The Case for Unbundling Infrastructure

Industrial and export growth are booming, but looming infrastructure shortages mean the boom cannot be sustained. Power shortages are widespread, overloaded ports cannot cope with demand, the railways are unable to carry desperately-needed goods, roads are overcrowded and slow, airports are clogged, telephones work badly. Without a boom in infrastructure, we cannot sustain a boom in either industry or exports.

Traditionally, many sorts of infrastructure were considered natural monopolies. It is uneconomic to have several railway lines from Delhi to Bombay, or several competing telephone and electric lines to each residence.

If monopoly is inevitable, a government one will extort less than a private one. And so Indian government has monopolised infrastructure. Besides, this needs huge amounts of capital, which the private sector could not raise in earlier decades. So large- scale government investment in infrastructure was both inevitable and desirable.

However, things have now changed dramatically. First, new technology has made competition feasible in parts or entire sectors of infrastructure, making formerly ‘natural’ monopolies unnatural. Second, the central and state governments are in financial straits, while the private sector can mobilise more funds than ever before.

So we must end all reservation infrastructure for the public sector, and encourage competition here ever technology makes this feasible. We also need independent regulatory authorities in each liberalised area, to ensure fair competition and consumer satisfaction.

An infrastructure industry typically has several components, which were once thought to be an inseparable bundle. But technology has increasingly made it possible to unbundle the package, and permit competition in some functions even while others remain a monopoly. India needs to adopt unbundling in a big way. This will enable a multitude of private investor to enter, provide the benefits of competition, and end infrastructural bottlenecks.

The railways have long been considered a natural monopoly. This is not so. A road may be a natural monopoly but a multitude of trucks can compete in using it. Similarly, a railway track may be a natural monopoly, but private parties can compete in running train services. Unbundling is simple. Competition is also feasible and desirable in manufacturing rail equipment.

Track capacity for running trains may be limited, so an independent regulator should auction rights to those offering the best train services at the lowest price. The railways must compete with others in such an auction on equal terms. The regulator must not let them, as track owners, favour their own trains over those of others. The resultant competition will bring in more investment, optimise track use, and generate competitive pressure to improve consumer satisfaction and prune costs.

Telecom is no longer a natural monopoly. Even where telecom lines are a monopoly, it is now technically possible for competing companies to use the same lines. Such competition is simplest to arrange in the case of trunk calls-this is routine in many countries but not yet allowed in India, despite supposed liberalisation.

For local calls, India is introducing a new technology-wireless in local loop-in which telephone exchanges are wired to each other but he connection between an exchange and individual telephones is done by wireless. By using this technology, India proposes, at economic cost, to let one private by compete in each circle with existing government service. However, still newer technologies like PCN ( a minicellular system ) may soon make cellular calls as cheap as conventional ones. When that happens, unlimited competition will be feasible, and telecom should be deli censed (subject only to a regulatory authority).

Consider ports. These are not natural monopolies. They should be delicensed, and anybody should be allowed to construct a port anywhere, subject only to technical specifications. Today, only public sector ports are permitted. Coast-based factories can set up jetties for captive use, but these cannot be used by anyone else.

Why no? Restricting them to captive use means these expensive facilities lie idle for long periods, when they should be used fully to expedite exports. The problem seems to be that the government is terrified of antagonising the port trade unions, which have a terrible reputation for slackness and fear competition. Ports should benefit consumers, not unions, and this is the best possible reason to increase competition.

A major port has a breakwater (to protect ships from ocean waves) with jetties inside. In government ports, the breakwater is common infrastructure, but why no privatise the jetties and let them compete? This will improve speed and service quality, which is abysmal today (Bombay dockers take up to seven times as long to stuff a container as dockers in Singapore).

Consider power. Transmission lines are a natural monopoly. But new technology means a multitude of generating companies can use one set of transmission lines to sell power to a multitude of users. We must permit a multitude of private distribution power in bulk and on sell I to small consumers. In the USA, power suppliers negotiate on the phone with consumers for supplying so much power at such-and-such price for such-and-such period. We need this in India too.

An US law (PURPA) makes it mandatory for every power utility to accept any power, at marginal cost. This has encouraged private companies to set up thousands of co generating power plants, producing more than 50,000 MW. India needs such a system too. Apart from encourage in new co generating capacity, it will harness thousands of stand-by diesel gensets which to day lie idle much of the time.

Privately built airports are feasible. Even in existing government airports, private airlines should be allowed to set up their own passenger and cargo terminals. Such unbundling is common abroad.

So far the government has sought to attract foreign investment in mega projects like Dabhol, maintaining the monopoly of the state electricity board in distribution. Far better is a system where anybody can produce power and sell it to anybody else, as with potatoes or soap. This will end the delays and kickbacks of negotiated deals between government monopolies and private builders.

Today, the size of mega projects reduces the number of potential competitors. Much more can be achieved by unbundling infrastructure, and introduction of competition in each segment. This will reduce the entry size of investors. So many more companies will be able to invest in infrastructure, much more innovation and cost-cutting will occur, and consumers will be able to choose instead of being at the mercy of one unbundled mega project

What do you think?