Predictability in Infrastructure

Posted by Shyam Ponappa at Nov 18, 2013 08:47 AM |
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Systematic planning and execution can reduce the need for crisis management in infrastructure and manufacturing.

The article first appeared in the Business Standard on November 6, and was cross-posted in Organizing India Blogspot on November 10.

Problems related to projects in infrastructure and manufacturing are either predictable or unpredictable. For the type of problem that is more predictable, the "known known", we need to apply ourselves to facilitate productivity across sectors. An example of the unpredictable variety is in the developments dogging the erstwhile Dabhol project.

Until we plan and build infrastructure systematically, our current account deficit will continue to overshadow our economic prospects, including our ability to increase exports. The United States' easy-money policy is no more than a stopgap thumb-in-the-dyke. While unpredictable infrastructure problems require crisis management, no amount of clever short-term measures can substitute for timely, co-ordinated actions that are within the controllable domain. Whether it's power generation and distribution, telecommunications and broadband, the railways, or air travel, any form of infrastructure - apart from exceptions such as the Delhi Metro - suffers from our inability or unwillingness to plan and execute systematically.

The Unpredictable: Dabhol

Consider the continuing, unforeseen problems with the Dabhol project. This power plant with a separate liquefied natural gas (LNG) terminal nearby is going through yet another crisis. The owner and operator is Ratnagiri Gas and Power Private Limited, owned by public sector units, the state and banks. This joint venture - between the National Thermal Power Corporation (NTPC), Gas Authority of India Ltd (GAIL), the Maharashtra State Electricity Board, and some banks - was constituted to pick up the pieces after Enron. Yet, the Maharashtra State Electricity Distribution Company Ltd (called MahaVitaran), after taking most of the plant's output, is significantly behind on payments. Second, after the drop in gas production by the supplier, Reliance Industries' KG D-6, gas supplies have been reduced and are now cut off. The plant has been running well below capacity because of limited gas supply since 2012. Imported gas prices are so high that the Maharashtra State Electricity Distribution Company Ltd refuses to buy power at prices nearly double that of domestic gas, so the plant may have to be shut down.

There we have it: a potentially valuable asset providing a critical resource, electricity, with a substantial, untidy set of problems that have dragged on for a decade. It's ironic that desperately needed energy assets were shut down because the output was deemed too expensive at first and then restarted without the "rapacious" private sector - only to run short of fuel, with state payments in arrears, and now close to another shutdown. This kind of problem needs hard decisions like getting state entities to pay on time, and the capacity to devise creative solutions and co-ordinated execution to tide over the crisis in the long-term public interest. Unless we muster the resolve to deal with such unforeseen, unstructured problems through hard decisions, Dabhol will continue to sap national resources.

Yet, when Chandrababu Naidu as chief minister in Andhra Pradesh dared to attempt rational tariff increases in 2004, the electorate swept him aside for the populists, who gleefully reverted to unsustainable free electricity and other handouts. More recently, the Aam Aadmi Party's plank in Delhi's state elections included lower-priced electricity, triggering another unsustainable race to the bottom. But there is a public outcry against accepting hard decisions in governance - and a consequent political unwillingness to deal with them, or to display the leadership to create public awareness. Raucous public opinion is not a substitute for knowledgeable and informed inputs and judgement. Until we break out of this self-abasing, illogical spiral of seeking instant gratification or short-term gains over balanced, reasoned, deferred gratification, the race to the bottom will continue.

Predictable Infrastructure: Telecom, Power, Railways, Airlines…

There's the other kind of problem, the one that is amenable to forward-planning, but doesn't seem to get it. The kind that it is impossible to put in place without comprehensive, integrated planning and execution. The classic cases from the 1990s have been telecom and power.

In telecom, the recent emergence of three national operators with smaller, localised successes reaffirms the oligopolistic structure of this sector. Three operators account for 67 per cent of the market in India, 82 per cent in Brazil, 90 per cent in the US, and 98 per cent in the UK; in China, two operators have 99 per cent. If policymakers accept this principle regarding market structure, the refrain that more competition is always better can be jettisoned in favour of delivery and results, with the objectives of quality services at reasonable prices. Once the focus is on these objectives, the primacy of delivering services over collecting government revenues becomes apparent, except from narrow "fiscal deficit" considerations. The point is that planning and project management have to be done upfront to be effective, and are much less powerful when retrofitted to problematic situations, as in stranded power generation or telecom services.

However, even with the best of intentions and skills, there can be mistakes requiring course correction in predictable processes. A good example is South Korea's adoption of WiMAX and the attempted creation of their own standard, WiBro. While successful initially, it turned out to be inferior to a newer technology, LTE. What South Korea has done after evaluating its alternatives is to abandon WiBro in favour of LTE. This is the approach and capacity that we must strive to cultivate. To be unafraid to commit - but equally, unafraid to retract and change tack if and when a choice proves inappropriate.

By recommending reduced reserve prices in auctions, the Telecom Regulatory Authority of India has indicated for the first time that delivery and price may be acceptable as concomitant goals alongside government revenues. Meanwhile, the department of telecommunications is reportedly considering lower levies on operators, although insisting on higher reserve prices, perhaps because of the finance ministry and/or public opinion. What is unclear is how public opinion will react to the focus on delivery and price. Contrarily, it favours auctions of inputs like coal mines and spectrum, but lower tariffs for power and telecom/broadband; auctions will have the opposite effect. Populists are more likely to go with public opinion, instead of analysing and resolving logical contradictions.

Every situation need not result in a crisis and firefighting. Systematically addressing end-to-end processes beforehand with those involved and experts can help in the resolution of a large set of predictable processes in areas like infrastructure and manufacturing.

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