Infrastructure and economic policies under Atal Bihari Vajpayee’s prime ministership provide us with some crucial pointers on creating high-quality infrastructure.
The liberalisation of the early 1990s had provided a platform for economic growth. Vajpayee used the platform to set the foundation for some of the most critical infrastructure assets in India through the National Highway Development Policy (NHDP) and National Telecom Policy (NTP), 1999 (building on NTP, 1994).
While discussions have focused on “what” was delivered through the effective policies, it would be prudent to assess as to “why” the policies succeeded. Policy features around pricing, management of risk and clarity of regulations were the fundamental reasons why the policies could deliver impact.
The first of these was rational pricing. The NTP, 1999, changed the payment scheme for telecom companies from a license fee to a revenue-sharing model with the government. Resolution of issues around paying high license fees and the subsequent growth that the telecom sector saw is a good template for how revenue-sharing models have a significant impact on infrastructure creation and consequent usage.
The government must ensure that while projects are auctioned at competitive bids, irrational pricing must not creep in. Additionally, infrastructure by definition involves high upfront costs. The ability of the infrastructure developer to share revenues from a project that is operational is far higher than paying high upfront license fees that possibly add to constrained balance sheets. The crucial point is that while infrastructure developers and the private sector must be disciplined through the right pricing mechanism, revenue structures that burden developers with significant upfront costs create barriers to infrastructure creation.
Secondly, there was standardisation of contracts. The development of the Model Concession Agreements (MCAs) was initiated under the Vajpayee government to facilitate the NHDP. The MCAs were instrumental in promoting the flow of private capital into road construction. As the years went by, the MCAs were improved upon with more data available. Well designed MCAs that were enhanced continuously allowed for better contract design and risk-management of infrastructure projects.
The most significant learning from the MCAs and the impact they had on infrastructure facilitation is the need for standardised and well-implemented contracts for each infrastructure sector. The sectors are complex with each having its unique features. Besides, each varies on financial and social returns that infrastructure assets deliver. Therefore, contracts that are well defined and consistent create greater clarity around policy and risk. This, in turn, allows market participants to gauge their interest better to partake in the sector.
The third factor was revenue allocation. The period also set the ball rolling regarding creating a clear policy on financing infrastructure through the various available financing avenues. The NHDP used fuel cess, toll collections, budgetary support and borrowings to finance projects. The foundation for an effective financing scheme was laid out, a foundation that was built on in the years to come.
Essentially, each infrastructure sector will need clarity on the financing aspect. The clarity pertains to issues such as what percentage of the financing will the operational asset be able to provide (through user charges) versus the budgetary support required. Having greater clarity at the sector – or even project — level assists in the planning and allocation of budgets to the most crucial sectors.
Finally, we saw the separation of licensing and policymaking from service provision. NTP, 1999, did this in the telecommunications sector. Separation of the policymaking division from the service provider was a significant development and one which greatly facilitated a competitive market with a regulator that was independent of market players. For infrastructure sectors in which private sector participation is deemed to be necessary, it will be critical that there is a clear demarcation between the regulator and participants. For private participants to commit long-dated capital, it will be essential to show them a level playing field.
In summary, Vajpayee’s prime ministership laid the foundation for mission-critical infrastructure through policies and templates that were built on by subsequent governments as well. A better understanding of “why” these policies could lay the foundations for modern infrastructure in India give us critical pointers on the direction we must head in today.