Project Introduction - Port Sector Study

Chapter 1 - Project Introduction

1. 1 Introduction

The infrastructure sector covers a wide spectrums of services like transportation (roads, railways, airways and water transportation), power generation, transmission and distribution, telecommunication, port handling facilities, water supply, sewage system, urban mass transports and other primary services.

Most of the services have direct impact on the growth of business and others are important from the social point of view. Our study is based on the key physical infrastructure services with special emphasis on the roadways and ports.

A strong correlation exists between the availability of infrastructure and per capita GDP. Many studies have indicated that growth in infrastructure spending has brought about positive growth in GDP of the country.

With the opening up of the Indian economy and to achieve a higher degree of integration with the world economy, it is imperative that the Indian firms become globally competitive. To achieve this, the infrastructure support is vital and therefore it is essential to accelerate investment in this sector. For a developing economy like India, the investment in infrastructure rises exponentially with economic growth rate. As per World Bank estimates, the East Asian Economics have steadily increased infrastructure investments in absolute terms and as a proportion of GDP.

Low spending on infrastructure is holding back India's average growth with the actual amount spent being miniscule compared to the requirement. At present, China spends seven times more on infrastructure (excluding real estate) than India, according to investment bank Morgan Stanley's research on 'India Economics - Infrastructure: Changing Gears'. India needs to chalk out a national plan to increase infrastructure spending.

1.2 Prominence of Public Sector

NOT ONLY IN India, but all over the world, infrastructure services have generally been provided by the Public Sector. The commercialization and private investment in infrastructure has been a recent phenomenon.

Most of the infrastructure services have an element of public good in them. To take an example, public lighting benefits all citizens. The consumption of public lighting by one citizen has no effect on the consumption by another. It is also difficult to exclude anyone from the benefit and hence charge for it from those who benefit. As a consequence, public lighting is provided by the public authorities and is generally financed from the tax revenues. Pricing and revenue from exclusive use for most of the infrastructure like power, telecommunication, roads, ports etc., can be set for exclusive use and thereby generate revenue from the user. Thus, most of the infrastructure industry, which were here to in the public sector is facing a change and private investments are coming up as it is now being seen as a commercial proposition.

Infrastructure projects involves high upfront investments and long pay back periods. Besides this, the investments are typically in bulks and in lumps. This has made it difficult for a private investor to raise such huge finances and for long term, which is again the reason why infrastructure projects have so far been in the public sector.

1.3 The Changing Scene

Several factors are responsible for commercialisation and greater participation of private sector in infrastructure. A waives of privatisation and de - regulation has been sweeping infrastructure sectors around the planet. The new wave began in 1970’s, when USA started de – regulating natural gas, power and airlines. During the 1980’s Chile, New Zealand and United Kingdom implemented privatisation on almost all infrastructure sectors. There are five factors that led countries across the world to consider commercialisation of infrastructure sector.

(a) Massive Investment Needs: The massive investment needs were becoming difficult to meet within the financial resources of the State, without ignoring other priorities in social and economic programmes. Currently, on an average, 5% to 6% of GDP is being invested in infrastructure by the States, which is not enough and most of the developing countries are facing infrastructure bottlenecks. Future projected investment needs are immense for which the only solution is to turn towards private investments.

(b) Managerial Constraints: With the infrastructure business being quite complex, the managerial challenges are great which public sector is unable to cope with. Public sector overlooks the efficiency of investments and accountability of the public expenditure. When infrastructure projects are developed by State or state agencies, there is little connection between the cost of funds and the returns from the investments. Typically, they are not responsive to consumer needs owing to rigidity in their management structures and the necessity to follow “Government – Set” rules and regulations. Thus, the demand comes for commercialisation and privatisation of infrastructure to inject greater efficiency.

(c) Change in Technology: Introduction of new technology, particularly in telecommunication, power and roads, have added value to the service. Each user is charged accordingly to the degree of usage of service. This has introduced an element of competition and unbundles the infrastructure services.

(d) Globalization: Many surveys have indicated that Foreign Direct Investments by transnational corporations is based on the availability of quality and cost of infrastructure in the country. Greater private investment brings in more efficiency and better prices. So adequate quality and reliability of infrastructure are the key factors in the ability of countries to compete in international trade. Privatisation can only bring about these changes.

(e) World Capital Markets: After the Second World War, the capital market of most of the countries in the world had broken down. So, there was little choice but for the public sector to provide for the infrastructure sector. But, by 1980’s, there was substantial arrival of pension funds and insurance funds with developed countries.

These funds were searching for high returns from developing countries, which resulted in flow by way of FDI and consequent improvement of the domestic capital market. By privatization, these funds could be channeled into infrastructure projects.

Thus, these are the forces, which have pushed countries towards commercialisation of infrastructure investments.