectrum Waterfront Land Water Land and Fuel
(State controls fuel and transport)
• Fiscal concessions
– Improves viability – Attract investment and financing
Use of Various PPP methods in Infrastructure by the Centre and States
Isn’t Private Infrastructure Expensive?
Additions to Cost
Risk Premium Public Sector ROI 8%
Benefits
Lower Cost From Efficiency
Example
Private Sector WACC 13.7%
(Debt @ 11% 70: 30 Equity @ 20%)
Cost 100 Required Return 108
Cost Required Return
95
108
• A 5% reduction in project cost (efficiency) by the private sector is enough to overcome the higher financing cost!
Isn’t Private Infrastructure Expensive?
Additions to Cost
Risk Premium
Benefits
Lower Cost From Efficiency
Example
Public Sector ROI 8% Cost 105.3 Required Return 113.7 Private Sector WACC 13.7%
(Debt @ 11% 70: 30 Equity @ 20%)
Cost Required Return
100 113.7
• A 5.3% cost overrun (increase in actual project cost) in the public sector is enough to overcome the private sector disadvantage of higher financing cost!
Two Types of Competition
• In the Market
– Long Term Contracts are Detrimental to Competition – All Products that can be sold in a Market should be so sold
• Electricity is one such product! • Port Services may be another example!
– Competition at the Bid stage is not sufficient in such cases
• For the Market (when markets cannot be established)
– Competition at the Bid stage – Usually relevant for networks not for services
• Electricity transmission • Rail networks • Road networks
LPVR
• Monopoly Roads are a special case of competition for the market
– Demand not very responsive to actions by service provider
• Not always sensible to introduce competition in the network
– Makes little sense to transfer traffic risk as it will only increase risk premium and cost
• Least Present Value of Revenue (LPVR) Auction
– Traffic Risk is converted to risk regarding duration of the BOT concession period
• This type of duration risk (asset-liability mismatch) can be handled by financial institutions
– Additional Bonus
• Renegotiation is more transparent since there is a natural cap on the extent of damage suffered – Total Expected Discounted Revenue is known from the bid and the Discounted Revenue already obtained is known
The Private Service Provider
• He wants it all
– Monopoly rights – Full pricing freedom – State support for any social obligations
• He needs
– Stable environment, i.e regulatory and policy framework – State support for any social obligations – Support for initial risk mitigation : can be pre-defined
• Implication: Regulator changes from a monitor to a referee
The Regulatory Role
• With multiple providers: Monitoring contract conditions
– maintaining the environment, quality, health, and safety : needs objective standards – cannot be a service provider
• Need to delink Port Trusts from service provision
• With monopoly elements: Defining access rules and monitoring prices
– Raison d'être for TAMP
• practice of one concessionaire per port • No competition between service providers - user often confronted with a local monopoly
The Regulatory Roles
• Power Sector : “Wires” regulation
– Managing competition in generation and distribution – Tariff rebalancing and provision of universal access
• Road sector: Monitoring concessions
– need to develop objective standards
• Rail sector: Defining access rules
– Freight can be opened to full competition – Fare regulation may be needed for some passenger services: need for state support
• Port sector: Conservator and Referee
– Containers open for competition : bulk can be bilateral – Need to monitor anti-competitive behaviour
• Emergence of coastal capture : DG - IV and HPH
• Telecom Sector
– Tariff rebalancing and provision of universal access
Indian Experience with Infrastructure Regulation
Tariff Rebalancing
• Electricity
– Reasonably and uniformly positive experience with non-agricultural tariffs – Mixed experience with agricultural tariffs but better experience with transparency of subsidy – Tariff “shocks” moderated
• Telecom
– Positive experience with rebalancing long distance and local tariffs
• Need to distinguish between “competitive politicization” and “patronage politicization”
Efficiency • Telecom is not cost-plus • Electricity
– Distribution
• Many positive experiences with reducing AT&C (Aggregate Technical and Commercial) losses both in the private and public sectors • Bulk and retail metering have increased
– Transmission
• Availability has improved but use of bidding is limited
– Generation
• Plant availability has improved
• Some improvement is possible with regulatory oversight even under public ownership
Quality • Grid frequency has improved
– Better regulation of unscheduled withdrawal and supply of power
• Experience with duration of supply is mixed
– Separation of rural household supply and agricultural supply has been done / is ongoing in many states
• Predictability of supply has improved • Consumer complaints
– Regulator has jurisdiction but individual complaints to be heard by Consumer Grievance Redressal Forum (CGRF) and Ombudsman !
Investment • Strong scrutiny of investment programmes
– Both Public and Private – Does approval depends on eventual effect on tariff?
• Use of regulatory asset to moderate price hikes • Tendency to go with the letter of the law in Appellate Tribunal
– Do Commissions try to balance the “letter of the law” with equitable outcomes?
Relationship with Contracts • Electricity
– Early conflict with existing IPP contracts
• Seen as exploitative and non-transparent • Protection of “commercial secrets” not palatable
– Procurement guidelines issued by most Commissions
• Focus on process and not outcome • Price-bids are allowed – Commission agrees to allow long-term commitments as to cost if determined in a competitively-bid process
– Higher degree of transparency with respect to contract terms
Regulatory Agencies • Headed by retired bureaucrats or judges
– Other members usually from the sector
• Not large
– Total expenditure for Maharashtra ERC was around Rs. 5 crore
• High Levels of Transparency and Discursiveness
– Variable level of involvement of consumers
• Driven by capacity of consumer organisations
Composition of Electricity Regulators
Chair Retired Civil Servant (IAS) Retired Civil Servant (non-IAS) 14 1 Member 2 4 Total 16 5
Retired person from the sector
Others Total
3
1 19
19
6 31
22
7 50
New Areas: Solid Waste • Use of private concessionaires common
– Spreading experience of contracting with the private sector among ULBs
• Risk of being focused on revenue generation rather than service delivery
– Waste to Energy projects
• Familiarity with regulation by Contract
– Medium term contracts – Are these “good” contracts?
• Limited success with regional facilities
Thank You
doc_866255612.pptx
Linking Infrastructure Policy & Economic Policy
Linking Infrastructure Policy and Economic Policy
Plan of Lecture • Why is government in infrastructure?
• What are the various roles it plays?
– Direct provider – Indirect provider
• Demand-aggregator • Facilitator / Regulator
• What has been the experience over these roles? • What alternatives are available?
Why is Government in Infrastructure?
• Techno-Economic: Economies of Scale
– State monopoly better than Private Monopoly
• Social Responsibility for Universal Access
– The underprivileged cannot be “thrown to the wolves”
• Availability of Funds: Large investment required
– Private sector is incapable of mobilising resources
• International Experience
– Most other countries publicly provide for infrastructure
Why Change ?
• Techno-Economic: Technology has changed
– Monopolies are no longer required, as in power – Cost of telephone networks allows for duplication
• Social Responsibility for Universal Access
– Underprivileged can be served more efficiently by moving away from direct provision to “purchase of service”
• Public providers have no incentive to reduce cost or maintain quality
• Availability of Funds: Government is fiscally constrained
– Private firm can raise more and cheaper finances
• International Experience:
– Countries are moving to private providers of infrastructure (Latin America, Australia, Asia, US, Europe)
What Does this Change in Role Imply?
• The Public Provision Role involves:– Direct provision of facilities – “Efficient” provision of services – Estimation of demand and selection of least cost supply
• The Private Provision Role involves:– – – – Allocation of scarce resources Fiscal Framework “Efficient” purchase of services from the private sector Risk Allocation
• Guarantees, Design of regulation and contracts
– Ensuring universal access to necessary services
Scarce Resources
• • • • • Telecom Ports Roads Water Power Spectrum Waterfront Land Water Land and Fuel
(State controls fuel and transport)
• Fiscal concessions
– Improves viability – Attract investment and financing
Use of Various PPP methods in Infrastructure by the Centre and States
Isn’t Private Infrastructure Expensive?
Additions to Cost
Risk Premium Public Sector ROI 8%
Benefits
Lower Cost From Efficiency
Example
Private Sector WACC 13.7%
(Debt @ 11% 70: 30 Equity @ 20%)
Cost 100 Required Return 108
Cost Required Return
95
108
• A 5% reduction in project cost (efficiency) by the private sector is enough to overcome the higher financing cost!
Isn’t Private Infrastructure Expensive?
Additions to Cost
Risk Premium
Benefits
Lower Cost From Efficiency
Example
Public Sector ROI 8% Cost 105.3 Required Return 113.7 Private Sector WACC 13.7%
(Debt @ 11% 70: 30 Equity @ 20%)
Cost Required Return
100 113.7
• A 5.3% cost overrun (increase in actual project cost) in the public sector is enough to overcome the private sector disadvantage of higher financing cost!
Two Types of Competition
• In the Market
– Long Term Contracts are Detrimental to Competition – All Products that can be sold in a Market should be so sold
• Electricity is one such product! • Port Services may be another example!
– Competition at the Bid stage is not sufficient in such cases
• For the Market (when markets cannot be established)
– Competition at the Bid stage – Usually relevant for networks not for services
• Electricity transmission • Rail networks • Road networks
LPVR
• Monopoly Roads are a special case of competition for the market
– Demand not very responsive to actions by service provider
• Not always sensible to introduce competition in the network
– Makes little sense to transfer traffic risk as it will only increase risk premium and cost
• Least Present Value of Revenue (LPVR) Auction
– Traffic Risk is converted to risk regarding duration of the BOT concession period
• This type of duration risk (asset-liability mismatch) can be handled by financial institutions
– Additional Bonus
• Renegotiation is more transparent since there is a natural cap on the extent of damage suffered – Total Expected Discounted Revenue is known from the bid and the Discounted Revenue already obtained is known
The Private Service Provider
• He wants it all
– Monopoly rights – Full pricing freedom – State support for any social obligations
• He needs
– Stable environment, i.e regulatory and policy framework – State support for any social obligations – Support for initial risk mitigation : can be pre-defined
• Implication: Regulator changes from a monitor to a referee
The Regulatory Role
• With multiple providers: Monitoring contract conditions
– maintaining the environment, quality, health, and safety : needs objective standards – cannot be a service provider
• Need to delink Port Trusts from service provision
• With monopoly elements: Defining access rules and monitoring prices
– Raison d'être for TAMP
• practice of one concessionaire per port • No competition between service providers - user often confronted with a local monopoly
The Regulatory Roles
• Power Sector : “Wires” regulation
– Managing competition in generation and distribution – Tariff rebalancing and provision of universal access
• Road sector: Monitoring concessions
– need to develop objective standards
• Rail sector: Defining access rules
– Freight can be opened to full competition – Fare regulation may be needed for some passenger services: need for state support
• Port sector: Conservator and Referee
– Containers open for competition : bulk can be bilateral – Need to monitor anti-competitive behaviour
• Emergence of coastal capture : DG - IV and HPH
• Telecom Sector
– Tariff rebalancing and provision of universal access
Indian Experience with Infrastructure Regulation
Tariff Rebalancing
• Electricity
– Reasonably and uniformly positive experience with non-agricultural tariffs – Mixed experience with agricultural tariffs but better experience with transparency of subsidy – Tariff “shocks” moderated
• Telecom
– Positive experience with rebalancing long distance and local tariffs
• Need to distinguish between “competitive politicization” and “patronage politicization”
Efficiency • Telecom is not cost-plus • Electricity
– Distribution
• Many positive experiences with reducing AT&C (Aggregate Technical and Commercial) losses both in the private and public sectors • Bulk and retail metering have increased
– Transmission
• Availability has improved but use of bidding is limited
– Generation
• Plant availability has improved
• Some improvement is possible with regulatory oversight even under public ownership
Quality • Grid frequency has improved
– Better regulation of unscheduled withdrawal and supply of power
• Experience with duration of supply is mixed
– Separation of rural household supply and agricultural supply has been done / is ongoing in many states
• Predictability of supply has improved • Consumer complaints
– Regulator has jurisdiction but individual complaints to be heard by Consumer Grievance Redressal Forum (CGRF) and Ombudsman !
Investment • Strong scrutiny of investment programmes
– Both Public and Private – Does approval depends on eventual effect on tariff?
• Use of regulatory asset to moderate price hikes • Tendency to go with the letter of the law in Appellate Tribunal
– Do Commissions try to balance the “letter of the law” with equitable outcomes?
Relationship with Contracts • Electricity
– Early conflict with existing IPP contracts
• Seen as exploitative and non-transparent • Protection of “commercial secrets” not palatable
– Procurement guidelines issued by most Commissions
• Focus on process and not outcome • Price-bids are allowed – Commission agrees to allow long-term commitments as to cost if determined in a competitively-bid process
– Higher degree of transparency with respect to contract terms
Regulatory Agencies • Headed by retired bureaucrats or judges
– Other members usually from the sector
• Not large
– Total expenditure for Maharashtra ERC was around Rs. 5 crore
• High Levels of Transparency and Discursiveness
– Variable level of involvement of consumers
• Driven by capacity of consumer organisations
Composition of Electricity Regulators
Chair Retired Civil Servant (IAS) Retired Civil Servant (non-IAS) 14 1 Member 2 4 Total 16 5
Retired person from the sector
Others Total
3
1 19
19
6 31
22
7 50
New Areas: Solid Waste • Use of private concessionaires common
– Spreading experience of contracting with the private sector among ULBs
• Risk of being focused on revenue generation rather than service delivery
– Waste to Energy projects
• Familiarity with regulation by Contract
– Medium term contracts – Are these “good” contracts?
• Limited success with regional facilities
Thank You
doc_866255612.pptx