INDIA INFRASTRUCTURE REPORT 2007

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2 INDIA INFRASTRUCTURE REPORT 2007

3 Managing Editors: PREM KALRA AND ANUPAM RASTOGI Avinash K. Agarwal Indian Institute of Technology, Kanpur, Elizabeth Alexander Philips Innovation, P. Amudha Unicef, New Delhi, Pradeep Baijal Former Chairman, TRAI, Jyotsna Bapat Consultant, Laveesh Bhandari Indicus Analytics, New Delhi, N.K.Bhandari National Water Development Agency, New Delhi, T. Bhogal Consultant, Sagarika Bose Nasscom, New Delhi, Bhaskar Chakrabarti Indian Institute of Management, Calcutta, B.P. Chandrasekhar National Rural Roads Development Agency, New Delhi, Atanu Dey Netcore Solutions Pvt Ltd, Siddhartha Dutta Indicus Analytics, New Delhi, Sumita Ganguly UNICEF, New Delhi, Ashima Goyal Indira Gandhi Institute of Development Research, Neeraj Gupta Global Institute of Technology, Jaipur, P.V. Indiresan Centre for Policy Research, New Delhi, Rekha Jain Indian Institute of Management, Ahmedabad, Prem Kalra Indian Institute of Technology, Kanpur, K.G. Karmakar NABARD, Mumbai, Pisupati Karthikeya Dhiya Consulting Pvt. Ltd., Bangalore, Alok Kumar WES, UNICEF, New Delhi, Amod Kumar IAS, UP, B.R. Vasantha Kumar Gulbarga Electricity Supply Co., Vijay Mahajan BASIX India, S.V. Mapuskar APSWT, Dehu Village, Pune, J.K. Mohapatra Ministry of Rural Development, New Delhi, N.S. Moorthy Unicef, Jaipur, Vibhu Nayar Tamil Nadu Water Supply and Drainage Board, Chennai Apoorva Oza Aga Khan Foundation, Sandeep Pasrija BASIX India, Anupam Rastogi Infrastructure Development Finance Company, Mumbai, G. Raghuram Indian Institute of Management, Ahmedabad, T.R. Raghunandan Ministry of Panchayati Raj, New Delhi, V.V. Rajsekhar ITC, Secunderabad, N.S.R.K.Reddy National Water Development Agency, New Delhi Anil Kumar Sagar Director, Local Bodies, GoUP, Preeti Sahai BASIX India, Runa Sarkar Indian Institute of Technology, Kanpur, Rajiv Shekhar Indian Institute of Technology, Kanpur, Rajendra Singh Tarun Bharat Sangh, Alwar, A.P. Singh District Info. Officer, NIC, Sitapur, Markanday Shahi U.P. Government Vinod K. Shrivastava Core International, Washington, Kala S. Sridhar National Institute of Public Finance and Policy, New Delhi Piyush Tiwari University of Aberdeen, U.K., Pradeep Varma KnowledgeOnline.Com Pvt. Ltd. Sri Vasuki Dhiya Consulting Pvt. Ltd., Bangalore, Michael Ward Department for International Development (DFID), India, New Delhi, The views expressed in the report are those of the individual authors and not the institution they are affiliated to, the 3iNetwork, or the publishers.

4 INDIA INFRASTRUCTURE REPOR T 2007 Rural Infrastructure 3iNetwork 1

5 1 YMCA Library Building, Jai Singh Road, New Delhi Oxford University Press is a department of the University of Oxford. It furthers the University s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trademark of Oxford University Press in the UK and in certain other countries Published in India by Oxford University Press, New Delhi Infrastructure Development Finance Company Limited 2007 The moral rights of the author have been asserted Database right Oxford University Press (maker) First published 2007 All rights reserved. No part of this publication may be reproduced, or transmitted, in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without the prior permission in writing of Oxford University Press. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose this same condition on any acquirer ISBN-13: ISBN-10: Typeset in AGaramond 10.5/12.7 by Elevenarts, Keshav Puram, Delhi Printed in India by De-Unique, New Delhi Published by Oxford University Press YMCA Library Building, Jai Singh Road, New Delhi

6 2 FOREWORD Rural development has remained an essential focus of India s economic policy. Rural infrastructure development started with the irrigation sector and later extended to rural electrification with the ultimate objective of ensuring self sufficiency in food. More recently, we have witnessed a shift in emphasis in providing connectivity through all-weather rural roads and telecommunications. The devolution of powers that has come with the 73rd Constitutional Amendment Act (CAA) has rejuvenated Panchayati Raj Institutions and empowered them substantially. However, large swathes of the rural population still remain steeped in poverty which, though less pervasive, is more regional than ever in character. It is our belief that continued efforts to provide access to basic physical infrastructure in rural India can provide major impetus to poverty alleviation. For the annual infrastructure report, the 3iNetwork this year has chosen the theme of rural infrastructure an important segment of IDFC s overall strategy. The development of rural infrastructure could not only help reduce poverty but also inequality as better road connectivity links rural communities to markets and services, and access to safe drinking water improves rural public health. The government has accepted the Ramachandran Committee Report on Planning at the Grassroots Level and is keen to implement it during the Eleventh Five-Year Plan through integrated local area plans. This implies local planning at the village, intermediate, and district panchayat levels as well as at the level of urban local governments and their consolidation into a District Plan in each district. Reliable power supply and irrigation facilities lie at the foundation of comprehensive rural infrastructure provisioning. The report suggests measures to harness the tremendous irrigation potential of the country through interlinking of rivers, but at the same time keeping in view the constraints of such a large project funding being one of them. For this it asks for a clear policy direction from the government. Finally, corporate India is eager to help transform a low productivity agro-economy into a globally competitive agroindustrial economy. Infrastructure spending on rural power, roads, irrigation, telecom, and rail freight corridors etc. will provide a significant boost to these initiatives, helping to increase productivity and spur growth besides providing employment opportunities. I would like to congratulate all the contributors who, under the aegis of the 3iNetwork have produced a comprehensive report on the status and prospects for rural infrastructure, governance, and planning at the local level. I hope readers find this report as interesting and informative as the previous ones and receive it with the same enthusiasm. RAJIV B. LALL

7 2 PREFACE The majority of India s poor lives and works in its villages. Rural development is seen as a catalyst for economic transformation. The strategy focuses on improving agricultural productivity; promoting the production and exportation of non-traditional products (processed gold, salt, handicrafts, etc.); generating gainful employment and increasing output of small-scale enterprises. Infrastructure is the key in transforming low productive economy into a fast-growing agro-industrial economy. Construction of rural roads, electricity distribution facilities, and telecommunication networks can provide the rural poor with access to a vast range of economically gainful activities and markets. Irrigation facilities can increase agricultural productivity, reduce vulnerability to drought, and stabilize yields. Provision of warehouses and godowns can ameliorate food security concerns. No one denies that delivering infrastructure facilities to the collage of 500,000 hamlets in India, each with a population of about 1000 people, is a daunting task. Our purpose is to take stock of the current state of rural infrastructure (across sectors); to identify key need gaps; and provide strategic recommendations to bridge these gaps. We evaluate prevailing plans and strategies, roadblocks and bottlenecks, to suggest ways to accelerate the pace of infrastructure development and fund public and private endeavours. We also showcase success stories and best practices followed elsewhere to achieve efficiency either through community participation or rural development agencies. Governance: More than fourteen years have passed since the 73rd Constitutional Amendment Act (CAA) 1992 was passed providing legal status to panchayats and entrusted them with the mandate of providing basic infrastructure to villages, but there is little visible sign of improvement. Raghunandan in Chapter 2 has argued that while technology is simple, users are dispersed and the demand supply gap is substantial leading to critical implementation issues. The normal bias of the technologically equipped elite is to design systems that are top driven. Top down strategies assume, sometimes with a touching naivety, that scales of efficiency are achieved by mass production and therefore, proceed in project implementation mode. Concerns about local participation are brushed aside as inconvenient and irrelevant; local leaders are ignored as corrupt and ignorant. Targets are achieved, glossy presentations made, awards are distributed and projects wound up, in a blaze of glory. A few years later, the same debates rise again. According to Raghunandan, provisioning of infrastructure suffers more acutely from governance inadequacy than technology or funds. Rural countryside is dotted with decaying bridges, potholed roads, crumbling buildings, electricity lines that carry no power, and dry water supply schemes. Therefore, voices advocating peoples participation and ownership for sustainability of infrastructure existing is increasingly being heard. While suggesting better frameworks for reform Raghunandan emphasizes equally the need to ensure that the fiscal transfer mechanism through a variety of means conforms with the letter and spirit of the provisions of the Constitution relating to panchayats. The government has accepted the Ramachandran Committee report on Planning at the Grassroots Level: An Action Programme for the Eleventh Five Year Plan and is keen to implement it during the Eleventh Five Year Plan. This may prove to be the catalyst required to ensure effective delivery of rural infrastructure through PRIs responsible for planning, maintenance as well as provisioning.

8 Preface vii Financing Rural Services: Even though there seems to be no paucity of funds in infrastructure creation, there has been an overemphasis on construction rather than maintenance. Mahajan et al. have explored the possibility of private funds and community funds flowing into rural services. They have argued that funds will flow only to those investments where, it earns a risk-adjusted market rate of return necessarily implying that investments will flow into those ventures, which cater to a sufficient number of customers with the purchasing power and willingness to pay. Thus, it is not a coincidence that enormous amount of private capital has flowed into cellular telephone network, because it meets these twin criteria. Greater provision of rural infrastructure will require active involvement of other players apart from the government panchayats, private sector, and the user community. It will be necessary to define their roles and responsibilities and bring them pro-actively on board for creation and maintenance of rural infrastructure. Mahajan has suggested that the government needs to create collaborative framework to build and operate infrastructure in rural areas within the constraints of each set of institutions in delivering finance for rural infrastructure. Solutions with the strengths of each side, which are balanced by civil society, are likely to be efficient, equitable, and sustainable. A progressive model has also been suggested which can be gainfully applied to various infrastructure projects. Key to their model is that rural services can easily graduate from one stage to another with the help of NGOs and CBOs. Telecom: Telecommunication network has reached several large villages. This has helped better local government with initiatives shown by dynamic administrators at the district and block level. Amod Kumar showcases e-governance of Sitapur District in UP which is based on the public telecom network. Baijal and Jain in Chapter 4 have convincingly argued that there is still room to expand the rural telephony. They have also suggested that by subsidizing fixed infrastructure of the wireless telephony, rural telecommunications can be spread and deepened rapidly. In fact the government has already invited bids from operators to set up telecom infrastructure in villages using subsidy from the Universal Service Obligation Fund. Roads: Rural roads expansion (i) by reducing transportation cost and time improves access to markets; (ii) raises productivity through better access to agricultural inputs and extensions; and (iii) creates better conditions for generating off-farm employment opportunities. For well over two decades in the eighties and the nineties, a large proportion of rural roads were built under various social programmes which cannot be treated as functional means of connectivity. Mohapatra and Chandrasekhar have concentrated on the rural roads being built under the PMGSY system assessing their capacity to provide all weather connectivity in the country. Anil Sagar has critically evaluated the maintenance of rural roads and has suggested a few alternatives to improve the same. Rural Electrification: The food shortage during 1965 and 1966 shifted policy emphasis from the general objective of electrifying village to the powering of irrigation pump sets and tube wells. Crash programmes were implemented with earmarked central assistances. Prem Kalra and Rajiv Shekhar have highlighted the change in the definition of village electrification and have argued that extension of power-grid to all the villages is not the only solution to provide electricity to villages. Mini grids for distributed generation and renewable sources of energy for remote villages would be the best solution. Sharp increase in oil prices has made bio-fuels more competitive. In the Tenth Five Year Plan the Planning Commission had advocated promotion of bio-fuel in a mission mode. Avinash Kumar provides a global energy perspective and argues that bio-fuels have a bright future in India and have the potential to change the course of the rural economy. Irrigation: The importance of irrigation lies in reducing the vulnerability of farmers to the unpredictability of rains. Data shows that 70 per cent of net irrigated area in India is covered by minor irrigation schemes. Apoorva Oza tackles the irrigationpower nexus in his paper and argues that much inefficiency is built into the system which needs to be addressed. According to him, community based systems can improve water efficiency and improve agricultural productivity. Bhandari and Reddy have outlined the benefits of inter-linking of rivers programme to improve many aspects of the rural economy. Drinking Water and Sanitation: Until the Third Five Year Plan, drinking water supply in the rural areas was a component of the amenities scheme of the Community Development Programme. Besides, the local development works programme, taken up through voluntary labour participation, and the programme of welfare of backward classes also included schemes relating to water supply. Bapat et. al. have noted that the government under the Rajiv Gandhi National Drinking Water Mission (RGNDWM), has covered all rural habitations with population of 100 and above, especially the inaccessible ones, by providing rural drinking water supply within 200 meters. The Total Sanitation Campaign of the government has made a perceptible difference in the lives of the people. Implementation of this campaign using Panchayati Raj system has made good progress which can be emulated by other sectors also. A participative model used to implement the programme has shown amazing results in the last few years. Environment: The degradation of rural environment is palpable, albeit gradual. Sarkar and Chakrabarti have argued that a centralized policy approach has led to market distortion,

9 viii Preface weak enforcement, and poor participation of civil society in environmental management. Declining land productivity and loss of forest cover have led to social dislocation and destitution. Competing uses of land for forestry, agriculture, pastures, human settlements, and industries exert pressure on the finite land resource influencing land-use patterns causing degradation. It is important from the management perspective to view land, forests, pastures, and biodiversity as an integrated resource given that they are intertwined in complex ways. Housing: Nearly 95 per cent of households in rural areas live in own houses, a large proportion of which is kutcha/semi-pucca. The major issue in housing in rural areas is not of homelessness but of poor quality, small house size, and congestion. Recent trends indicate that the sizes of houses that are being constructed in rural areas have reduced over time. This is a consequence of the rising price of land and building materials. Government has played a very limited role in the provision of rural housing with even more limited success. The penetration of formal finance in rural areas has also remained nascent. Repayment patterns of rural households for institutional loans are not very different from urban households. Typical form of security in both rural and urban areas is personal guarantee. Mortgage on land and buildings in rural areas is not a typical form of security due to problems regarding clean land titles and non-admissibility of farm land as security for construction loans. As an institution for capacity building, microfinance institutions have played a significant role but they can t replace formal financial institutions due to their limitations in raising financial resources from broad financial markets. Tiwari suggests that the devolution of power to PRIs offers immense opportunities for the development of rural housing sector as these could perform the monitoring role as municipalities in cities do. Developing only building by-laws is not sufficient but monitoring its adherence would also be necessary. PRIs, as legal institutions. Local institutions need to be involved in housing programme formulations. These programmes could take into account rural diversity at local level. Health: Rural healthcare services suffer from a shortage in public sector infrastructure, that is, physical infrastructure all weather road connectivity and telecom services which play an important role in providing health care in remote areas. Even for basic health care services such as reproductive and child health, significant proportions continue to remain untreated. Immunization, ante-natal care, and deliveries in the presence of professionally trained personnel, etc. all show large unmet needs. Bhandari and Datta have found that the failure of the public delivery system today is an outcome of systemic breakdown of accountability relationships within the institutional framework. There is a shortfall not only in terms of physical infrastructure but also human resource, measured against even the minimal norms prescribed by the government. Posts of health workers at various levels lie vacant; existing facilities are underutilized; most health workers especially the doctors do not want to serve in the rural areas due to overall infrastructural inadequacy and lack of incentives; and public doctors prefer private practice. This leads to widespread absenteeism from service and closure of facility. Above all, there is no accountability in the public sector service. In the absence of public healthcare system, the private sector is filling in the unmet need to an extent and this role is rapidly expanding. Today private sector health care provision in rural areas is greater than the public sector. Access issues however remain important because in remote and far flung habitations, the private sector does not have the incentive to set up shop and in the absence of adequate penetration by public sector health centres, these areas remain unserved. Regulatory mechanisms and the role of new information technologies have come under scanner for possible solution baskets in providing accessible and effective quality healthcare to the vast Indian rural populations Education: Ward finds that through the Serva Shiksha Abhiyan (SSA) there has been remarkable progress in increasing access to pre-school and elementary education in rural areas, particularly over the past ten years or so. He has highlighted that rural road connectivity has lowered the teacher s absenteeism in village schools. Of course, several problems such as irregular attendance of children and teachers, low levels of time on task and gaps in provision still persist and the issue of how to ensure a quality education for all remains. But these challenges are being addressed and there are positive signs that the emphasis on major government programmes such as SSA is shifting from universal enrolment to universal retention and quality. In tandem with this, increasing attention is being given to the governance of schools with the formation and functioning of VECs and more transparent processes for managing school resources. The next challenge is to increase access in rural areas to secondary education, particularly for girls, SC, ST and minorities, and technical and vocational education and skills. At the SE level particularly, private sector service provisioning is emerging in a big way. But in both elementary and secondary education, better services will only come about with greater expansion of infrastructure, both within and around schools. This will require, in part, larger allocations to education, but probably not more than the already stated goal of 6 per cent of GDP. More importantly, these increases will need to be accompanied by appropriate reforms and strategies. It will also require the continuation of strong central support for policy, strategy, technical assistance and monitoring,

10 Preface ix and evaluation combined with increased decentralization within government; stronger public private partnerships; and improved accountability relationships between the service providers, policy makers, and consumers. Overall, we understand that infrastructure stocks have a positive effect on the long-run economic growth. Physical infrastructure is an important ingredient for poverty reduction as infrastructure raises society s overall level of income and helps raise the income of the poor more than proportionately. Thus, infrastructure is the key to enhance agricultural productivity and reduce rural poverty. The growth in rural India throws plenty of opportunities for wide-ranging business establishments to benefit from. Already, private sector with interests in irrigation, power, cement, sugar, paints, tea, and fertilizers is reaping positive benefits. We hope that ITC s initiative of Choupal Pradarshan Khets in UP, Rajasthan, Maharashtra, and Madhya Pradesh will go a long way to achieve higher productivity for farmers and rural economy as a whole. Rural infrastructure can play a silent but big role in providing gainful employment and income in rural India. PREM KALRA AND ANUPAM RASTOGI

11 2 ACKNOWLEDGEMENTS The Rural Infrastructure Report was mooted simultaneously with the report on Urban Infrastructure published in Diversity in the provisioning of rural infrastructure on one hand and the disparity between official reports and what is available on the ground made our task far more challenging. Many have helped us in understanding the evolving needs of rural infrastructure and acquainted us with the ground realities of rural India. It is difficult to acknowledge all of them here. However, we would like to thank operators of Mini Hydel Plant at Jankichatti (Uttaranchal) for explaining difficulties faced in running a remote facility. Panchayat officials in Chiklur, Moinabad Mandal (Andhra Pradesh), Taluka Philambri (Maharashtra), and villages around Hasanpur (Uttar Pradesh) were very helpful in discussing issues related to infrastructure in their areas problems in receiving funds under various schemes, allocation of funds among beneficiary households, and difficulties faced in levying and collection of user charges. Almost all the contributors have comprehensive hands-on experience of working in the rural infrastructure sector. Many have spent months and years working in various parts of rural India. The three workshops were organized at IIT, Kanpur to assimilate experiences of contributors and other participants. We would like to thank Partha Mukhopadhyay, Neeraj Gupta, Srikumar Nandi, B.K. Thapaliyal, A.P. Agarwal, Runa Sarkar, and Rajiv Shekhar, who participated in the first exploratory workshop held at IIT, Kanpur on January The second workshop held at IIT, Kanpur on 12 April 2006 was more focused wherein participants outlined their ideas on the subject matter. We would like to thank Michael Ward, Atanu Dey, Laveesh Bhandari, Amit Patel, Anil Sagar, Neeraj Gupta, Sagarika Bose, P.V. Indiresan, Apoorva Oza, Rajiv Kumar Garg, M.N. Joglekar, Deepak Maheshwari, Shailesh Thakur, Nitin Gachhayat, Didyala Malkitsingh, Jyotsna Bapat, Somnath Bandyopadhyay, Preeti Sahai, Puneet Chitkara, Akanksha Chaurey, Avantika Singh, D.R. Prasada Raju, Y. Suresh Reddy, P.R. Sodani, Periasamy, Maina Sarkar, K.S. Sridhar, Alok Srivastava, A.K. Saxena, Sanjay Jadhav, S. Srikumar, Ram Kumar Arti, A.P. Singh, Markandeya Shahi, and S. Padmanabhan who participated enthusiastically. The Writer s Workshop held at IIT, Kanpur on July 2006 was essentially to integrate the report and iron out duplications. We thank Bhaskar Chakrabarti, P.R. Sodani, Apoorva Oza, Ashima Goyal, Atanu Dey, Jyotsna Bapat, Y. Suresh Reddy, D.R. Prasada Raju, Vibhu Nayar, Laveesh Bhandari, Siddhartha Dutta, R.K. Goyal, Rajendra Singh, N.K. Bhandari, Piyush Tiwari, V. Sridhar, P.V. Indiresan N.S.R.K. Reddy, Anil Kumar Sagar, Rajiv Shekhar, Preeti Sahai, Pradeep Baijal, P. Mukhopadhyay, B.P. Chandrasekhar, Pisupati Karthikeya, Rajendra Singh, Alok Kumar, T. Bhogal, and Avinash Agarwal, whose contribution go beyond as an author of their individual chapter. Besides authors, G.N. Pandey, Mukul Kulshrestha, A. Shajahan, Sunil Kumar, Prabha Kant, R.N. Trivedi, Anup Yadav, V.V. Rajsekhar, S.K.F. Kujur, and Sri Kumar Tadimalla participated whole heartedly in the workshop and interaction with them has enriched the report immensely. On behalf of 3iNetwork, we would like to thank Ministry of Rural Development, UNICEF and Swiss Agency for Development and Cooperation (SDC) who sponsored the workshops. Renuka Viswanathan, P.K. Sinha, and J.K. Mohapatra of Ministry of Rural Development, R. Gopalkrishnan of Prime Minister s Office and T.R. Raghunandan of Ministry of Panchayati Raj extended their unwavering support and encouragement. We are thankful to Ministry of Rural Development for extending financial support. Veena Joshi and Avni Malhotra of SDC and Alok Kumar of UNICEF took keen interest in the coverage of the report and we are thankful

12 Acknowledgements xi to them. Lizette Burgers of UNICEF needs special mention as she extended full support by helping us in getting information on the projects being carried out under the aegis of UNICEF in many rural areas. We are also grateful to all the authors who despite their busy schedule, participated in the workshops and maintained timelines for the many drafts their write-ups had to go through. We would like to be excused for troubling and reminding them of their commitments through various channels of communication. We would like to acknowledge the contribution of Shreemoyee Patra, who ploughed through the draft chapters to provide editorial advice on restructuring and revising the content of the report to enhance its readability and ensure accessibility of its technical discourses to a wider audience. Thanks are also due to Gracinda Rodrigues, Sandeep Chandel, Sunil Sharma, Sandeep Yadav and S.K. Khullar who formed the backbone of the workshops. They, as versatile executive assistants and research assistants undertook a host of tasks from organizing travel, meetings, and smooth functioning of workshops. Gracinda also helped in preparing graphs, tables, figures, printing final draft of the report and proof reading the report with a ready smile. Finally, I am thankful to the editors at Oxford University Press, who once again accepted the stiff schedule in publishing this report in time. PREM KALRA AND ANUPAM RASTOGI

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14 2 CONTENTS List of Tables List of Boxes and Figures List of Abbreviations xvi xviii xxi 1. THE INFRASTRUCTURE SECTOR IN INDIA Anupam Rastogi Roads 1 Ports 3 Railways 3 Airports 6 Power 8 Telecom 14 Urban Infrastructure 16 Rural Infrastructure 18 Conclusion 25 References RURAL INFRASTRUCTURE, PANCHAYATI RAJ, AND GOVERNANCE 28 T.R. Raghunandan Introduction 28 The Constitution and the Panchayats 28 Roadblocks in Effective Functional Transfer to Panchayats 30 Recent Developments in Panchayati Raj 32 Generic Features of a well designed Panchayati Raj 33 Capacity Building 40 Role of Parallel Bodies of Central and State Governments 40 CBO, SHGs, and User Groups 42 Way Forward 43 References FINANCING OF RURAL INFRASTRUCTURE 47 Vijay Mahajan, Preeti Sahai, and Sandeep Pasrija Introduction 47 Attributes of Rural Infrastructure and Interlinkages with Funding Issues 47 Demand Supply Gap in Rural Infrastructure 49 Rural Infrastructure Financing 51 Workable Infrastructure Financing Models for Rural India 61 The Way Forward 66 Conclusion 73 References RURAL TELECOM PART I: RURAL TELECOM AND IT 44 Pradip Baijal and Rekha Jain Introduction 44 Status of Rural Telephony 76 Evolution of the Telecom Sector: Lessons for Telecom 76 Review of Rural Telecom Policies 80 Barriers to Penetration of Telecom in Rural Areas 83 IT Application in Rural Areas: Some Initiatives 86 Rural BPOs 92 Agenda for Action 94 Annexe 99 References 101

15 xiv Contents PART II: ACCELERATING RURAL TELECOM PENETRATION: A STATE LEVEL ANALYSIS 102 Rekha Jain and G. Raghuram Introduction 102 Fixed Line Telecom Density in States 102 Linking Consumption Patterns to Target Policies 104 Price Regulation and its Effect on Demand 105 Implications and Recommendations 106 Appendix 107 References RURAL ROADS 109 J.K. Mohapatra and B.P. Chandrasekhar Introduction 109 Status of Rural Roads in India 109 Pradhan Mantri Gram Sadak Yojana 111 Alternatives to Reduce Cost of Rural Road Construction 119 Maintenance of Rural Roads 119 Role of Panchayati Raj Institutions 123 Way Forward 129 Annexe 131 References ELECTRIFICATION AND BIO-ENERGY OPTIONS IN RURAL INDIA PART I: RURAL ELECTRIFICATION 138 Prem K. Kalra, Rajiv Shekhar, and Vinod K. Shrivastava Introduction 138 Role of Electricity in Rural Development 138 Current Status 139 Rajiv Gandhi Grameen Vidyutikaran Yojana 141 Rural Electrification Models 142 Alternatives in Power Distribution in Rural India 148 Rural Electrification and Panchayats 155 Critical Issues in Rural Electrification 157 Way Forward 161 Annexe 162 References 164 PART II BIO-ENERGY OPTIONS AND RURAL INDIA 165 Avinash Kumar Agarwal Global Energy Scenario 165 Renewable Energy in India 165 Monetary Value of Biomass 169 Electricity from Biomass Technologies 170 Biofuels 171 Bio-Ethanol Programme 175 Way Forward 175 References IRRIGATION AND WATER RESOURCES PART I: IRRIGATION: ACHIEVEMENTS AND CHALLENGES 178 Apoorva Oza What is Irrigation? 178 Status of Irrigation 179 The Importance of Irrigation in the Indian Economy 182 Who Loses out to the Prevailing Irrigation Policy Imperatives? 183 Financing of the irrigation sector 184 Irrigation Power Nexus 185 Surface irrigation: Is More Money the Answer? 189 Community-based Watershed Programme 190 The Rain Water Harvesting Movement 191 Micro-irrigation 192 Way Forward 193 References 196 PART II: INTER-BASIN WATER TRANSFER 197 N.K. Bhandari and N.S.R.K. Reddy Introduction 197 Need for Inter-Basin Water Transfer 197 National Perspective Plan 198 National Water Development Agency 199 Benefits of Interlinking of Rivers Programme: Rural Perspective 200 Roadblocks in ILR 204 Monitoring of the ILR Programme 205 Conclusions 205 Annexe 206 References 209

16 Contents xv 8. RURAL DRINKING WATER AND SANITATION 210 Jyotsna Bapat, P. Amudha, Alok Kumar, S.V. Mapuskar, N.S. Moorthy, Vibhu Nayar, T.R. Raghunandan, and Sumita Ganguly Introduction 208 Drinking Water Sector 208 Sanitation 218 Way Forward 223 References RURAL ENVIRONMENT 226 Runa Sarkar and Bhaskar Chakrabarti Introduction 226 Status of the Rural Environment 226 Causes of Degradation 229 Managing the Environment 232 Rejuvenating the Rural Environment 238 Way Forward 241 Annexe 242 References RURAL HOUSING 247 Piyush Tiwari Introduction 247 Demographic Trends and Housing Needs 247 Household Asset and Liability Structure 250 Government Housing Initiatives 257 Appraisal of Rural Housing Initiatives 259 Rural Institutional Framework 261 Way Forward 262 References HEALTH INFRASTRUCTURE IN RURAL INDIA 265 Laveesh Bhandari and Siddhartha Dutta Introduction 265 Public Infrastructure 265 The Expanding Role of Private Healthcare Services: Issues of Access to Quality Care 267 Finding Quality Healthcare Solutions: Public, Private or Partnerships 271 Financing Health Care: The Individual and the State 273 Way Forward 275 Annexe Tables 277 Annexe Figures 283 References RURAL EDUCATION 286 Michael Ward Introduction 286 Brief Overview of the Education System in India 287 Infrastructure Needs for Providing Effective Rural Education 288 Status of Rural Education Infrastructure in India 290 Comparing the Roles of the Public and Private Sectors in Rural Education 303 Regulating the Education Sector in India: Interstate Comparisons of Education Outcomes 305 Issues Affecting the Costs and Financing of Rural Education Infrastructure 307 Closing the gaps: An agenda for the future 308 Concluding Remarks 312 Annexe Tables 313 References 317

17 2 TABLES 1.1 Premium Segment Passenger Growth (%) Power shortage in Delhi Categorization of States with regard to Perceived Improvement in Quality of Electricity Supply 10 and Increase in Tariff 1.4 Categorization of States based on Opposition to Privatization and willingness to Pay More Status of UMPP Projects Outlay of Bharat Nirman Composition of Panchayats Round Table Conferences on Panchayati Raj Progress on Activity Mapping in States Categorization of Rural Infrastructure Access to Water and Sanitation Services by the Rural Population Village Connectivity by Size of Village Existing and Potential Irrigation Capacity in India, Allocation of key responsibilities under the PPP options Progress of Central Power Distribution Company of AP Ltd Estimate of Government Levies from Licence Fee, Spectrum Fee and Service Tax on Telecom Services Telecom Sector Levies in Pakistan, Sri Lanka, China, and India Call Charges per Minute of Use, ARPU and Termination Rates Per Minute for Mobile Service 79 in Different Countries (June 2004) Growth of Internet & Broadband and Tariffs ( ) NTP 1999 Targets, Achievements, and Shortfalls Collection and Disbursement of USOF (Rs crore) Proposed Network Coverage by End 2006; Operators Plan Mobile Coverage in Selected Countries, by region, Urban/Rural Income-wise Distribution of Households in Urban-Rural Markets Number of Cable Subscribers and Number of Fixed Line Telephone Subscribers (2003) Capex/Opex of Broadband connectivity projects State-wise Fixed Line RTD with CAGR The Indian Middle Class: Where does it Live? Basis for assessment, assessed targets and expected densities in the Road Development Plans Connectivity Status under PMGSY Alternate Maintenance Strategies for Rural Roads 123

18 Tables xvii Status of Rural Electrification Technologies for distributed generation Cost estimates for Village Electrification under RGGVY Agricultural Crop Residue Production in India Seasonal Availability of Agricultural Residues Region-wise Availability of Various Crop Residues in India Comparison of Agro-residue Cost Estimation (Supply and Demand side approaches) Comparison of Biomass Electricity Generation Systems Comparison between Biomass Combustion versus Gasification-based Power Generation Technologies Irrigated Area in India Yields and Water Use for Selected Crops under Conventional and Drip Irrigation Systems in India Sector-wise Demand Scenarios of Water in India Water Resources Scenario in India Foodgrain Production as per NCAER study (million tonnes) Comparative Growth Scenario (Average Growth during to , percentage) Various aspects/parameters of ILR project Access to Water Services in Status of Coverage of Habitations under Rural Water Supply (as on 1 April 2005) Rural Households without Drinking Water and Sanitation Facilities in Incentive Pattern of Nirmal Gram Puraskar Scheme Impact of Agro-Chemicals on Human Health Growth of Employment in Rural Enterprises Stock of Housing and Growth Dwelling Units in Rural Areas by Use (in million) Housing tenure (Percentage) Average Floor Area (square meter) and Average Cost (Rs thousand) per completed house construction 252 during Sources of Finance (Percentage of Monetary Cost on Construction) during Share of Different Institutional Sources of Finances (percentage) Loan Repayment Pattern of Households (average per household figures in Rs) Percentage share in Total Borrowings by type of Security and Occupation Outstanding Housing Loans (million rupees) Status of Health Infrastructure in Villages Provider Absence Rates by Country and Sector Percentage Villages with Access to various Health Care Facilities round the Year (access by type of facility) Place of Delivery Antenatal Care (ANC) and Postnatal Care (PNC) Percentages of Teachers (including para-teachers) by Academic Qualifications, Male and Female Gaps in Provision No. of Districts having >50,000 Out of School Children in 2005 by State Gender-wise Enrolment for last 5 Years ( ) Comparison of Education Outcomes between Kerala and Uttar Pradesh Gross Enrolment Rates at each level of Education in Rural Areas Public Expenditures on Education in India and Selected Developing Countries Primary School Pupil: Teacher ratios and Teachers Salaries as a multiple of per capita GDP in Selected 308 Developing Countries, around 1992

19 2 BOXES AND FIGURES BOXES 1.1 Electricity Generation in China WiFi Everywhere but No User in Sight Indore City Transport Service PURA Providing Urban Amenities in Rural Areas Rural Infrastructure and Services Commons RISC NREGS, Local Infrastructure and Governance Research and Training Institute Centre for Rural Transformation Elements of Activity Planning Rural Decentralization: Fiscal Maladies Capacity Building of Elected Representatives of Panchayati Raj System Misdirected Subsidies which Benefit Non-poor more than the Poor Rogi Kalyan Samiti Rural Infrastructure Development Fund Revival of Lift Irrigation Schemes Community Financing in Building Infrastructure Rural Health and Environment Programme in Orissa Sustainable Rural Power Distribution Project Changing Institutional Arrangements in Irrigation Shift in Financing Pattern in Rural Water Supply Innovative Programmes with Financing Orchestrated by Government of Andhra Pradesh CLIFF Financial Products, Pune, India Pamir Private Power Project in Tajikistan LOKVANI People s Voice Building Rural Market Infrastructure New Wave of BPOs GramIT, a Rural BPO: An initiative of the Byrraju Foundation A Possible Roadmap for Enhancing Rural Tele-density using USO Fund The Concept and Utility of Core Network Why Cost varies across Regions Use of locally available materials Pilot Project on Application of Jute Geo-Textile in Rural Roads Relook at Maintenance of Rural Roads 124

20 Boxes and Figures xix 5.6 A Proposed Model of Community Participation in Rural Road Maintenance Citizen Monitoring of Rural Roads Single Wire Earth Return Single-phase versus Three-phase Power Supply Gram Vidyut Pratinidhi The Arvari River Parliament Anakapalle Rural Electric Co-op RUSCO A Better Channel for Rural Subsidies Meters for Recording bi-directional flow of Electricity Biofuels in Chhattisgarh, Uttaranchal and Andhra Pradesh Water and Energy Use in Groundwater Irrigated Agriculture: Case Study of the 186 BESCOM Doddaballapur Substation Feeder Line DF 12 and DF 13 Service Area Check Dam Programme of Gujarat Transformation of Tippehalli When do Subsidies lead to Market Creation? Drinking Water from Sardar Sarovar Project Bhakra Dam Our Dream Secure Water for all, Forever The State of Kerala s Environment Government Failure in Managing the Ghasnies of Himachal Pradesh Water Harvesting in Alwar: Revival of the Tradition of Johad Management of the Sundarbans The Naya Ghar Project of the Mahila Housing Sewa Trust Gram Vikas Housing Programme Grameen Bank Housing Project of Bangladesh KESNIK Nirmithi Kendra Orissa Development Technocrats Forum From Mason to Engineer Using IT to Improve Delivery of Health Services National Rural Health Mission Rural Health Insurance Building as Learning Aid: Achieving Universal Primary Education in Rajasthan Technology Enhanced Learning for Rural India 300 FIGURES 3.1 Evolution of Institutions and Financial Arrangements for Rural Infrastructure Telecom Growth: The Changing Scenario Rural and Urban Tele-densities ( ) Factors affecting Universal Service Objectives Mobile Phone Growth Growth of Fixed line Telephone Subscriber Base of PSU and Private Sector Operators Mobile Growth and Effective Charge per Minute Growth of Mobile Subscriber Base with Reducing Average Revenue per User (ARPU) Yearly VPT Additions Yearly Rural DELs Additions (in millions) States by Rural Tele-density (2004) Rural DELs additions Comparative Average Income and Expenditure of Connected and Unconnected Villages Goods Transportation Cost on Different Types of Roads Impact on Standard of Living from Improvement on Roads Connectivity Status 110

21 xx Boxes and Figures 5.5 DRRP for a Typical Block Core Network for the Above Block Village Electrification in India Domestic Product and Percentage of Electrified Household Irrigation Costs as Perentage of Farm Income Haryana Electricity Pumps Cost Comparison of Transmission Systems Notice of the Janaki Chatti Micro-Hydel Committee at the Panchayat Installed Capacities of Renewals in India Oil Production of most of Non-OPEC and Non-FSU countries Global Oil Production of Most of Non-OPEC and OPEC Countries Global Oil Production Per Capita Per Year Global Oil Production Per Capita Per Year and Future Projections The Evolution of Forms of Irrigation in India Age of Major Water Infrastructure in India Political Economy of Irrigation System Proposed Inter Basin Water Transfer Links Proposed Inter Basin Water Transfer Links Coverage of Rural Water Supply in India ( ) The ideal situation: Towards a Good Governance for Natural Resource Management Possible changes in Natural Resource Governance because of Decentralization Growth Rate of Household and Housing Stock Housing by Construction Type Trends in Size of Houses Rural Households Distribution by Asset Holdings Assets held by Asset Class in Average Cash Debt as Percentage of Average Value of Asset for Rural Households Percentage of Households who undertook House Construction during Distribution of type of House Construction according to Structural Type during Sources of Treatment Low Spend States can Spend More Structure of Education in India Enrolment in Grade I XII in Rural Areas (September 2002) Distribution of Villages by Education Facilities Available (2002) Infrastructure in Schools in India Districts with more than 50,000 Out of School Children Number of Institutions at School Level 298

22 2 LIST OF ABBREVIATIONS ADC AERA AERAAT AGR AI AIE AIES AKFED ANM APCPDCL APDRP APIDC APL APMC ARECS ARPU ARWSP ARWSP ASHA ASHG AWR AYUSH BMSP BOOT BOTT BPL BRC BTS CABE Access Deficit Charges Airports Economic Regulatory Authority Airport Economic Regulatory Authority Appellate Tribunal Adjusted Gross Revenue Accredited Institution Alternative and Innovative Education All India Education Survey Aga Khan Fund for Economic Development Auxilliary Nurse Mid-wife Andhra Pradesh Central Power Distribution Company Ltd Accelerated Power Development and Reforms Programme Andhra Pradesh Irrigation Development Corporation Above Poverty Line Agriculture Produce Marketing Committee Anakapalle Rural Electric Cooperative Society Average Revenue per User Accelerated Rural Water Supply Programme Accelerated Rural Water Supply Programme Accredited Social Health Activist Artisans Self Help Group Annual Water Resource Ayurvedic, Yoga, Unani, Siddha and Homeopathy Systems of Health Basic Minimum Service Program Build, Own, Operate and Transfer Build Operate Train Transfer Below Poverty Line Block Resource Centres Base Transceiver Station Central Advisory Board for Education CBDA Chhatisgarh Biofuel Development Authority CBO Community Based Organization CCDUs Communication and Capacity Development Units CEEF Cost effective, Energy Efficient and Environment Friendly CHC Community Health Centre CIDA Canadian International Development Agency CLIFF Community Led Infrastructure Finance Facility CN Core Network CRC Cluster Resource Centres CRRI Central Road Research Institute CRSP Central Rural Sanitation Programme CSS Centrally Sponsored Schemes CT Container Terminal CTI Collaborating Training Institution CWSS Combined Water Supply Scheme DDG Decentralized Distributed Generation DDWS Department of Drinking Water and Sanitation DEEL Department of Elementary Education and Literacy DEL Direct Exchange Line DHAN Development of Human Action DIET District Institutes of Education and Training DISE District Information System for Education DOT Department of Telecommunication DPC District Planning Committee DPEP District Primary Education Programme DPR Detailed Project Report DRDA District Rural Development Agency DRRP District Rural Road Plan DWCD Department of Women and Child Development DWR Developed Water Resource EA2003 Electricity Act 2003

23 xxii List of Abbreviations ECCE EGS ERM FSU GER HFWTC HSE IASC IAY ICDS ICT ICTSL IDA IDEA IDEI IEC IFC IMR IPAI IPPS ISL ISP ITU IUC JGSY JGT JNNURM JRM KRCs LED LHV LIS MAC MARR MCA MDR MFI MG MLL MMR MNP MOA MORD MOSRTH MOWR MPCE MPW (M) MWS NABARD Early Childhood Care and Education Education Guarantee Scheme Extension, Renovation and Modernization Field Services Unit Gross Enrolment Ratio Health and Family Welfare Training Centres Higher Secondary Education International Accounting Standards Committee Indira Awas Yojana Integrated Child Development Services Information and Communication Technology Indore City Transport Service Ltd International Development Agency Infrastructure Development Enabling Act International Development Enterprise India Information Education and Communication International Finance Corporation Infant Mortality Rate Institute of Public Auditors of India Individual Power Pump Scheme Individual Sanitary Laterine Internet Service Provider International Telecommunications Union Interconnect Usage Charge Jawahar Gram Samridhi Yojana Jute Geo Textile Jawaharlal Nehru National Urban Renewal Mission Joint Review Mission Key Resource Centres Light Emitting Diodes Lady Health Visitor Lift Irrigation Scheme Maximum Affordable Cost Multi Access Radio Relay Model Concession Agreement Major District Roads Microfinance Insititution Maintenance Gangs Minimum Levels of Learning Maternal Mortality Ratio Minimum Needs Program Ministry of Agriculture Ministry of Rural Development Ministry of Surface, Road Transport and Highways Ministry of Water Resources Monthly per capita consumer expenditure Multipurpose Health Worker (Male) Million Wells Scheme National Bank for Agriculture and Rural Development NBC National Biofuel Centre NHDP National Highway Development Project NIC National Informatics Centre NIEPA National Institute of Educational Planning and Administration NIHFW National Institute of Health and Family Welfare NIRD National Institute of Rural Development NMB National Mission on Biodiesel NMTLI New Millennium Technology Leadership Initiative NPTEL National Program on Technology Enhanced Learning NQM National Quality Monitor NREGS National Rural Employment Guarantee Scheme NRHM National Rural Health Mission NRLP National River Linking Project NRRDC National Rural Roads Development Committee NSDP Net State Domestic Product NTP 1994 National Telecom Policy 1994 NTP 1999 New Telecom Policy 1999 OBTS Online Bus Tracking System ODR Other District Roads ODTF Orissa Development Technocrats Forum OFC Optical Fibre Cable OMMS Online Management or Monitoring System OOSC Out of School Children OPEC Organization of the Petroleum Exporting Countries PCRA Petrol Conservation Research Association PHC Primary Health Centre PIU Progamme Implementation Units PMGSY Pradhan Mantri Gram Sadak Yojana PRI Panchayati Raj Institutions PTA Principal Technical Agency PTICs Public Telecom and Information Centres RCH Reproductive and Child Health REB Rural Electrification Board/Regional Electricity Board REC Rural Electrification Corporation REDB Rural Electricity Distribution Backbone RGNDWM Rajiv Gandhi National Drinking Water Mission RHEP Rural Health Environment Programme RIDF Rural Infrastructure Development Fund RKMLSP Ram Krishna Mission Lok Shiksha Parishad RRB Regional Rural Bank RSM Rural Sanitary Mart RTD Rural Teledensity RWSS Rural Water Supply and Sanitation SACFA Standing Advisory Committee for Frequency Allocation SCERT State Councils of Educational Research and Training

24 List of Abbreviations xxiii SE SEZ SGSY SHPI SIDBI SIEMAT SIS SJSRY SLSC SPV SRP SRRDA SSA SSHE STA SVO TDSAT TEL TSC Secondary Education Special Economic Zone Swarnajayanti Gram Swarozgar Yojana Self Help Promoting Institutions Small Industries Development Bank of India State Institutes of Educational Management and Training State Implementation Societies Swarn Jayanti Shahari Rozgar Yojana State Level Standing Committee Special Purpose Vehicle Sector Reform Project State Rural Roads Development Agency Serva Shiksha Abhiyan School Sanitation and Hygiene Education State Technical Agency/State Transport Authority Straight Vegetable Oil Telecom Dispute Settlement and Appellate Tribunal Technology Enhanced Learning Total Sanitation Campaign TWAD UBB UEE UIP ULB UMHFW UMPP USO UTD VEC VEC VEI VHG VLPE VPT VR VWSC WENEXA WUA Tamilnadu Water Supply and Drainage Board Uttaranchal Biofuel Board Universalization of Elementary Education Ultimate Irrigation Potential Urban Local Bodies Union Ministry of Health and Family Welfare Ultra Mega Power Projects Universal Service Obligation Urban Teledensity Village Electricity Committee Village Education Committees Village Electricity Infrastructure Voluntary Health Guide Village Level Productive Enterprise Village Public Telephone/Village Panchayat Telephones Village Roads Village Water and Sanitation Committee Water and Energy Nexus Water User s Association

25 1 THE INFRASTRUCTURE SECTOR IN INDIA 2006 Anupam Rastogi 1 India has witnessed a robust economic growth of over 8 per cent in the period It is aiming to achieve an average growth rate of 9 per cent in the next five years. 2 The higher growth rate expectations are pegged on the hope of better performances from the farming and services sectors, and strong consumer demand induced by the demographic dividend (in the next five years, India s workforce is likely to swell by 71 million people, which amounts to nearly a quarter of the world s extra workers). For the expectations to materialize, large investments in all infrastructure sectors are called for. According to experts, in order to achieve and sustain the anticipated growth levels, investments in infrastructure should be substantially stepped up from the current level of 4.5 per cent of GDP to about 8 per cent. Spurred by the successes achieved in the telecom, roads, ports and airports sectors in recent years, policy makers are increasingly seeking to harness private sector efficiencies in the provision of infrastructure services. In this context, Public Private Partnership (PPP) is emerging as a preferred option for building infrastructure capacities rapidly and for maintaining them efficiently. Against this backdrop, this chapter takes stock of major developments and initiatives in each of the key infrastructure sectors. In the transport sector, even as the first two phases of the National Highways Development Project (NHDP) namely, Golden Quadrilateral and the North South East West Corridors have fallen behind schedule by a few years, the scope of the programme has been expanded to include more 1 The author would like to thank his colleague Sri Kumar for his helpful comments. However, he is not responsible for any error. All views expressed in this chapter are of the author and should not be attributed to the organization he works for. 2 Prime Minister Manmohan Singh has reiterated that the growth rate should reach 10 per cent in two to three years time. phases. While ports and airports have continued to benefit from new capacity addition through private participation, Indian Railways has successfully scripted a turnaround story by adopting a few notable best practices within the extant ownership structure. In the power sector, notwithstanding the presence of a comprehensive legislation (Electricity Act, 2003) with several reform-oriented provisions, progress remains elusive in many parts of the country which are plagued by chronic shortages, poor quality, and heavy losses in the distribution segment. Government-owned power utilities in some states, however, seem to have managed to stem the rot for now but it remains to be seen whether they will be able to sustain the achievements and checkmate the risk of policy reversals while they remain under public-ownership. The Central government has launched the initiative of Ultra Mega Power Projects (UMPPs) to quickly add sizeable generation capacity and quite a few states too are seeking to give fillip to generation capacity. Following the launch of the Jawaharlal Nehru National Urban Renewal Mission, urban infrastructure came in the limelight and we report its progress, especially, in the development of Mass Rapid Transit System in mega cities. We also touch upon the progress of Bharat Nirman Yojana an ambitious programme launched by the Prime Minister in December 2005 to build irrigation, roads, telecom, housing, drinking water and sanitation, and education infrastructure in rural areas. ROADS The ambitious NHDP moved into the slow lane with work in the first three phases of the programme running behind schedule. The second phase of the project is suffering from cost overruns due to increase in input costs, change in scope of projects, etc. One of the reasons could be the decision of the

26 2 India Infrastructure Report 2007 Cabinet Committee on Economic Affairs (CCEA) to set up a Public Private Partnership Appraisal Committee (PPPAC) on the lines of a public investment board with authority to approve projects worth Rs 100 crore and above. This move did not find favour with the Ministry of Surface, Road Transport and Highways (MoSRTH). The government has increased budgetary support for NHDP from Rs 9320 crore to Rs 9945 crore in The government has also decided to develop 1000 km of accesscontrolled Expressways built on the design, build, finance, and operate (DBFO) model. The sections that have been identified are Vadodara-Mumbai, Delhi-Chandigarh, Delhi-Jaipur, Delhi-Meerut, Delhi-Agra, Bangalore-Chennai, and Kolkata- Dhanbad. The concessionaires will be selected through an international competitive bidding process. The public-private partnership will primarily drive construction of highways under NHDP phase III, IV, V, VI, and VII. This means that while in the past, under NHDP phases I and II, the main source of finance of the National Highways Authority of India (NHAI) had been the fuel cess and budgetary grant, a large part of funding for other phases would come from the private sector. In fact, the private bidders are themselves funding construction of some stretches that promise high toll collections. In the process, these companies are sparking a new trend in the highway construction programme one that may see more and more bidders paying for rights to construct highways and recovering their investment from toll collections which is popularly referred to as negative grant. However, all the projects will be eligible for viability gap funding up to 40 per cent of the project cost as being applied to NHDP phase-iii A projects being taken up on build-operatetransfer basis. The fifth phase of the NHDP has been launched with the NHAI signing an agreement to six-lane the Bharuch-Surat section of National Highway NH8. Under this phase about 6500 km of National Highways including the golden quadrilateral will be widened from four lanes to six lanes at a cost of Rs 41,210 crore by For the Bharuch-Surat project, the NHAI has received a negative grant of Rs 504 crore for the project from the consortium-idaa Infrastructure Pvt Ltd. The NHDP is set to make a profit of Rs 12 crore as the project is estimated to cost only Rs 492 crore. Six-laning of the stretch is expected to be completed in thirty months. It will be implemented on BOT basis. The concession period including the construction period for the project is fifteen years. A second project under the fifth phase of the NHDP six-laning of the highway between Vadodara and Bharuch has received Rs 666 crore as negative grant. The 86 km long stretch on National Highway NH8 will also be undertaken on a BOT basis. The agreement includes a fifteen-year concession period, which will include a thirty-month construction period. A special purpose company called L&T Vadodara Bharuch Tollways Ltd is formed exclusively for the project. Along with six-laning of the highway, the company will also provide amenities and other infrastructure. The World Bank is conducting a prioritization study of phase V and VI of the NHDP which it is interested in financing. ADB is also in discussion with the Ministry for funding phase V, VI and VII of the highway projects. 3 The MoRSTH is planning to introduce automatic tolling system on all national highways by the second half of Under the current system, receipts are issued to commuters by clerks at toll plazas, which is a time consuming process, and on an average only seventy to eighty vehicles are cleared every hour. Also, the queues of vehicles at these plazas lead to traffic snarls on highways. Once the toll collection system is computerized, it will lend accuracy and facilitate queue free toll collection. On the Kishangarh-Jaipur stretch of 145 km an even more advanced toll collection technology, popularly known as Smart highways, is being implemented by an Austrian technology firm called Efkon which will operate the high-speed traffic management system. States are keen to take up road construction projects, in a manner similar to that followed by the NHAI, on those stretches of roads that are not national highways. In a major policy initiative, state governments are expected to sign an undertaking that they will not, in principle, construct an alternate road on the same route on which a toll highway has been constructed by a private contractor. The clause is part of a state support agreement issued by the road transport ministry which is to be signed by the state governments. The agreement has been drafted in order to give a push to PPP projects at the state level. Model Concession Agreement for Highways The Planning Commission has published a Model Concession Agreement (MCA) for highways for road concessions under direct tolling (Planning Commission, 2006). This is going to be used as the model agreement for projects worth more than Rs 100 crore, with minor variations. In this agreement commercial, legal and procedural aspects of the concession are defined in detail. Under the MCA, if all bidders seek grant from the government there is no change from the earlier concession agreement. If, however, some bidders are willing to pay negative grants (called Premium in the MCA), the procedure is different. The premium schedule will be set by the NHAI in terms of a percentage of total realizable fees during a year. An interesting development is that in the MCA the NHAI and the concessionaire are equal partners. If the NHAI does not fulfil any or all of the Conditions Precedent (such as pro- 3 Financial Express (August 8, 2006).

27 The Infrastructure Sector in India curement of all applicable permits relating to environmental protection, procurement of approval from railway authority to build roads over-bridges/under-bridges and so on), the Authority shall pay the Concessionaire 0.1 per cent of the Performance Security for each day s delay, subject to a maximum of 20 per cent of the Performance Security. All new road projects of the NHAI are to follow the MCA. The role of the NHAI essentially remains the same but the focus has shifted to preparing bankable bid documents, resolution of disputes and fulfilling the condition precedent in time. PORTS Global trade passing through India s ports crossed 500 million tonnes in The thrust is now on developing an efficient multi-modal system, which uses the most efficient mode of transport from origin to destination. This involves coordinating rail and road connectivity between ports and hinterland. Rail and road connectivity to ports is still weak and strengthening it will improve freight movement in the medium term. Indian Railways is also gearing up to meet new challenges of matching service delivery with customer expectations and assimilating rapid changes in technology. The Committee on Infrastructure, headed by the PM, noted that poor rail and road connectivity was affecting cargo movement. As a result, a Committee of Secretaries (CoS) under the Chairmanship of Member-Secretary Planning Commission, with Secretaries of Shipping, Road Transport and Highways, Environment and Forests, and Member Traffic (Railway Board) as members, was set up. The Planning Commission has commissioned a study on transportation, with a view to improving it for the benefit of the economy. The study aims to understand traffic flow on the basis of volume and cost, and is expected to be completed by mid The three-member committee set up by the shipping ministry has endorsed corporatization of major ports as a viable proposal. It has said that each of the major ports should draw up individual business plans for the post-corporatization scenario. Corporatization means getting converted into a company under the Companies Act. The provisions of the Major Port Trusts Act and restrictions there under would not apply then. The board of directors under the provisions of the Companies Act would be competent enough to take final decisions on issues without the need to seek permission from the central government. Most port users and port chairpersons generally prefer corporatization. Containerised cargo, a sub-set of sea-borne trade, is growing faster than total sea-borne trade. As more cargos are being moved in boxes, major ports are gearing up to invest a whopping Rs 10,260 crore in setting up container terminals (CTs) in the next five years. This is in addition to container terminals being set up at non-major ports run by private terminal operators. The main containerised cargos are garments, electronic goods, agro products, machinery parts, leather, and jute products. Ports are also witnessing that many hitherto break bulk cargos such as rice, maize, glass, granite, garment, sand, soya, cement, banana, cotton, green coffee beans, and flowers are now moving in containers. The Jawaharlal Nehru Port Trust (JNPT) has decided to invite global tenders for developing one of the largest container terminals in the port sector in India. The feasibility study for the fourth CT, involving an investment of over Rs 3000 crore, has been completed. The fourth CT is likely to have a capacity of 4.5m twenty equivalent units (TEU). With a berth length of 2 km, the terminal will have one of the largest capacities in the port sector. The terminal is likely to be developed in two phases of 1 km each. With the third CT (1.3m TEU) which became operational in August 2006, the capacity of JNPT has increased to 3.6m TEU. It has been estimated that, total container at demand JNPT is around 4m TEU. Meanwhile, the government is also initiating channel deepening process to facilitate the berth construction and operations, so as to equip ports to receive bigger vessels. Model Concession Agreement for Ports In order to fulfill the planned investment of Rs 50,000 crore in port infrastructure by 2012, government is keen to have Public Private Partnership in the port sector to improve operational efficiencies reducing user charges. For reducing transition costs, ensuring transparency and improving the quality of investments in PPP projects, the Planning Commission has prepared a model concession agreement for PPP in port terminals. After due consultation with state governments, prospective investors, lenders and experts, the agreement will be finalized. The MCA will be published for use by Port Trusts and state governments. In the new MCA, the existing bidding parameter based on revenue-sharing may be changed into a combination of both license fee and revenue share model. The new model may cap revenue share at 20 per cent while inviting quotations from bidders on a one-time upfront premium. RAILWAYS The highways under the NHDP and ports using PPP are adding new capacities, but the biggest success story in the transport sector in the last two years is turning out to be the railways, which languished for want of investment for many years. Railways will have a surplus of an astonishing Rs 20,000 crore in , three times the figure. A new dedicated freight corridor (with port linkages) is on the anvil. With private container operations starting to become

28 4 India Infrastructure Report 2007 a reality, internal transport efficiency will have knitted domestic markets together like never before. If the railway stations also get re-done with all the conveniences of modern airports, as is planned, rail travel will emerge as a modernized service. At present, four mega-terminals at New Delhi Railway Station, Chatrapati Shivaji Terminal, Mumbai, Howrah Junction catering to Kolkata, and Chennai are being considered for complete overhauling and modernization in such a manner that they can compete with airports in terms of facilities. Recent Developments When the Ministry of Railways took stock of its financial performance over the period , it realized that serious revenue enhancement measures were necessary to improve the precarious financial health of the Indian Railways. It was found that operating expenses had vastly outpaced increases in railway traffic and expenses were moving independent of throughput. Hence, to improve the Railways profitability the only strategy was to chase the incremental customers. 4 The Railways realized that it has to increase volumes if it is to turn around in short run. 5 The Railways enhanced wagon utilization in the period The per unit cost of freight which was 61 paise per net tonne km (ntkm) in 2001, was brought down to 56 paise per ntkm in Freight volumes have increased from 310 billion tonnes km to 460 billion tonnes km during the same period. In a move to win back the bulk freight traffic lost to the road sector, the railways announced a slew of measures including a rebate of 20 per cent on bulk commodities transported in the empty flow direction (Kumar, 2005) As demographic dividend of India unfolds in the next fifteen to twenty years, there is likely to be a quadrupling of demand for passenger and freight services. To capture that demand, IR had a look at ways of expanding network and freight carrying capacity. It could not achieve this alone and was forced to invite private players as independent operators in freight business, or as partners to expand its network. 4 Railways: The Shift from socialism has passed us by (Financial Times, London, April 24, 2006). 5 This should not have come as a surprise. According to Drew Lewis, CEO of Union Pacific, The unique thing about a railroad is that the incremental of last 5 to 10 per cent of the business is where you make the money... The break-even point is very high, and the profitability after break-even is so inelastic it s almost a straight line up... We don t even have to double our business to double our profit. Off the top of my head, a 25 [per cent] increase in volume would more than double the profits. Union Pacific Corporation is one of America s leading transportation companies. Its principal operating company, Union Pacific Railroad, is the largest railroad in North America, covering 23 states across two-thirds of the United States. The Turnaround Story of the Railways The story of Indian Railways turnaround was never told in the same way as the turnaround of a commercial venture would have been covered by the media. Nor was it celebrated at stock markets. This is the most appropriate forum where we can document the steps which led the Indian Railways in the last two years to emerge as a commercially viable, businessoriented organization. 1. An increase in permissible axle load which had been about 22 tonnes, well short of the 30-tonne norm in other countries: With the use of concrete sleepers and longer and heavier rails, track capability, and strengthening of bridges (weak link in the rail network at present), the Railways is trying to reach international standards and in certain pockets operating nearly 30 tonnes axle load. 2. Improved quality of freight services: IR has entered into an agreement with CONCOR to run freight container trains on guaranteed transit times. It introduced roll-on roll off services on the Konkan Railways, tied-up with the Central Warehousing Corporation to provide more value added services as well as door-to-door transportation of freight. 3. Changes in monopolistic pricing policy: So blind was IR to the changes around it in the 1990s that over the decade IR actually raised freight rates 180 per cent for captive commodities such as steel. Tata Steel, the largest private metal company, duly cut its business with IR, while newer steel companies did not even have railway sidings, so uncompetitive had IR become. Over the past two years, IR has sought to amend its disastrous pricing, with some reward. Innovative pricing structure to suit the needs of customers was introduced with the intention of retaining existing customers and attracting new customers from road haulage firms. 6 The schemes have been broadly classified into three categories including volume growth incentive schemes, cargo aggregation schemes, and consignment volume based schemes. 7,8 The schemes have provided for 6 Concor tried to pass on the increase in haulage charges to Tata Steel in April Tata Steel stopped using Concor s services and drove a hard bargain until they got a competitive rate from them (The Business Line June 22, 2006). 7 The Railways has entered into a 30 year agreement to transport coal for the AVB Group s Rosa Power Plant. The distinctiveness of the contract is that the AVB Group will pay a 5 per cent premium over the freight charges for coal and the railways will pay a penalty of 5 per cent of freight charges if it fails to transport at least 85 per cent of the contracted amount of coal (Economic Times, May 16, 2006). 8 The Railways has begun to offer special packages to pithead projects in the power sector in order to prevent an erosion of its market share in coal carriage which constitutes half of its annual cargo load. Pithead projects are typically situated close to coal mines and thereby help to cut down transportation costs. The Railways is ready to lay

29 The Infrastructure Sector in India the formation of freight forwarders, a group of agents/ transporters/traders wanting to ferry small consignments to come together to book wagons for freight traffic. 4. Introduction of Double Stack Container Trains on certain sections of the network: Besides a cut in fuel consumption and reduction in infrastructural needs at railway stations, the Railways expects the double stack container trains to eventually ensure faster evacuation of containers from ports and Inland Container Depots, thereby, attracting bigger ships to run direct services to Indian ports. 5. Commercial development of railways land and air space: Sixty-two sites with commercial potential were identified and bids were finalized for seven sites. The Railways has constituted a Rail Land Development Authority through amendment in the Railways Act, 1989 to undertake all tasks relating to property development. 6. Privatization Initiatives: In March 2006, IR privatized container-freight operation, the first such initiative in its long and eventful history. 7. A new accounting system by September 2008, with phased transfer to the system from July The new system of accounting will make a clear differentiation between capital expenditure on infrastructure and operational costs. The shared costs for freight and passenger trains on track maintenance and railway station maintenance too would be apportioned according to usage in both segments of the railway business. This would help the Railways understand better the cost efficiency of both its businesses Rationalizing premium passenger fares: The Railways has been losing passengers in the premium segment as no-frill airlines spread their wings. The Railways has arrested that slide by rationalizing passenger fares in the premium segment also. In , it has gained an impressive 16.9 per cent growth in terms of premium class passengers (Table 1.1). 10 With all these reforms the Railways has made a turnaround. With a few more crucial reforms not only will it be able to tracks for the new power units likely to come up in Orissa and Jharkhand so that it can forge long-term agreements with them. The Railways has also devised a specialized scheme for short routes under which the turnaround time will be considerably reduced. Wagons which are open at the centre will be used, reducing the unloading time and allowing three trips per train per day (Business Standard, June 6, 2006). 9 An important accounting change conforming to commercial accounting practices was announced in the budget. This change allowed lease charges for financial leasing of rolling stock, which were hitherto charged to operating expenditure without segregating the interest and principal repayment components. These have now been bifurcated. This has resulted in a substantial 3 percentage point reduction in the operating ratio with the decrease in ordinary working expenses by Rs 1616 crore (Business Line, March 8, 2006). 10 First AC, Second AC, Third AC, and First Class are defined as premium segment. Table 1.1 Premium Segment Passenger Growth (%) Years: Railways Air Source: Mumbai Mirror (June 4, 2004) consolidate its position, it will also ensure its long-term survival and would be able to meet the challenges of rising demand of transport services of the country. Freight Business In February, 2006, with the Railways opening up the container operations space, fourteen companies had put in their applications with registration fee (license fee) totalling Rs 540 crore. Ten companies had applied for the Rs 50-crore category that allows transporting EXIM containers from all ports including the Delhi-JNPT route; whereas four had applied for the Rs 10-crore category that allows operations in specific routes. Companies in the Rs 50-crore category include Adani Logistics, Central Warehousing Corporation (CWC), Container Corporation of India, which is the incumbent, Dinesh/ETA (Emirates Trading Agency), Gateway Distriparks Ltd, Hind Terminals (MSC Group), India Infrastructure Leasing, MICT (P&O Ports), Reliance (a firm of Mr Anil Ambani), and SICAL Logistics. A model concession agreement to be signed between the container operators and Railway Ministry is in the final stages and is expected to be out soon. The Railway Ministry is getting the agreement vetted by other Ministries such as Commerce and the Department of Shipping apart from the Planning Commission. The Railways is being criticized by private operators on its earlier draft policy for container train operations, which failed to gather consensus approval despite several rounds of discussions. The new stakeholders feel that the Railways is working at cross purposes to its own stated objective of exploiting competitive forces to improve service and reduce costs. The first fixed rail infrastructure project built under publicprivate participation under the Rail Vikas Nigam Ltd (RVNL) became operational with a goods train traversing the newly converted Palanpur-Samakhiali link. RVNL has invited strategic investors to pick up equity stake in several rail link projects being implemented on PPP basis. The projects for which equity will be invited are Bharuch-Dahej gauge conversion, Krishnapatnam Rail Road gauge conversion, Surat- Hazira new line, Tughlakabad-Greater Noida (Dadri) new line, and Angul-Sukinda Road. Projects are likely to have equity participation by Adanis, ONGC and Gujarat Industrial

30 6 India Infrastructure Report 2007 Development Corporation and Gujarat Maritime Board, apart from RVNL, who are the principal users of the rail track at present. To provide thrust to the port connectivity projects, Special Purpose Vehicles (SPVs) will be floated under the aegis of RVNL. The SPVs will be floated to lay new rail lines between Hastavaram-Krishnapatnam, Surat-Hajira, Haridaspur-Paradip, Bhildi Samdari, Bharuch-Samni-Dahej, Arsikeri-Hasan- Mangalore, and Gandhidham-Palanpur (worth Rs 453 crore, for 313 km). These SPVs are to be floated soon so that these projects can be completed by Dedicated Rail Freight Corridor To augment the overall capacity, the Railways have proposed a 9260 km dedicated freight corridor at a cost of Rs 60,000 crore. The first phase of the project includes the Delhi- Howrah and the Delhi-Mumbai routes and is estimated to cost Rs 12,000 crore for the Delhi-Mumbai stretch and another Rs 10,000 crore for the Delhi-Kolkata stretch. RITES is conducting the feasibility study for the project. The Cabinet has approved an SPV under the Ministry of Railways for execution of the dedicated freight corridor. It has also constituted an empowered committee under the chairmanship of a Cabinet Secretary to monitor the implementation of the project and resolve inter-ministerial and state level issues. The project is to be completed in five to six years time. RITES has already given a feasibility, location survey, and detailed report on the costing of the project. The final location survey will be available by December AIRPORTS With the emergence of low cost carriers (LCCs) or no-frills airlines the metro airports are finding it difficult to cope with the increase in passenger traffic. The airlines sector has emerged as a fiercely competitive industry with the presence of a number of private and public airlines and several consumer-oriented offerings. The airline industry has witnessed tremendous growth in air traffic. Domestic and international traffic grew by 24.2 per cent and 18 per cent respectively in FY05. Private airlines now account for 76 per cent of domestic traffic. This growth has been the second highest in the world, next only to China, for the second consecutive year. The airports that witnessed major growth in domestic aircraft movements include Amritsar (293.6 per cent), Hyderabad (47.1 per cent), Vishakhapatnam (40.3 per cent), Delhi (24.1 per cent), Cochin (24 per cent), and Bangalore (24 per cent). Hyderabad is emerging as the fastest growing airport in the South recording a growth of almost 43 per cent in domestic passengers handled during April-March The main reasons for the increase in the growth rate are attributed to new low cost airlines and increase in the number of sectors being operated by Air Deccan. The total freight traffic handled by domestic airports grew close to 10 per cent during April-March compared to the previous period. Two greenfield airport project are under construction. Hyderabad and Bangalore international airports are scheduled to become operational by the middle of FY08. The International Civil Aviation Organization has approved the GOI s plan to build a second airport at Navi Mumbai. The airport would be near the two Special Economic Zones (SEZ) being set up in that area. First phase of the project requires an investment of Rs 2500 crore and bid documents are likely to be finalized by December A similar project is also being contemplated in Goa. The Airport Authority of India will invest about Rs 1500 crore to modernize at least ten non-metro airports in the country by The AAI has already identified twelve cities, which include Jaipur, Udaipur, Srinagar, Amritsar, Ambala, Thiruvananthapuram, Vishakhapatnam, Mangalore, Nagpur, Goa, Varanasi, and Trichy. Of these ten airports will be modernized using the PPP model. The air side of the modernization will be with AAI, which will include modernization of terminals, parking bays, taxiways, and runways. Growth in air freight services to and from India, especially in the wake of the burgeoning trade in the pharmaceutical and gems and jewellery sectors, has been attracting new players in this space. The major commodities being air freighted out of India are garments, machinery, components, pharmaceuticals, dyes, chemicals, and perishables such as fruit, vegetables, flowers, fish, and meat. But inadequate airport infrastructure continues to be a major roadblock stifling the growth in air cargo traffic vis-à-vis the potential available. Apart from the national carriers, Indian Airlines and Air India, new entrants such as Jet Airways, GoAir and Kingfisher Airlines have charted out plans to play a bigger role in the air freight market. Nagpur has quietly emerged as one of the country s most important logistics centres. Reliance Industries is charting a new flight path for its mega retail foray. The firm has set its sights on establishing a captive cargo airline venture to meet the logistics needs particularly for transporting farm and dairy products for its Pan-India retail venture. A fleet of cargo planes will be used to transport perishables, like fruits and vegetables, from its warehouses to the various retail outlets spread across the length and breadth of India. Reliance Industries is also planning to set up a small airport in Punjab to support this operation. The firm plans to invest over Rs 4000 crore in North India, especially in Haryana and Punjab, for its ambitious foray in the agri-business and agri-retail sector. If successful, agrofreight airports will become an integral part of the rural infrastructure.

31 The Infrastructure Sector in India One of the biggest reforms in the infrastructure sector in 2006 was the privatization of the Delhi and Mumbai airports. In February 2006, the government decided to award the contract to upgrade the Delhi airport to a consortium led by GMR, an Indian construction company, and Germany s Fraport. The group holds a 74 per cent stake in the new venture with the government s equity at 26 per cent. Delhi airport is operated by the Delhi International Airport Ltd (DIAL) at present. It plans to have runways ready for a fullyloaded wide-bodied aircraft including the largest airbus A380 to take off for direct operations to the US and Europe. The Mumbai airport contract went to GVK, another Indian construction company, and its partner Airports Company South Africa. Mumbai airport is at present operated by the Mumbai International Airport Ltd (MIAL), a joint venture company of the GVK group and the AAI. The modernization of the Mumbai airport includes construction of a six-lane elevated highway from the Western Express Highway linking the airport terminal directly. The proposed highway will connect with the proposed Mass Rapid Transport System (MRTS). The city-locked airport may also have a parallel second runway, additional exclusive terminal for domestic and international operations and a cargo terminal. The plan also includes a low-cost terminal for low-fare airlines. Airport Economic Regulatory Authority The aviation sector in India is at the threshold of a quantum leap with domestic demand as the main driver of this growth. The Indian aviation sector is responding, albeit late, to the technological changes in the aviation sector. Freight, airport infrastructure, and airport related logistics services will benefit immensly from this growth. The Naresh Chandra Committee, constituted in 2003 by the Ministry of Civil Aviation, to prepare a roadmap for the country s civil aviation sector, had mooted the idea of establishing an Airport Economic Regulatory Authority (AERA) which would have powers to determine capital expenditure and investments to improve airport facilities, check monopolies, set tariffs for aeronautical services, as well as prescribe standards for operations across airports. The airport regulator will prescribe tariffs every five years and monitor the economic and operational viability of airports. AERA would be independent of the Directorate General of Civil Aviation (DGCA), as proposed by the Ministry of Civil Aviation. The ministry feels the sector requires a regulator as it is embarking on greater privatization in the airport infrastructure sector. The regulator will only deal with the operations of the airports. Issues relating to airlines and anticompetitive practices in air transport services could be handled by the Competition Commission of India. The regulator would have all pricing regulation powers, while rule making would rest with the civil aviation ministry. The Ministry s proposal has not gone down well with the Finance Ministry and the Ministry of Company Affairs. The latter are of the view that the setting up of the aviation economic regulator will undermine the importance of the Competition Commission. The government proposes to set up a dispute settlement mechanism called the Airport Economic Regulatory Authority Appellate Tribunal (AERAAT) for the airport infrastructure sector. The tribunal, set up along the lines of the telecom tribunal TDSAT, will settle disputes among airport operators as well as those between airport users and airports. SPECIAL ECONOMIC ZONE In May 2005, the government approved a new Special Economic Zone (SEZ) Law. 11 The new law further improves the environment for setting up SEZs as it is more comprehensive than the earlier law and provides for a larger tax incentive package. However, the labour law environment remains restrictive. One of the attractions of SEZ is the availability of good infrastructure provided by SEZ investors so that there is plenty of room to scale up manufacturing. SEZs may help create high-quality infrastructure in a few pockets, provide a liberal and supportive business policy environment, and thus kick-start growth in manufacturing. They also allow the government to experiment with the liberalization of labour laws. SEZs provide scale-related advantages due to the creation of clusters, resulting in a reduction in manufacturing costs. SEZs can be particularly helpful for small and mid-sized entities, which cannot afford to set up captive infrastructure facilities, but can share the costs in a large group. Finally, they can help attract foreign capital and technology. The failure of the earlier SEZ policy (April 2000) has led the government to declare a uniform SEZ policy and cover all aspects of establishment, operation, and fiscal regime in a comprehensive manner under single legislation. The most important change is related to tax incentives. Under the new law, the period of corporate income tax exemptions has been increased to 15 years from the existing 10 years. Units in 11 The previous SEZ policy had made a number of improvements over the EPZ/EOU policy. The norm of a net positive foreign exchange requirement, to be calculated cumulatively over a period of five years, was a simplification over the then existing norms for value-addition and currency balancing. The automatic approval for 100 per cent FDI and exemption from SSI reservations were other steps in the right direction. The self-certification procedure also simplified customs and excise procedures and sales to the Domestic Tariff Areas (DTA). The extension of excise relief on purchases from the DTAs was to help foster linkages with firms outside the SEZs, though these firms suffered from the same unhelpful environment that the SEZs had been designed to insulate their firms from.

32 8 India Infrastructure Report 2007 SEZs will now be 100 per cent exempt from corporate income tax for five years; 50 per cent exempt for the next five years and, for the last five years, 50 per cent of the profits ploughed back will be exempt from tax. The government is also likely to provide greater operational freedom to the Development Commissioner as the key authority managing the SEZs. Recent Developments The country s largest SEZ at Mundra is expected to generate about two lakh direct and indirect jobs in the coming months and attract Rs 70,000 crore of investment in a decade, soon after the first phase of infrastructure is put in place by March The Mundra SEZ has adopted the popular Chinese model of One Levelling and Seven Connections and would develop land, levelled and landscaped with boundary walls and streetlights. The seven utility connections would comprise road network, power supply, water supply, drainage network and holding ponds, sewerage collection and treatment (common effluent treatment plants), telecommunication and infocom network, and gas. For providing medical and health facilities, it has tied up with the Apollo Hospitals Group to run a 50-bed hospital in the SEZ-Mundra Port complex. The Mundra SEZ has the potential to emerge as a major rival to Dubai, Sri Lanka, and Singapore in the Indian Ocean- Arabian Sea waterways. The SEZ, readying to emerge as an engineering manufacturing hub, would have a processing area for manufacturing, trading, and warehousing; a central business district; and social infrastructure comprising housing, healthcare, education, and recreation. Dubai Ports World (DPW), world s third largest container port operator, will invest in port-specific SEZs in Bangalore, Chennai, Delhi, and in international container transshipment hub at Vallarpadam island in Kochi Port. Dubai Ports will invest in projects such as rail connectivity, warehousing facility, inland container depots (ICD), container freight stations (CFS) and other port related investments. With the acquisition of P&O Ports, the DPW has direct control over Nhava Sheva International Container Terminal (NSICT) at Navi Mumbai, Chennai Container Terminal, Mundra International Container Terminal (MICT), and Kulpi Port (West Bengal). POWER The lack of reliable and affordable electricity has created the single most crucial bottleneck in India s development process. There is a flurry of activity in the power sector to remove this bottleneck and ease growth potential. The power ministry has set upon the onerous task of commissioning as many as 53 generation projects totalling 20,608 MW in as part of the Tenth Plan (2002 7) compared to the 19,015- MW generation capacity installed in the Ninth Plan period ( ). The rate of return for the state power sector is still negative 26 per cent (2005 6) compared to negative 32 per cent (2004 5) (GOI, 2006). But things have changed for the better. At least ten SEBs are now cash positive because state governments now pay the boards the subsidies they mandate; governments are entitled to give subsidies, and paying for these directly (instead of indirectly, and non-transparently) is a sign that the new laws are beginning to work. Of course, old dues have been securitized (Rastogi, 2003). Further, the level of power losses during transmission and distribution (approximately 40 per cent) has started to come down in small steps. Similarly, privatization in Delhi has been successful in financial terms because it has helped the local government to cut its subsidy bill by per cent from the levels prevailing around the turn of the century. The Government of Delhi has defended the privatization of the distribution sector in Delhi. Table 1.2 shows the overall shortage of power in Delhi in the first quarter of the year (April July 2005) according to the government. The central government has asked states to work on a multi-year tariff plan to protect consumers from yearly tariff shocks. This is a positive development in power sector reforms. Although the reforms in the distribution sector may not have changed the situation for the ordinary person in Delhi and other states in a discernable way and it will take a couple of years more to show a perceptible change in the quality and quantity of power available to small consumers. We look at Table 1.2 Power shortage in Delhi Energy (MU) Peak (MW) Requirement Availability Surplus/Deficit (-) Demand Met Surplus/Deficit (-) (MU) (MW) (MU) (%) (MW) (MW) (MW) (%) Source: ES

33 The Infrastructure Sector in India recent developments in the sector and studies which throw light on the way electricity supply is perceived by consumers. Recent Developments The National Electricity Plan, an integral part of the Eleventh Five-Year Plan ( ), has targeted a generation capacity addition of 67,000 MW and around 60,000 MW in the Twelfth Five-Year Plan ( ). 12 In order to achieve the plan target the Eleventh Five-Year Plan will contain several policy measures for the power sector. A working group on power is examining legislative and policy issues with respect to use of inputs such as coal, gas, and transport for the sector. The government is keen that the utility-based generation capacity should increase by 60,000 MW in order to be consistent with a growth rate between 8 to 9 per cent per annum (Planning Commission, 2006). The implementation of the Electricity Act 2003 which has liberalized captive generation and contains provisions for enhancing the choice for consumers is facing many hurdles. A merchant plant providing electricity through the open access has to pay cross-subsidy surcharge and additional surcharge. Most regulatory commissions have pronounced the timeline for introducing open access, and most of them have issued orders outlining the wheeling charges and cross-subsidy surcharge applicable in the context of open access. The regulators have tended towards fixing charges that protect incumbent providers and diminish the commercial feasibility of the open access provision. 13 This is adding uncertainty to the plans of private investors who are eager to harness the open access avenue by establishing additional generation capacity. Similarly, determination of tariff for surplus power from captive facilities is emerging as a contentious issue. The utilities and regulators are accused of bargaining down the price of surplus power from captive facilities. In short, investors/traders/and generators who were seeking to harness the trading and open access provisions of the Electricity Act 2003 are becoming wary because the regulatory and other 12 Of the 67,000 MW planned capacity by 2012, 20,000 MW will come from hydro-generation, 40,000 MW from coal-based power generation, 3000 MW from nuclear power-generation and 4000 MW from non-conventional energy sources. Around 50 per cent of the generation has been planned from the central sector, 30 per cent from the state sector and the rest from the private sector. 13 Take an example of an HT consumer in Karnataka. To entice him, a supplier sourcing power from the eastern region would have to be able to procure electricity at Rs 2 per unit or below (so that the final cost of open access power after adding inter-state transmission charges of Rs 0.40 per unit, cross-subsidy surcharge of Rs 1.15 per unit, intra-state wheeling charges of Rs 0.27 per unit could be competitive in comparison to the current tariff applicable to the consumer). practical issues pertaining to implementation of these provisions are still evolving. The government is going to upgrade a total of 225 power plants, both thermal and hydroelectric, at an estimated cost of Rs 12,404 crore by renovation and modernization which may help in generating an additional 12,263 MW in In a recent survey carried out on perceptions in the change in quality of electricity supply, behaviour of line staff, billing/ bill payment, the increase in tariff shows some interesting results (Santhakumar, 2006). Madhya Pradesh stands out with majority reporting a worsening quality of supply in all its dimensions whereas the quality seems to have improved in five states (West Bengal, Gujarat, Tamil Nadu, Karnataka and Orissa), but with a reasonable increase in tariff in three of them (Orissa, Tamil Nadu, and West Bengal) (Table 1.3). Majority reports little change in quality in four states (Haryana, Andhra Pradesh, Punjab, and Rajasthan) but see an increase in tariff perceived to be unreasonable in three of them. In the three states where majority saw an improvement in quality with a reasonable increase in tariff, privatization was attempted in one. In the case of others, such improvements have taken place within the state-owned utilities. The situation in Orissa where privatization has taken place is particularly notable since the majority in that state has expressed satisfaction also over the performance of line staff and procedures of billing (Table 1.3). The state level picture of opposition to privatization and willingness to pay (WTP) more is quite revealing. High opposition to privatization is when about 70 per cent of the respondents are against it. There is much variation between states in terms of the WTP more. In this regard, the states are grouped into three categories and what is interesting to note is that states with high or medium WTP have low opposition to privatization (Table 1.4). The research shows that the higher the level of consumption of the majority of domestic consumers, the easier it is to implement reforms. One strategy to implement reforms mainly by improving distribution efficiency by reducing AT&C, then, could be to isolate geographical areas (within the states) where substantial sections of people consume more electricity and pay higher average tariff, and un-bundle the power distribution of such places into separate entities. 14 Thus, it seems, it is politically viable to implement the strategy of first reforming commercially viable segments of the distribution network, as envisaged in World Bank (2004) and IDFC (2001). The distribution systems in such localities (probably some cities or industrial areas) may be isolated to provide better quality service at close to cost tariff structure (Santhakumar, 2006). 14 Distribution reforms are one of the conditions for set up of megapower project policy.

34 10 India Infrastructure Report 2007 Table 1.3 Categorization of States with regard to Perceived Improvement in Quality of Electricity Supply and Increase in Tariff Reasonable Increase in tariff Unreasonable Increase in tariff Improvement in Quality Orissa, West Bengal, Tamil Nadu Gujarat, Karnataka No Change in Quality Haryana AP, Rajasthan, Punjab Worsening of Quality Bihar UP, MP, Maharashtra Source: V. Santhakumar, Table 1.4 Categorization of States based on Opposition to Privatization and willingness to Pay More High Opposition Medium Opposition Low Opposition to privatization to Privatization to Privatization High WTP Karnataka, Gujarat, Bihar, MP Medium WTP West Bengal Maharashtra Rajasthan, Haryana, Punjab, UP Low WTP Source: V. Santhakumar, Kerala, Tamil Nadu, AP Box 1.1 Electricity Generation in China India is not the only country surging ahead to improve the availability of power in the country. China is also expanding its power generation capacity. China added power generation capacity of 67,710 MW in 2005, with a further 70,000MW of capacity expected in China is undertaking large urbanization projects to connect more of its people to the power network. Hence, the power grid is central to China s economic growth as it has invested heavily in power intensive industries such as steel making, aluminum and copper smelting, along with manufacturing activities from car making to electrical appliances. Apart from the industrial demand, domestic demand is also expected to be huge as more than 400 million people are still without electricity. In 1987, China used to generate 100,000 MW which grew to 200,000 MW in March 1995, 300,000 MW in April 2000, 400,000 MW in May 2004, and 500,000 MW in September In other words, China took 40, 8, 5, 4 and one and quarter years respectively to add 100,000 MW. Compared to this the Indian government is targetting capacity increases totalling 100,000 MW over the next ten years. Source: Power market: Industrialization fuels demand by Kevin Morrison, Financial Times, May 9, 2006 APDRP The Accelerated Power Development and Reforms Programme (APDRP) in the present form has achieved some results and there is an urgent need to accelerate the pace of reduction in AT&C losses, which will ultimately pave the way for more private sector investments. The Planning Commission expressed serious concern over the slow progress in the reduction of AT&C losses after the APDRP s implementation. 15 The Commission observed that 15 In the year AT&C losses were 36 per cent which translates into losses of Rs 24,000 crore incurred by SEBs. the present rate of reduction in AT&C losses by a paltry 1.5 per cent it would take at least 15 to 20 years to reduce it to a level of 10 per cent to 15 per cent. The Planning Commission would like that State Electricity Boards (SEBs) take four to five years to achieve the level of per cent. States have claimed that the present system of allocation of funds under APDRP routed through states is causing delays and thereby, affecting various initiatives in the distribution sector. Many states feel that there should be direct allocation of central funds to power utilities under the APDRP. The Abraham Committee has been constituted by the Centre to make recommendations to rework the present format of APDRP. The committee is to undertake restructuring of the

35 The Infrastructure Sector in India programme in line with the Integrated Energy Policy of the Planning Commission. States have objected to the linking of funds under the APDRP for distribution reforms with unbundling of state utility. The country s power requirements could jump four-fold over the next twenty-five years if demand grows on average by 6 per cent per annum which is reasonable if the economy is expected to grow at 8 per cent plus rate. The supply of coal cannot be relied upon forever, while hydrocarbon reserves in India are meagre. Hence, hydroelectric and nuclear power are obvious options in the long term. Quite aware of this dilemma the government in the past one year has concentrated on policy issues which will alleviate the shortage of power immediately through the surplus captive power generation to be sold to the grid, in the near future (5 10 years time) through the construction of mega power plants, in medium term (10 15 years time) through the hydro electric power generation and in the long term (more than 15 years time) through the nuclear power generation. The issue of distribution reforms is still on the agenda but rising demand of electricity has forced the government to concentrate on generation of electricity once again. Captive Power The all India installed generation capacity of captive power plants of 1 MW and above is estimated at 18,740 MW (from approximately 2350 plants) as on March 2005 and the estimated capacity addition from captive power plants in the next five years is around 12,000 MW. The Electricity Act 2003 has liberalized norms for establishing captive power generation in India. Besides other reforms and policy measures contained in the Act such as delicensed generation, freedom to captive generation including group captive, recognizing trading as an independent activity, introduction of open access in transmission and multiple licenses in distribution and so on, further heralded the way for progress of the sector. Sale of surplus power from the captive generating plant to the grid is, however, subject to regulatory control. The Tariff Policy, while recognizing the right of the state governments to impose duties, taxes, cess on sale or consumption of electricity, states that these could potentially distort competition and optimal use of resources, especially, if such levies are used selectively and on a non-uniform basis (see footnote 13). The sole purpose of freely allowing captive generation to sell electricity to the grid is to enable industries to access reliable quality and cost effective power. This purpose is defeated if tax levies are imposed selectively on the basis of sources of generation such as captive generation. Thus, to harness surplus capacity to overcome the power shortages there is a need to review these cess or duties and rationalize them so that the industries and service sector can avail reliable and cost competitive power. Ultra Mega Power Projects The Government of India (GoI) has embarked on an ambitious mission of adding 20,000 MW of generation capacity by 2012 through implementation of five Ultra Mega Power Projects (UMPP) of 4000 MW each at a cost of Rs 80,000 crores. To meet the policy objective which aims at providing universal electric service at competitive and affordable prices the Government of India formulated Power for All by 2012 mission. After a disastrous record of the recent past when eight fast-track power projects could not be built for one reason or the other, the government is taking a different route to add new generation capacity. To ensure that there are no last minute glitches, GoI has structured a PPP to prepare the projects and transfer them to private investors (Table 1.5). Power Finance Corporation (PFC) is the nodal agency to float SPVs for each of the identified projects. These SPVs would have the responsibility of ensuring various key inputs for the projects like preparation of detailed project report, land acquisition, allocation of fuel linkages or coal blocks, allocation of water, appointment of consultants for Environmental Impact Assessment, power evacuation, rating of projects, approvals and statutory clearances, off-take or sale of power under section 63 of Electricity Act 2003 and so on. Once all the inputs have been tied up and requirements met, these SPVs would be transferred to potential investors, thereby, reducing initial time to start construction of the power plants. The aim is to create and sell running companies with locked-in approvals to investors in India, the US, Europe, and even China. The five UMPPs are planned in MP, Chhattisgarh, Gujarat, Maharashtra, and Karnataka. The bidding procedure for all five will be via competitive tendering, based on the criteria of lowest tariff per unit of power. Apart from foreign companies such as GE and Caterpillar, domestic companies such as Tata Power Company along with Siemens Project Ventures GmbH, Essar Power, GMR-CLP Power India are keen to participate in the tariff-based bidding process. The winners of the Sasan and Mundra projects, announced in December, 2006 are Lanco Infratech Ltd. and Tata Power respectively. There will be no free party for state governments when it comes to the setting up of new thermal power projects within their boundaries. The Planning Commission has expressed its concerns over flaws in the process of development of UMPP. Pointing out that the feedback from potential bidders, equipment suppliers, and financiers is not very encouraging, the Commission has

36 12 India Infrastructure Report 2007 Table 1.5 Status of UMPP Projects Status Sasan, MP Mundra, Gujarat Bhasma, Orissa Krishnapatnam, AP SPV formed, detailed project report (DPR) ready. SPV formed, DPR ready. SPV yet to be formed, Consultant appointed. SPV yet to be formed, Consultant appointed. Land Demarcation of 3,500 acres completed. MP to issue order for land acquisition. Acquisition of 2,700 acres is expected to be completed soon. Confirmation on alternative sites is awaited. Details of 2,300 acres for power plant and 300 acres are filed with the District Collector. Water Permission to get cusecs from Rihand Reservoir is granted. Permission from Gujarat Maritime Board to draw sea water from Gulf of Kutch is awaited cusecs from Ib river is given. A barrage is to be built. Permission to draw sea water is filed with AP Maritime Board. Fuel Linkages Coal blocks of Moher- Amlori are allocated by Ministry of Coal. Imported coal linkages to be established by the investor. Coal blocks are yet to be allocated by Ministry of Coal. Imported coal linkages to be established by the investor. Environmental Clearance EIA completed EIA completed and CRZ clearance awaited Site not yet confirmed EIA not yet completed Girye, Maharashtra SPV formed but site is not yet confirmed. Tadri, Karnataka SPV formed. Environmental clearance is a hitch. Project is on hold. Akaltara, Chattisgarh SPV formed. Project is on hold as state government wants free power from the project. Source: Business Standard (August 25, 2006). said that the lending community is looking to some form of payment security in light of all the uncertainty. Further, for the bidding to produce credible and comparable bids, the project structure must first be in place. This structure must be acceptable to the ultimate buyers of the power and the lenders, as well as to the Central and the State Regulators concerned. The Planning Commission has also questioned the role of SPVs and the Fuel Supply Agreements as it is not clear who bears the fuel supply and price risk and to what extent. There is some local opposition to these plants as they will emit large volumes of carbon mono oxide and demand huge quantities of water for cooling purposes. The Asian Development Bank has proposed a few methods of risk mitigation for FDI through foreign exchange hedging, and has agreed to extend hedging coverage to developers of the UMPPs. The government sought the involvement of ADB in developing specific financial instruments for UMPP since each such project requires investment of nearly Rs 16,000 crore and involves both domestic and international players. Hydro Power Against India s hydro power potential of 84,000 MW, just about 20 per cent has been exploited so far. To give a major fillip to hydro power generation, the government has finalized a new set of guidelines for development of projects over 100 mega watt by the private sector through competitive tariffbased bidding. The biggest advantage of a hydro-electric power plant is that it produces clean and environment-friendly energy at low generation costs with attendant benefits of irrigation, flood control, drinking water supply, navigation, recreation, tourism, pisciculture, and so on. It has a very long life and can meet sudden increases/decreases in demand for power as it takes less than an hour to start or shut a hydro-electric turbine (see Box Bhakra Dam). The government has decided to set up shell companies 16 to implement large hydel power projects of more than 100 MW each in an attempt to expedite capacity addition in power generation. Just like shell companies meant for UMPP, the shell companies will be required to prepare project reports, acquire land and get necessary environment clearances. Additionally, the SPVs will also conduct preliminary relief and rehabilitation (R&R) work as well as prepare a detailed R&R plan, study the transmission system, and analyse the 16 A shell company is defined as a company that is incorporated but has no significant assets or operations.

37 The Infrastructure Sector in India demand for power from different states. The SPV will be transferred to the successful bidder selected through a tariff based international competitive bid. The Ministry of Power has identified around 162 spread across 16 states throughout India. Detailed reports for 78 projects totalling an installed capacity of over 30,000 MW are underway (MoP, 2006). A special requirement of hydel projects is the availability of long term funding at reasonable interest rates for back ending of tariffs so that the cost of power during the initial years is reasonable. The Power Finance Corporation has developed special schemes for funding hydro projects with tenures of up to twenty-five years to address the issue of back ending of tariff. By reducing the quantum of free power earmarked for the home state during the initial years and then increasing it during the terminal years, the state would ensure that the project remains viable while maintaining an average of 12 per cent free power over the life-time of the project to adequately compensate the state for local area development as well as for rehabilitation of displaced people (MOP, 2006). Almost 6500 MW of hydel power capacity has been added in the past five years, nearly double the thermal power capacity commissioned in the same period. Among the major construction companies, L&T, Gammon, and Nagarjuna Construction are developing hydel projects. Patel Engineering, a construction company involved with dams, also proposes to take up projects as a developer. Himachal Pradesh, Madhya Pradesh, and other states are providing incentives to the private sector to develop small hydro-power projects in their states. Nuclear Power The Expert Committee on Integrated Energy Policy has set out a comprehensive energy plan for India in the long-term (Planning Commission, 2005). According to the Committee, if India wishes to grow at 8 to 10 per cent annually up to 2031, it will need to produce five to seven times more electricity than today s supply. With skyrocketing oil prices and pressure to join the Kyoto Protocol, putting a cap on emission of carbon mono-oxide, India can meet growing domestic demand for energy through nuclear power plants. Technologists know that many of the dangers attributed to nuclear power plants are equally, if not more, applicable to hydrocarbons. The Indo-American Nuclear Co-operation Promotion Act of 2006 will lead to more efficient import of nuclear technology and equipment which will ultimately translate into higher nuclear power generation. Construction work is in progress on eight reactors with plans being drawn up to build more such reactors under international safeguards. The eight reactors being built would, after completion, lead to an increase in nuclear power generation from the current 3900 MW to 7280 MW in a few years time. State-owned NTPC could be the first company to foray into nuclear power with plans to set up generation capacities of up to 2,000 MW. NTPC has already engaged experts from Nuclear Power Corporation and the Atomic Energy Commission to procure technology based on long-term fuel supply, keeping in mind the geo-political issues for venturing into this area. The power ministry has sought a formal clearance from the DAE (Department of Atomic Energy) to allow NTPC to build and operate nuclear power stations. India signed an agreement, along with six other countries, to establish a multi-billion-dollar nuclear fusion energy project in Brussels. Representatives of six countries India, the US, Russia, China, South Korea, Japan, and the European Union signed a formal agreement paving the way for establishment of the International Thermonuclear Experimental Reactor (ITER) fusion energy project, which is to be built in Cadarache, France. With positive tariff policies and opening up of the private sector for transmission and distribution, the sector is likely to see heightened activity over the next couple of years though the Prime Minister s Energy Co-ordination Committee is worried that 75,000 MW capacity addition required by 2012 to sustain 8 9 per cent growth would not be met. According to the Committee, under the most optimistic scenario, India would be able to add only 30,000 MW capacity by CERC order on Power Trading Margin Less than three per cent of India s total generated electricity is bilaterally traded, with the Power Trading Corporation having 70 per cent of the market share, and the WBSEB (West Bengal State Electricity Board), DVC (Damodar Valley Corporation), and the Himachal Pradesh government being the important suppliers. The trading, being mostly inter-state/ inter-regional in nature, requires open access through the central transmission unit network. There has been an upward trend in the price of traded electricity. Sellers dictate the prices by inviting bids. Successful bidders get limited supply and sell the same to the deficit states along with their trading margin. In January 2006, CERC capped the trading margin for short term power contracts at Rs 0.04 per unit. Further, there is congestion in the network, and barriers to entry still exist. Adopting measures for easy access of new entrants to the growing market; ensuring a competitive pricing system; and creating an efficient, transparent, and equitable trading mechanism are necessary to fulfil the mandate enshrined 17 Business Standard (August 14, 2006).

38 14 India Infrastructure Report 2007 under the existing legislative and policy framework in the electricity sector. TELECOM The success of the telecom story is already well known. With 4.5 to 5 million new telephone connections being given out every month, the country could have 250 million telephone users by December Phone ownership is growing rapidly in India. India can boast of the world s cheapest mobile call rates at less than one rupee (2 US cents) a minute. Buoyed by the positive customer response to call rates and better-thanexpected teledensity in 2005 (11.4 per cent against 8.6 per cent in 2004), the Department of Telecommunications (DoT) is planning to revise upwards the target of teledensity to 22 per cent by According to ITU (International Telecom Union), India is far behind the US and China which have a teledensity of 60 per cent and 23 per cent respectively. France (73 per cent), Germany (86.4 per cent), and UK (102 per cent) also have a high teledensity. Though, it will take time for India to catch up with Chinese teledensity, it has been recorded that more Indians than Chinese are acquiring mobile telephone services each month. China s mobile subscriber base is growing at a compounded annual rate of 11 per cent, compared with 31 per cent for India, the fastest-growing major market worldwide. In June 2006, India became the fifth member of the 100m mobiles club, joining Russia (130m in February), Japan (141m in January), the US (170m in January) and China. The acceleration in the growth of the Indian mobile market is a result of a 93 per cent fall in the cost of calls since 1998 and growing availability of affordable handsets apart from pro-reform government policies. More than 90 per cent of Indian mobile users have signed up since January Four years after it was permitted in 2002, Internet Telephony usage has finally come of age. From a mere 56 million minutes of usage during the third quarter of , it has gone up to nearly a billion minutes during the fourth quarter ended March 30 as adequate bandwidth is made available to Internet operators. Internet telephony is bigger than the outgoing international long distance (ILD) telephony market, which is estimated to be around 600 million minutes a quarter. Calls using Internet telephony are cheaper as they do not have to pay access deficit charges. Though telecom service in India is the cheapest in the world, the service providers are still making good profits. They posted revenues of about Rs 87,962 crore in , a growth of 30 per cent over last year s Rs 67,523 crore (Voice & Data, 2006). Regulators as well as the government believe that there is still room for the telecom services to deepen in the country. The new telecom based services can provide jobs in towns and villages as telecom network becomes a vehicle to deliver many public services and other value added services. The service providers feel that telecom tariffs can be further reduced if government reduces license fees. Apart from this, the Telecom Regulatory Authority of India (TRAI) is looking at a number of crucial policy issues such as spectrum charges for 3G services, regulations for IPTV, convergence related issues, interconnect charges for SMS, and roaming to ensure that the entire nation can benefit from this technology. Telephone Tariff Tariffs seem to have really hit rock bottom. After the new TRAI regulation, an STD call charge can be broken up into three components access deficit charge (now 1.5 paise), mobile termination charge (30 paise), carrier charge (65 paise). All this adds upto about 97 paise. So, in effect 3 paise is what remains as an operator s profit in a Re 1 per minute call. The Ministry of Finance has agreed in principle to the telecom commission s proposal for reducing the fee for unified access service license (UASL). The ministry has asked the DoT to provide projections on the revenue impact of a proposal to introduce a uniform 6 per cent fee for a universal access service license (UASL). 18 The Ministry is fairly confident that revenue will not be adversely impacted, but would like to be assured by informed projections. Besides the license fee, overhauling of interconnect charges could also bring down the call charges. Changes in the interconnect charges are also under consideration. Interconnect Charges TRAI has decided to overhaul the entire interconnect regime to make it capacity or bandwidth based against the present system which is distance and usage based. The new interconnect usage charge (IUC) regime is expected to be in place by January Since IUC is within the telecom regulator s domain, TRAI can notify the changes without any approval from the DoT. In the capacity-based IUC regime, termination and carriage costs will be eliminated. Operators hooking on to another company s network will have to pay for the interconnect port s capacity in one go. The port can then be used for unlimited call carriages and termination. This obviates the need for metering and billing. The new norms would be based on the principle of sender keeps all, which means that once the operator has paid the one-time charge for the port, it keeps the revenue rather than sharing it. 19 The shift to the new norm 18 Currently, telecom operators providing basic and cellular services under the UASL have to pay a fee ranging from 6 10 per cent of their adjusted gross revenue based on the category to which their circle belongs. For the metros and A circles, the revenue share is at 10 per cent, for B circles it is 8 per cent and for C circles, it is 6 per cent. 19 Currently, operators pay 30 paise a minute for terminating a call on another operator s network. For carrying long distance calls on a

39 The Infrastructure Sector in India will see death of distance i.e. call charges for local or a longdistance calls would be the same. The new system will also help the transition to the next-generation network (NGN), which will enable service providers to offer a wide range of services (voice, data, and video) over the same platform. The changes in the interconnect regime will lead us to a more mature market where unlimited calls come for a fixed rate per month. Most such offers, though, come in markets where the growth begins to stagnate and India is still some years away from that. Spectrum Allocation With the unprecendented expansion of mobile telephony subscriber base in the country, the spectrum available to mobile operators has not been able to keep pace with the demand, resulting in poor quality of service and congestion. The allocation of spectrum has been the bone of contention among mobile operators. To roll out 3G telephony, mobile operators need larger bandwidth. At present, it is allocated to operators by the DoT, based mainly on the type of technology used and the subscriber base. TRAI has circulated a consultation paper on allocation and pricing of 3G spectrum and submitted its recommendations to the GoI in September, 2006 after taking into consideration views expressed by operators and users (TRAI, 2006a). The industry is divided regarding the preferred basis for allocating spectrum between subscriber-based allocation of spectrum and cash-for-spectrum formula. The former, by definition, is subjective and hence, vulnerable to severe disagreement. The cash-for-spectrum (auction) seems to be a better alternative as it allows the prospective service providers to decide the price based on their business plans. However, experiences of the auction of spectrum for 3G services in Europe and for 2G services in India (in 1995) have not been very good. Nevertheless, the consultation paper has observed that undesirable outcomes can be simply remedied through appropriate auction design. The DoT has agreed, in principle, to the finance ministry s suggestion of raising Rs 1000 crore from telcos applying for 3G spectrum licences. The amount is meant to fund new equipment purchase by the armed forces so that they can vacate spectrum which, in turn, could be allocated to telecom service providers awaiting the same. The splitting of the Rs 1000 crore among different defence services is yet to be worked out. 20 It national long distance (NLD) provider s network, they have to pay carriage cost, which is capped at 65 paise a minute. 20 The Air Force could be the first amongst the Defence Services to vacate spectrum for use by mobile operators. This is because the work for providing connectivity to the Air Force access points as part of the Rs 1000 crore exclusive optical fibre cable project for the three armed forces is likely to be completed by the end of The spectrum is important for authorities to ensure that the spectrum is put to the best possible use, in an efficient manner. With the roll out of the 3G services, convergence of broadcasting and telecommunications is not far away. Convergence TRAI issued a consultation paper again on Issues relating to Convergence and Competition in Broadcasting and Telecommunications to resume the debate on convergence (TRAI, 2006b). The issue is fraught with many intractable problems. One of the most important questions is how to allow entry into voice services as it hinges on scarce availability of spectrum. Furthermore, there needs to be a reasonable (low) level of entry fee, eligibility criteria, and regulatory obligations for such licenses. The consultation paper does not adequately encourage the traditional providers of data (Internet Service Providers) and video (broadcasting and cable) services to fully exploit their capabilities to offer voice services. This way the license regime recommended by the authority would not allow licensees to take full advantage of the technological developments. It would restrict the type of services which could be potentially offered, and thus, there will be inefficient utilization of resources and diminution of economies of scale and scope. Value Added Services Value-added services (VAS) are gaining importance in the country. Value added service are provided by mobile telephone service providers to their subscribers. These include services such as downloading a ringtone, tracking cricket score, stock prices, mobile gaming, etc. The turnover of the VAS is approximately Rs 500 crore in a year and is expected to grow many folds by The industry has enjoyed a year-onyear growth of 100 per cent over the last two years and the trend is expected to continue for the next five years. The industry operates on revenue sharing principle between mobile operators and VAS providers. So far, the revenue share has been heavily biased towards the operators with VAS providers getting as low as 10 per cent to 20 per cent. Among VAS, the most popular service is downloading of mobile music followed by SMS-based infotainment services provided by TV channels such as Sony, Star, Mauj, and NDTV. Broadband Users Broadband subscriber base stood at around 1.4 million, at 18.4 per cent of the 7.1 million Internet subscribers and dialup connections still remained predominant at 63.3 per cent released would be allocated to operators for offering the existing mobile services as well as 3G (next generation mobile services) services.

40 16 India Infrastructure Report 2007 Box 1.2 WiFi Everywhere but No User in Sight WiFi is available almost everywhere in Taiwan. There are 4100 hot spot access points reaching 90 per cent of the population in Taiwan but only 40,000 of Taipei s 2.6 million residents have agreed to pay for the service since January, Q-Ware, the local Internet provider that built and runs the network, once expected to have 250,000 subscribers by the end of 2006, but it has already lowered that target to 200,000 now. That such a vast wireless network has attracted so few users in a tech-hungry metropolis should give pause to other wireless network providers in other countries. Source: NYT June 26, 2006, What if They Built an Urban Wireless Network and Hardly Anyone Used It? By Ken Belson. (TRAI, 2006c). Despite the regulator s best efforts, broadband use is refusing to take off. Though wired broadband services are available in 300 towns in the country, subscriber figures are still negligible at nearly 1.4 million. Adoption of new technology by consumers is quite uncertain not only in India but in developed markets as well (Box 1.2). Indications are that wireless broadband services primarily based on the WiMAX technology, which is likely to be opened up by the government in 2007, will become popular in Telecom Service Quality The telecom revolution of India is well documented but not everything is nice for the customer. Issues like frequent call drops, poor connectivity, unwarranted messages, telemarketing calls and absence of a consumer redressal cell still pester the consumers in the country. After five years of regulation and nearly twenty-four consumer advocacy groups continuously expressing displeasure over the Quality of Service (QoS) of telecom providers in India, five out of eleven mobile operators in the country have fallen short on their performance parameters vis-à-vis 2004 on issues such as sales, pre-sales, network quality, billing, customer care, and valueadded services. Network performance satisfaction is also substandard, especially, in rural India. Both the GSM and CDMA networks score low on user satisfaction. Billing complaints have continued to mount. 21 For almost all the operators, there was a significant decline in satisfaction level of customers. Undersea Cables Connectivity to the World The story of the telecom revolution of India is not complete without the mention of the international dimension of controlling stake in undersea cables acquired by Indian companies, a fact which is not so well known. The undersea cable business shifted across continents to Asia after the tech meltdown in The Indian owners of undersea cables are 21 The third VOICE&DATA Mobile Users Satisfaction Survey. Reliance Communications (which bought out Flag Telecom) and the Tata-owned Videsh Sanchar Nigam Limited (VSNL) which owns Tyco. Realizing that undersea cables are the lifeline for the export of IT enabled services, Reliance is now building a new cable system called Falcon, which, when operational, will connect Africa and the Persian Gulf to Asia and the rest of the world. Part of the system connecting India with the Middle East is already operational. VSNL is already a part of the Se-Me- We-3 and Safe consortiums. The former is a 38,000 km cable connecting South East Asia, the Middle East, and Western Europe, while Safe is a 28,800 km cable with landing stations in Malaysia, Mauritius, and South Africa, thus making VSNL the third largest undersea cable operator in the world. To strengthen their market share, VSNL is investing $600 million to lay submarine cables, one between India and Europe and, the other, intra-asia. The new capacity will be available for use by end With this VSNL will have a 200,000 km undersea cable system criss-crossing the globe. Flag and Tyco continue to be the world s largest submarine cable systems. Recently, VSNL also acquired a leading wholesale international voice player Teleglobe. It is the largest voice over Internet protocol provider in the world. URBAN INFRASTRUCTURE A new wave of megacities, with more than 10m inhabitants, and metacities conurbations of more than 20m are gaining ground across Asia, Latin America, and Africa according to the United Nations State of the World s Cities Slum management presents one of the developing world s greatest challenges, as poor countries brace for a rapid expansion in urbanization. JNNURM After the launch of Jawaharlal Nehru National Urban Renewal Mission in January 2006, fifty-seven of the sixty-three cities have made concerted efforts to submit city development plans of their city to the Ministry of Urban Development. MoUs

41 The Infrastructure Sector in India have been signed with six states Andhra Pradesh, Gujarat, Madhya Pradesh, Maharashtra, Tamil Nadu, and West Bengal and seventeen cities. Apart from city-development plans, fifty-eight projects costing Rs 2252 crore have been sanctioned. Also, Rs 266 crore have been sanctioned as the first installment of additional central assistance. In the current year, Rs 4596 crore have been budgeted for the JNNURM. A few of the important urban projects which have begun work are the eight-lane 162-km Outer Ring Road (ORR) project, first in the country, encircling the twin cities of Hyderabad and Secunderabad. Phase I of the much-awaited Rs 4,000-crore project is likely to be completed when the Hyderabad International Airport becomes operational in mid Russian and Taiwanese infrastructure majors have begun work on different stretches of the road. The Mumbai Trans Harbour Link project has shortlisted pre-qualified bidders. The project developed on BOT basis is expected to be completed by It consists of a six-lane road bridge of 22 km from Sewree (Mumbai side) to Nhava Sheva (main land side). UMTS The success of the Delhi Metro Rail has prompted a few megacities to make determined efforts to have metro rail as mass rapid transit system. The Ministry of Urban Development (MoUD) has decided to introduce a common act governing all the metro rail transit systems in the country. At present, there is no common Central act governing the operations of metro rail. The new act will be framed on the lines of the Central Motor Vehicles Act. A uniform act will help the Metros operate within and outside the municipal areas alike. Now the Metro system cannot extend beyond the prescribed municipal boundaries without obtaining prior permission from the municipal corporation. The Union Cabinet has also decided that in the construction of Metro Rail systems, the respective State Governments would choose the gauge to be adopted. Metro rail could soon become an industry of over Rs 50,000 crore if all the projects for which the Delhi Metro Rail Corporation (DMRC) has submitted detailed project reports to various states are implemented. DMRC has ten Metro projects in the pipeline. Apart from Delhi, work on Mumbai and Bangalore metros is also under way. The other projects the DMRC is considering include those for Hyderabad, Ahmedabad, Kochi, Chennai, Kolkata, and the extensions from Delhi to Noida, Gurgaon, and Ghaziabad. The Mumbai Metro s first line between Ghatkopar and Versova has been won by the Reliance Energy Limited (REL) consortium. Other members of the consortium are mass transport system operators Connex SA, France, and MRT Corporation, Hong Kong. The latter will provide technology solutions and take care of the operational side of Mumbai Metrorail. This is the first metro rail project under PPP using viability gap funding from the central government. The Bangalore Metro Rail project will now be implemented for a 33 km long route by Bangalore Metro Rail Corporation Ltd (BMRCL). The BMRCL is a joint venture between the Centre and the Karnataka government. Currently, Bangalore Metro Rail Corporation is wholly owned by the Karnataka government. The work will start on the 7-km stretch connecting the Karnataka State Cricket Association (KSCA) stadium on M.G. Road and Byappanahalli. This stretch of the metro will be ready by December Both, Mumbai and Bangalore have chosen standard gauge for their metro rail systems. The Hyderabad Metro rail project that seeks to decongest dense traffic zones in the city with a fast transport network is also poised to get central government support to make it financially viable. The modalities of the project are yet to be finalized. Unlike other cities Indore has chosen rapid bus transport system as the mass transit system for the city. This system became operational in the last one year and, using new technology, the system is being improved to meet the city s mass transit needs (Box 1.3). Jaipur, Pune, and Ahmedabad are also developing pilot projects of the Bus Rapid Transport System (BRTS). Box 1.3 Indore City Transport Service The main objective of Indore City Transport Service Ltd (ICTSL) is to create a specialized and effective regulatory agency to monitor cost effective and good public transport services. The ICTSL will soon introduce global positioning system (GPS) based on an online bus tracking system (OBTS) and Light Emitting Diodes (LED) system to offer better facilities to commuters in the city. It will be for the first time in India that such a system is used for bus services. ICTSL will have a control room for OBTS where every bus will be fitted with a GPS-based tracking device with online data transfer facility. With this, estimated time of arrival could be flashed on display screens at 50 bus stops and the passengers waiting for the buses would know the arrival timings and other information related to the buses. The service was started in the second week of March The number of buses is expected to increase to 100 within a year. The ICTSL s Rs 868 crore BRTS system has been approved by the MoUD under the JNNURM. In the first phase of the BRTS, Agra-Bombay Road will have the BRTS system, later on it will be extended to the Riverside Road, A.B. Road, and Ring Road.

42 18 India Infrastructure Report 2007 RURAL INFRASTRUCTURE The Bharat Nirman Yojana and the Jawaharlal Nehru National Urban Renewal Mission are the time bound programmes of the central government to achieve overall development in rural and urban areas respectively. The television, mobile telephony and slowly improving rural roads are reducing the rural-urban divide. Kirk Johnson, a sociologist at the University of Guam who has studied the impact of television in rural India, believes satellite TV will change social and economic patterns as well as provide poorer country-dwellers with information they can use to improve their lives (Johnson, 2002). A significant impetus to the current enthusiasm over India s medium-term economic growth prospects is the country s favourable demographic transition. The UN puts the population s median age at around 24.3 years in India, compared to 32.6 in China and 35.1 in Korea. At present, some 63 per cent of India s population is in the agegroup, while slightly more than 50 per cent is under 25. Over time, however, India s working-age population proportion will swell. The Indian economy is, therefore, poised for a major demographic bonus. In general, while East Asia s workingage population share will peak around 2010, India s share should continue rising for the next two decades. Aware of this unprecedented opportunity coming India s way, the issue of rural development has excited many scholars. Providing urban facilities to rural areas is one model propounded by Prof. Indiresan (Box 1.4). There is a strong belief among some researchers that the best way to provide rural infrastructure services is through the market mechanism (Box 1.5). India s household savings rate has risen from 17 per cent in , to 24.3 per cent in Being a late economic boomer, India s saving-investment dynamics from here will follow the virtuous cycle experienced by much of Emerging Asia in the 1980s, with a higher saving rate aiding higher investment. The private consumption-gdp ratio, therefore, is likely to fall, despite the expected consumption boom. The expected rise in the saving rate will position India to boost investment substantially above the current 26.3 per cent of GDP. A higher saving rate by itself is unlikely to boost India s economic growth. What is critical is that economic policies gainfully employ the increase in working-age population largely settled in rural areas. The government launched the National Rural Employment Guarantee Scheme (NREGS) on February 2, The scheme provides enhanced livelihood security for the poor in rural areas by providing at least 100 days of guaranteed wage employment in every financial year to every household whose adult members volunteer to do unskilled manual work. This is a major milestone in the social sector in Some economists believe that the NREGS can be used to build rural infrastructure. The schemes adherence to unskilled manual work has attracted a few criticisms and some economists believe that the scheme suffers from incentive incompatibility (Box 1.6) Over the years, rural infrastructure development has simply not received the kind of attention it needs and deserves. It has not attracted the required levels of investment, either from the public sector or the private sector. Whether it is roads or telecom, water or power, warehousing or banking, the latent needs of rural India far exceed the supply. The latent demand of almost all goods is well appreciated by mass-market product companies. Corporate India is rushing to rural India to unlock its economic potential. ITC and HLL started their journey a long time back to sell their products. Reliance India Ltd and Bharati Group are venturing into commercializing the agricultural sector of the country to unlock the wasted potential of the country s farms and making India one of the biggest exporters of fruit and vegetables. The idea is to connect India s farms with the world by modernizing the supply chain. Improving rural productivity will require significant investment in rural infrastructure and these corporate houses are ready to do so. However, public investment in irrigation and watershed management as well as greater expenditure on rural roads to improve access and connectivity will be the key to improve productivity. Bharat Nirman The main objective of the Bharat Nirman Yojana is to build rural infrastructure and provide a platform to guarantee rural employment, health, and education through REGS, National Rural Health Mission, and Serva Shiksha Abhiyan respectively. It is a time-bound plan for rural infrastructure by the GoI with state governments and Panchayti Raj Institution implementing it over the period of The programme s total outlay is Rs 174,000 crore. The mission received budgetary support of Rs 12,160 crore in and Rs 18,696 crore in A separate window for the rural roads component of Bharat Nirman is to be opened under Rural Infrastructure Development Fund (RIDF) XII with a corpus of Rs 4000 crore in Specific projects under the PPP model would also be allowed to access RIDF funds. RIDF XI sanctions touched a level of Rs 7301 crore as on January 31, 2006 (Table 1.6). The main criticism of the mission is that there are no tangible plans for PPP. As of now, it is a contractor-client relationship, not a partnership for development. The mission suffers from three risks, namely, non-sustainability, short-term opportunity for a few contractors, and possibility of getting stuck in a low-development trap.

43 The Infrastructure Sector in India Box 1.4 PURA Providing Urban Amenities in Rural Areas P.V. Indiresan PURA is a scheme that empowers villagers to enjoy urban amenities without moving out of their habitat. Obviously, individual villages are too small to support even one amenity of urban quality. For that reason, PURA connects together a cluster of villages in such a manner that any facility in any one village is accessible to all others. Then, each facility enjoys a market equal to the combined population of all villages, large enough to make it commercially viable. President Kalam has explained that PURA requires four types of connectivities physical, economic, electronic, and knowledge. In practice, PURA provides four types of amenities to households potable water, smokeless fuel, modern sanitation, and internet plus four others at the community level, transport, education, healthcare, and economic services like banks, warehousing and the like. In this manner, PURA aims to raise rural prosperity to urban levels and halt (even reverse) rural-urban migration. It plans to do both without sacrificing rural ambience (Table B1.4.1) and without depending on perennial subsidies. As PURA provides urban amenities without sacrificing rural ambience, it is best described as a rurban habitat and the process rurbanization. Table B1.4.1 Rural Ambience Urban Ambience Item Urban Ambience Rural Ambience Water Import Self reliant Waste Export Local recycling Housing High-rise apartments Low-rise houses Daily commuting Long hours Little or none Neighbourhood Isolated; dormitory Close companionship Open fields Far away Walking distance PURA is planned as a habitation of about 1 km in width, restricted to a walking distance of about 500 m on either side of a ring road some km in circumference. This configuration has been chosen because it minimizes the length of all infrastructure and hence, capital costs of development substantially (Figure B1.4.1). Such a layout has several other advantages in terms of land requirement, capital, congestion and commuting from one place to other. Inner Unbuilt Area Fig. B1.4.1 A Comparison of an Idealized PURA with Rectangular Grid Note: Both patterns have the same area of 30 sq km. Both have similar access with all points within half a kilometer to the main road(s). In the former case, total length of all main roads equals 60 km and in the latter case, for same main road length is 30 km. None of the eight types of amenities listed above can be sustained without the support of a number of high income families, about a thousand of them for a start. Then, PURA should attract substantial number of organised businesses. That will happen only when it is more profitable for organised businesses to locate in PURA rather than in (congested) cities. The services offered should also be of urban quality (not the sub-standard quality prevalent in villages).

44 20 India Infrastructure Report 2007 Evidently, PURA is capital intensive whereas, by tradition, rural development is designed to be labour intensive. Most proponents of labour intensive development overlook the importance of Return on Investment (ROI). However small the capital, if ROI is negative, the system will have to be on life-support forever. If ROI is positive, however large the capital, the effort will be selfsustaining. Hence, the issue is not how much capital PURA needs but whether it is profitable. Located as it is among villages, purchasing power of money is high in PURA in the sense that one rupee in rural India buys more material and labour than in urban India. In addition, as infrastructure lengths are minimised by the ring design, capital costs are decreased further. Hence, we should expect PURA to offer a higher ROI than do existing congested, and hence, expensive cities. Proponents of both labour intensive and capital intensive development would do well to take a careful look at PURA: it promises both what they seek and what they are not getting job creation and urban amenities, the first at urban wages and the latter at rural prices. In addition, as every point in PURA lies within walking distance of open fields, and is planned on modern lines, it will offer a quality of environment unmatched by either villages or cities. (Figure B1.4.1) Note: Views expressed are the author s personal views. Box 1.5 Rural Infrastructure and Services Commons * RISC Atanu Dey The idea of RISC is to bring to the rural population the full set of services that are normally available only in urban locations. It works within the constraints of limited resources by concentrating investments on specific locations to obtain economies of scale, scope, and agglomeration. USERS Services Level Market, Education, Health, Informational, Governmental Infrastructure Level Power, Telecom, Physical Plant Fig. B1.5.1 The Structure of RISC RISC follows the logical trend of moving away from vertically integrated institutions to horizontal segmentation and specialization. Thus, conceptually and operationally, a RISC has two levels: the lower one is the infrastructure level (I-level) which provides a reliable, standardized, competitively-priced infrastructure platform consisting of power, broadband telecommunications, and the physical plant (building, water, air-conditioning, sanitation, security). I-level is achieved by the coordinated and cooperative investment of firms that specialize in component activities (Figure B1.5.1). The user services level (S-level) is above the I-level. Co-located at the S-level are firms that provide user services such as market making, financial intermediation, education, health, social services, governmental services, entertainment, logistics, and so on. The presence of the I-level reduces the cost of the services and therefore, the prices that the users face. Economies of scope and agglomeration are obtained by the presence of the variety of different service providers. Given that rural populations are poor, it is reasonable to expect that the aggregate demand of a single village for any single service will be very low. However, the aggregate demand for, say, 100 villages for a single service could be significant. Aggregating the demand for many different kinds of services of the same 100 villages would translate into a lot of services. These services would require infrastructural inputs which can be commercially and sustainably supplied. Thus, a RISC would supply to the needs of about 100 surrounding villages. The total rural population of India can be covered by about 6000 RISCs each servicing the needs of approximately 100,000 people. Further external economies of scale can be obtained by implementing a few thousand RISC locations across the rural landscape. Access to an RISC for any rural person would be only a bicycle commute away.

45 The Infrastructure Sector in India Operationalizing RISC The distinction between the I-level and the S-level becomes apparent at the operational level. I-level is provided by a small number of firms which specialize in the provision of infrastructure. The essential requirement is that the investments from these various firms are coordinated. This resolves the coordination failure generally associated with investments that are large, lumpy, which have large lead times in implementation, and have long pay-back periods. These can be private sector or public sector firms. There is an element of planning in the creation of the I-level. But it is not a top-down, bureaucratic, government imposed centralized planning. It is a coordinated investment in various components of the infrastructure so that they all make each other mutually viable. The role of the government is the highest at this level. The government has to facilitate the process of the creation of the I-level first through light-handed regulation. Second, it has to give required tax incentives to the firms. Third, the government may be required to facilitate investment through loan guarantees. Finally, it has to help with the acquisition of land required for the projects. The model does not require the government to directly fund any of the infrastructure. The firms providing the infrastructure will base their investment decisions on adequate return on investment, of course. The infrastructure will be used by, and paid for by the firms which are at the S-level and which provide the services that users demand. The composition of firms at the S-level will be almost entirely market-driven. There would be two basic categories of services. First, services which the users are willing and able to pay for the benefits to the users of the services will be greater than the costs. These are the income-enhancing services such as greater market access. Second, services which are not fully priced such as government services and those provided by NGOs and charitable entities. *Dey, Atanu and Vinod Khosla (2003), RISC Rural Infrastructure and Services Commons, web document, Note: Views expressed are the author s personal views. Rural Electrification Driven by the government s desire to enable universal access to electricity, the Ministry of Power has chalked out a blue print Mission 2012 which sets out milestones to be crossed in the coming 5 years. This exercise entails additional electrification of 62,000 villages by 2007, 18,000 remote villages by 2012, and complete electrification of all households by The Rajiv Gandhi Grameen Vidhyutikaran Yojana (RGGVY) was launched in April 2005 to complete household electrification within next five years time and modernizing the rural electricity infrastructure. The scheme also lays special emphasis on sustainability of rural supply through collection of the cost of electricity from the beneficiaries. To achieve this objective, it is proposed that franchisees like NGOs, consumer associations and so on will be deployed with appropriate involvement of Panchayati Raj institutions. The State Governments will be free to provide appropriate targetted subsidy to poor households. Reliance Energy Ltd has taken up the massive task of electrifying 7220 UP villages as a part of the RGGVY. The company completed 50 per cent of the task allotted to it by the Agra-based power discom Dakshinanchal Vidyut Vitran Nigam Ltd by May National Hydroelectric Power Corporation has also taken up rural electrification projects in West Bengal, Bihar, Jammu and Kashmir, Orissa, and Chhattisgarh. It would implement rural electrification projects in 1100 villages spread over twenty-seven districts of these five states. US Agency for International Development (USAID), in alliance with General Electrical (GE), has identified several villages in India for promoting rural electrification, using renewable energy technologies like bio gas. For the rural electrification programme, the GE Global Research Centre in Bangalore has developed an integrated hybrid technology model which combines various forms of renewable energy, and provides customised power solutions based on availability of local fuel resources. Rural Roads The rationale for public investment in rural roads is that households can exploit agricultural and non-agricultural opportunities to employ labour and capital more efficiently. Empirical results from Bangladesh suggest that rural road investments reduce poverty significantly through higher agricultural production, higher wages, lower input and transportation costs, and higher output prices. A collateral advantage of rural roads is that it leads to a higher rate of schooling for girls and boys. Thus, rural road investments are pro-poor, meaning the gains are proportionately higher for the poor than for the non-poor. The Pradhan Mantri Gram Sadak Yojana (PMGSY) and the road component of Bharat Nirman are not two separate programmes. The rural road connectivity component of Bharat Nirman is to be achieved through PMGSY which is an ongoing programme. Under Bharat Nirman, the goal is to provide all-weather connectivity to every habitation with

46 22 India Infrastructure Report 2007 Box 1.6 NREGS, Local Infrastructure and Governance* Ashima Goyal Specific features designed to improve governance are a welcome feature of the NREGS. These partly meet criticisms against past similar schemes. But there are lacunae in implementing the checks and balances put in. In addition some improvements are required in the design of incentives for the lower level bureaucrats involved. It is normally difficult to give a clear incentive to bureaucrats since they have multiple tasks. The structure of the NREGS, however, makes this possible. Rewards for these officials can be focused on the delivery of durable assets. Since rules specify that 60 per cent of the expenditure has to be on employment, both, objectives of employment and improving village productivity can be achieved. The essential decentralization initiatives have also to be strengthened. One way to do this is to tap into and revive past cooperative local management of water bodies. The NREGS is well suited to do this, given its emphasis on water harvesting. The NREGS and Incentives for Delivery The Indian government has a long history of schemes meant to alleviate poverty in rural areas. But poverty persists. Poor design and implementation lead to leakages and a poor success rate. The late Rajiv Gandhi s statement (after his visit to Kalahandi in Orissa) that only about 15 per cent of money meant for the poor actually reaches them is famous. The Employment Guarantee Act (EGA) legislated on 22 August, 2005, consciously builds in features to improve delivery of employment and assets. First, there is universal targeting to remove bureaucratic discretion, a major source of corruption, delay and leakage. All those who are registered in a village and offer themselves for work are eligible. Muster rolls of the eligible, of those given employment, and of work done, are to be posted in public places. Panchayats are also to maintain job card and asset registers. The Right to Information Act (October 13, 2005) makes it mandatory for officials to give information to citizens on request. Second, the legal right to work, together with measures to ensure transparency, is expected to encourage citizen action to ensure delivery (Bhaduri, 2005 and Drèze, 2005). 22 Rural poor are guaranteed 100 days of work per household every year. To ensure support, a reduced payment is made to the applicant if no work is available. Third, no contractors are to be used since they have been a major source of corruption and kickbacks in public works. Fourth, the Centre will provide 90 per cent of the required funds directly to the panchayats, thus, cutting out intermediaries such as state governments that are further potential sources of leakage. Local panchayats are responsible for identifying the works and implementing the scheme. It is easier to make lower levels of government accountable to citizens. Delivery of assets is expected to improve since the work is to be used to strengthen local infrastructure and thus raise productivity. Labour intensive projects are to be taken up, especially, water harvesting etc. NREGS aims at providing work, and not just a dole. Only manual work is offered at the state minimum wage or 75 per cent of the national minimum wage, whichever is higher. This is meant to encourage self-targeting and limit the liability. Critics, for example (Virmani, 2005), have focused on the huge fiscal costs of what they see as ineffective giveaways. They expect soft government jobs to be created with no real work done, a waste of public funds through leakages, and a pressure to continually extend the employment, with the next government announcing more schemes. 23 The fiscal cost is expected to be about $9 billion or Rs 150,000 crore a year if one member from each of the 150 million rural families wants relief work. 24 But in the first year of its operation, even the Rs 11,300 crores earmarked for an initial 200 districts were not spent. Many have argued that current multiple schemes must be shut down to make this the sole rural poverty alleviation scheme. Virmani (2005) estimates upto 75 per cent of the required funding can come from such rationalization. Further, combining the land area development plans of local panchayati raj institutions (PRIs) with the NREGS would improve their incentives to create good quality assets since more of their own funds would be involved. Since the scheme only offers insurance against seasonal unemployment it cannot remove poverty for that productive labour intensive employment has to be created. Moreover, since only cyclical low quality labour will be available for employment it cannot alone be relied upon to create a robust rural infrastructure. While Virmani would like to see Bharat Nirman, meant to create rural infrastructure, 22 Drèze (2005) points to the successful use of RTI in Rajasthan to clean the muster rolls and improve delivery in the National Food for Work Programme (NFFWP). Compared to 5 other sample states, including West Bengal, where muster rolls were impossible to trace or found to be fudged, the rolls were accurate and easy to obtain in Rajasthan. In an example of activism, NGOs asked Sonia Gandhi to intervene when Solapur collector, Manisha Varma, was transferred after she arranged for public reading of NREGS muster rolls in order to detect bogus payments. The transfer orders, from the Maharashtra Chief Minister, came after resistance from her staff, who were used to pocketing payments (Times of India, Mumbai Edition, September 2, 2005). 23 A clause put in the NREG bill provides that it can be discontinued only through a Parliamentary majority. 24 Since state minimum wages vary from Rs 25 to 135 a day, the average wage paid is expected to be about Rs 60 per day (as stated in the NREG Bill, introduced to the Lok Sabha on 21st December The EGA has the scope to set the wage as Rs 60, subject to notification. This has been criticized since state minimum wages vary widely over India, and so labour supply may over- or under-respond in different areas. Despite pressure from the finance ministry that wants to be able to budget a committed amount, States have resisted implementing it). With wages to material costs expected to be in a ratio of 60:40, the cost per person per man day of employment will be Rs 100. D.R. Mehta (2005) argues, based on experience with drought relief work in Rajasthan, that the percentage of daily workers will not be more than 5 per cent of the total population or 10 per cent of the working population of the country, the wage bill then would be 30,000 crore, and including the 40 per cent material component would rise to 50,000 crore. For the first few years, since the scheme will be implemented in about 200 districts, the expenditure would be lower. A ramp-up will take time.

47 The Infrastructure Sector in India amalgamated with the NREGS, Rao (2005) argues that this will effectively kill Bharat Nirman, preventing any robust creation of rural assets. But coordination is necessary across multiple schemes in order to rationalize, create synergy, and save resources. For example, NREGS is not linked to the PMGSY since funds come from different sources for different aspects of the latter. The State pays for planting trees along the sides, and the Centre for land acquisition. But the roads are to be handed over to the PRIs to be maintained by them in five years. Road maintenance is a good means of absorbing cyclical rural unemployment. Another set of criticism comes from the working of the Maharashtra EGS (MEGS) and other government schemes for rural India. The MEGS had initial successes, especially in water shed development, that enabled diversification into horticulture. But it was unable to remove chronic rural poverty. Criticism 25 of the working include organizational failures such as poor coordination, lack of technical competence and involvement of local beneficiaries. Specific complaints are that work given is too distant to be useful; wages are too low so that no one comes; work and wages are not given in time. The NREG Act tries to take care of some of these aspects, specifying reduced payment to be made after a set number of days of not being given work, an extra allowance paid for work at a distance, transparency in lists to help prevent delays. But ultimately improvement depends on well-integrated incentive structures. The Outcome Budget shows the poor record of national schemes in creating rural employment. 26 Even so, the NREG Bill document uses this record as a justification for launching a new, hopefully more effective scheme. Terhal and Hirway (1998) noted that conflict in a top-down inflexible bureaucratic structure between the revenue department and the technical departments led to organizational failures in MEGS. The first was responsible for the employment guarantee and the second for the quality of assets constructed. Bagchee (2005) also details the administrative conflicts, but finds local politics and awareness contributed to resolving these. Panda et al. (2005) indicates poor training as well as technical, coordination, and administrative skills of local officials. There was no uniform record-keeping or accounts and too many activities were undertaken. Terhal et al. (1992) points out that the topdown choice of projects resulted in the overemphasis on constructing buildings and roads following the requests of line departments. Less capital-intensive activities such as soil and water conservation meet local needs better, yet require fewer resources. They cushion the poor against yield shocks and induce private investments in land improvement that raise long-term agricultural productivity. Since such activities also require less of non-labour inputs there is no trade-off between employment and asset creation objectives. Community participation, local enthusiasm, and maintenance of such assets are also better (Barrett et al. 2004). However, according to Krishna Vatsa 27 community assets are poorly maintained. Household assets and task based payments worked better in the MEGS but these are not there in the NREGS. Decentralization Decentralization of the task to lower level politicians may improve delivery and reduce corruption; it can also do so at lower cost. Chandrashekar (2005) argues that relying on NGOs for schemes such as watershed development and monitoring has raised the cost. Many NGOs have come up only to utilize the funds made available for such purposes. So local responsibility and social audits through gram sabhas or sansads (village voter bodies) is a better option, unless the NGOs are local, such as self-help groups. The NREG Bill mentions such audits. But are local bodies sufficiently independent and active to make this feasible? Studies show that local public works and poverty-alleviation schemes worked well when there was devolution of funds to the panchayat. This led to a large reduction in costs and leakages. The elected body was able to exercise control over the local administration (Ghatak and Ghatak, 2002). The 73rd CAA extended panchayati raj to the entire country, established procedures and a three-tier structure, mandated proportional representation for weaker sections and reserved one-third of the seats for women. Formal accountability of the PRIs to the people was extended beyond just the five yearly elections, since the panchayat had to report to the annual gram sabha and the six-monthly gram sansad. Gram Sansad meetings were constituency level meetings of about 700 voters, held to examine the progress of existing programmes, suggest new ones, choose beneficiaries, inspect accounts and budgets. The meetings and their recommendations had a legal status. Such meetings are being held in West Bengal, for example, since But the system has yet to become fully functional in many states. Even in states such as West Bengal, where PRIs have been functioning for the longest time, they tend to be dominated by males; sansad meetings are thinly attended with only party workers and beneficiaries of the schemes participating; they are dominated by the CPM, the party in power in the state; devolution of funds from the state government to the PRIs is not satisfactory; although central government funds are devolved, bureaucrats retain control; the PRIs raise hardly any money themselves through user charges or local taxes, so there is no incentive to use money efficiently; coordination between different plans, technical expertise, and creation of durable assets is poor. The better off complain that the focus is on welfare schemes and not on public projects; this is a major reason why they do not participate. 25 Early (Terhal et al. 1992, Terhal and Hirway, 1998) and more recent assessments (Panda et al. 2005) concur in these findings. I thank R. Radhakrishna and Srijit Mishra for making the reports available, and Srijit Mishra for summarizing points made in a 2005 IGIDR workshop on the NREG Bill. 26 This is a compilation of desired outcomes for government schemes and was tabled in the Lok Sabha for the first time on August 25, Against a target of crore mandays of employment for the Sampoorna Grameen Rozgar Yojana the achievement was only 9.41 crore mandays; against a target of 15 crore mandays for the first quarter of the year, achievement was only 7.31 crore for the NFFWP. There were complaints that sufficient funds were not released. These two schemes are to be merged into the NREGS. 27 Secretary, Relief and Rehabilitation, Government of Maharashtra, associated with the MEGS. Remarks made in a presentation on the MEGS at an IGIDR workshop on poverty alleviation, May 2006.

48 24 India Infrastructure Report 2007 Kerala has had relatively more success with its people plans of the late 1990s; competition among political parties was an important motivating factor in organizing them. But in Karnataka, where panchayati raj was not preceded by a re-distribution of land, rural elites have tended to capture the PRIs, although the newer reservation polices are making a difference by distributing political power more evenly. The most successful PRIs were those where leaders pushed for inclusive programmes that created assets. But since true empowerment encourages voting based on performance, outcomes become uncertain, explaining the reluctance often observed to fully empower (Ghatak and Ghatak, 2002). People kept poor may continue to vote for politicians who give them subsidies. Since some local empowerment helps build grass roots support for political parties, they are motivated to provide it. Political competition, the push from NGOs and increased public awareness, explain why political parties are supporting local self-government. Politicians are being forced to accept more checks on themselves. Although PRIs have not been fully empowered in many states, and even elections are not held, the funds available under the NREGS themselves form a strong incentive to get PRIs functioning. Effective decentralization may require going directly to communities and habitats and creating stronger links from the latter to the PRIs. Yardstick competition among states can spread best practices. It will be a long process, but the NREGS will help push it. The speed with which it was initiated did not give sufficient time for raising local awareness about it. NGOs play a role in this but creating interactive discussion in state radio will also help. 28 Early survey-based reports suggest that states, aware of potential political dividends, are making an effort to implement the NREGS. Since heterogeneous States and districts are involved, reports are conflicting. A series of reports have appeared in Business Standard (Menon, 2006) based on visits to 3 states. Corruption and apathy continues in implementation suggesting that awareness has to be raised and training of functionaries and supervision by Gram Sabha and NGOs improved. Junior engineers are holding up sanctions of projects, demanding money. An asset had been built only on one site. Career based incentives linked to asset-creation will make these officials keener implementers, and reduce delays and graft. Gender The steps taken to empower women in political and civic activities have been very fruitful in improving village surroundings. The 73rd CAA also reserved one-third of panchayat pradhan positions for women. Chattopadhyay and Duflo (2004) find that in villages with women leaders more was spent on public goods relevant to their needs such as water and roads. But in traditional villages local bodies tend to be conservative and dominated by elites. The view that village (gram) panchayats headed by women have delivered better governance, is contested with allegations that women heads and representatives just serve as dummies for controlling male interests. Panchayati raj has also reduced the user rights that women and weaker sections had earlier enjoyed on the village commons. More independence of women has sometimes provoked a backlash in the form of increased violence against them. 29 These may be transitory features but the solution requires reservations (with some minimal qualifications or training) to be combined with greater economic opportunities, strengthening communities, a stronger awareness of rights, and legal backing for those rights. Awareness has been rising and NGOs continue to contribute to it. The NREGS has one-third reservation for women, and will itself contribute to their economic empowerment. Initial reports suggest women seem to be making good use of it. 30 In villages where women are leaders, the selection and maintenance of assets may be better. It has been remarked that although construction of water bodies was the strength of the NREGS, maintenance of community assets created remained poor. It seems more than just monitoring by Sansads is required. It may be necessary to revive the tradition of ownership, and voluntary labour in the provision of public goods. Villages had such a tradition linked to the water economy. Water and local self-governance: Per capita availability of fresh water in India is currently the lowest in the world, 60 per cent of diseases are water borne. Water is also essential for sanitation; more than 80 per cent of villages and village schools are still without sanitation. Investing in safe drinking water may do more for improving health and reducing poverty than even the availability of more food (Radhakrishna, 2005). Therefore, water is a public good whose availability will benefit equally to the poor as well as the better off in the rural community. Only about a quarter of agricultural area is irrigated in India. Farming continues to depend on the vagaries of the monsoon, with bankrupt farmers forced to commit suicide out of desperation. Till the end of the 1980s there was a total neglect of village water bodies and sanitation. Then as the Supreme Court and NGOs became very active in the water sector a new water policy was announced. The NREGS, if successful, can have a salutary effect on the water economy of Indian villages, 31 since 7 out of 9 items in the NREG Act refer to water, irrigation and flood control, with water conservation and water harvesting as the first priority. This is particularly so if it is used as the seed to revive and revitalize older traditions of cooperative local management of water bodies. * This write-up is a condensed version of the author s paper Incentive Structures in the Employment Guarantee Scheme (2006). Note: Views expressed are the author s personal views. 28 I thank Apoorva Oza for this point. 29 S. Galab s presentation of a case study of an Andhra Pradesh selfhelp group at an IGIDR workshop on poverty alleviation in May A survey of three of the six NREGA districts in Rajasthan shows the scheme has been well implemented. Preliminary work had strengthened the muster rolls. Transparency is good, with entries in job cards matching the rolls. Panchayats are maintaining all the prescribed registers and accounts (Ghildiyal, 2006). But the women worker turnout is high, between 50 and 99 per cent. Menon (2006) reports that in more feudal UP, women workers are deliberately excluded by non-provision of creches, and are paid lower wages. 31 The discussion of the village water economy draws upon Sengupta (2001, 2002) and his presentation, at an IGIDR-UNDP workshop on 5th September 2005.

49 Table 1.6 Outlay of Bharat Nirman The Infrastructure Sector in India S. Sector Target 2009 Required Invest- Present Status Disbursal Financing Implementing No. ment (Rs cr) agency 1 Irrigation* 10 m hectares m 944 cr to cover State govt. additional 0.6 m hect by Rural Housing 6 m houses 1.54 m in Rs 2260 crore Rs 25,000 per DRDA (Rural BPL) household 3 Rural Electricity 1,25,000 villages 10,366 villages Rs 1100 crore 90% capital REC & 23 m households -subsidy, 100% capital subsidy to housholds 4 Rural Telecom 66,822 (11/07) ,251 USO funds USO Admin (Sep 2006) Authority 5 Rural Roads 66,802 habitations Rs 3749 crore 100% central MoRD (>1000 pop) (Sept 2005) govt 6 Rural Drinking 55,067 habitations 4050 (2005 6) (ARWSP- 50% central govt State Water Jan 2006) Governments Source: Compiled by author. Note: * Target is to be met by ongoing major and medium irrigation projects a population above 1000 (above 500 in hilly, tribal, and desert areas) by Accordingly, 66,802 habitations are to be provided with all-weather connectivity under PMGSY during Rural Telecommunication Currently, the rural tele-density in India stands at a meagre 2 per cent compared with urban teledensity of 31 per cent. The TRAI has proposed a subsidy of Rs 8,000 crore for creating necessary infrastructure which will raise the teledensity in rural areas from the current 1.9 per cent to 15 per cent by With this kind of subsidy support, it will be possible to install 20,000 base stations in rural areas to cover about per cent of the villages. The government has amended the Indian Telegraph Act to include mobile services in rural areas under basic telephony. Cellular operators now will be able to access the USO (universal service obligation) fund to finance telecom infrastructure in rural areas. Besides, they will also get the government subsidy enjoyed by the basic telecom service providers in rural areas. NGOs and CBOs play a very important role in implementing rural development programmes. However, there is no proper documentation and sharing of experiences among these organizations or with the outside world. There are very few academic institutions in the country that are involved in implementation of the development programmes at village level. An NGO the Byrraju Foundation, founded by Satyam Computers has established a Centre for Rural Transformation. Its Research and Training Institute in Hyderabad is to provide a link between field level implementation and knowledge creation and dissemination (Box 1.7). CONCLUSION It is beyond doubt that the strong foundation which infrastructure must provide to an expanding economy like India is fairly precarious at present. It is widely believed that the single most important macro constraint on the Indian economy, holding back its average growth, is the low spending on infrastructure. But it is probably true that the worst phase of India s infrastructure problems (communications, transport, power) is over. In the case of even the most intractable problem (power), the solutions are in sight and the results have begun to trickle in. Lack of quality power remains the Achilles heel and one hopes that it will get fixed in three to four years time. India is infamous for its poor quality infrastructure but there is one area the country can look at with some pride and other sectors emulate. The pace at which wireless carriers have rolled out their networks and services has been extraordinarily rapid for a country such as India where economic reforms are implemented at a snail s pace. Another success story is the turnaround of the Indian Railways. The Railways undertook the reforms by holding the tariff line, curtailing the staff strength, commercial initiatives,

50 26 India Infrastructure Report 2007 Box 1.7 Research and Training Institute Centre for Rural Transformation Despite the efforts of the government for improving the quality of life in rural areas, there is a felt need for better documentation and sharing of experiences by NGOs. There are very few academic institutions in the country that are closely and directly involved in implementation of the development programmes at village level. Centre for Rural Transformation s (CRT) Research and Training Institute (RTI) was inaugurated recently to provide a link between field level implementation and knowledge creation and dissemination. Objective of the Institute is to spread knowledge of various models that are being developed and deployed in India and abroad to address issues faced by rural people. A great deal of work has been done in areas such as health, women and child care, education and adult literacy, water, livelihoods, agriculture, women empowerment, housing, environment and sanitation, and so on. The centre would like to identify best practices in India and elsewhere in rural transformation, testing and validating them in the field and disseminating such knowledge to sustain rural transformation through chronicling of operational problems in rural transformation interventions, and tracking the impact of interventions for rural transformation. The Center would adopt the strategy of designing and conducting competence building programmes, providing advisory services/ handholding support, publishing research work in national and international journals, developing and publishing, teaching and training material and best practices for knowledge dissemination. The Institute will forge alliances and partnerships for knowledge creation and dissemination with Civil Society Organizations, SHGs, Cooperatives, Panchayati Raj Institutions, government departments and agencies involved in rural development/ rural transformation work, Corporate Social Responsibility groups, academic institutions, and funding agencies. Source: Byrraju Foundation. capacity expansion where the economy required and not where political exigencies demanded while maintaining core issues like governmental structure and determination of tariff mechanism. Thus, the Railways responded to the competitive challenge by introducing three types of microeconomic changes. First, it enhanced the economic value generated by railway assets. Second, it increased the economic linkages between transport and other assets in the economy. Third, it is in the process of reassigning risks and modifying incentives between the public and private sector associated with asset productivity improvement such as giving licenses to private sector to operate container trains. As can be gauged from the recent initiatives by the government, India is on the verge of emerging as a major player in the civil aviation industry. Many factors have combined to provide the much-needed impetus to civil aviation development in the country. However, there will be speed breakers in the pursuit to develop and grow which will aid removal of barriers and ensure a successful, if shaky takeoff. The opening of the sector to greater private and foreign participation is a positive move. India s dream of replicating the success of the telecom sector in other infrastructure sectors is tough due to the inherent nature of the other sectors. Nevertheless, lessons learnt from the accomplishments of the telecom sector are not lost. The government wants to harness allocative and financial efficiency by using PPPs to build new ports, roads, railways, power, and UMTS. The next three to four years dedicated to building new infrastructure capacity are trying time for India. Urban infrastructure is also getting a serious upgrade. One of the most heartening developments in the last one year has been corporate India s interest in developing the agriculture sector of the country. Whereas roads and telecom have provided connectivity to millions of Indians, it is contract farming, development of agro-processing zones, transportation of fresh produce to urban consumers in India and abroad that can improve the agriculture sector s productivity and raise standard of living of millions of Indians living in villages. Integrating the agro-sector with the world economy will pull many village folk out of poverty and provide them productive employment. Good physical infrastructure telecom, roads, power, and water will play a catalytic role in realizing this dream.

51 The Infrastructure Sector in India REFERENCES Bagchi, A. (2005). Political and Administrative Realities of Employment Guarantee Scheme, Economic and Political Weekly, XL(42), October 15, 2005, pp Barrett, C., S. Holden, and D. Clay (2004). Can Food-for-Work Programmes Reduce Vulnerability, Discussion Paper, Agricultural University of Norway. Bhaduri, A., (2005). First Priority Guaranteeing Employment and the Right to Information, Economic and Political Weekly, January 22. Chandrashekhar, H. (2005). Subsidy and Cost Sharing in Watershed Projects, Economic and Political Weekly, Discussion, August 27. Chattopadhyay, R. and E. Dufto (2004). Impact of Reservation in Panchayati Raj: Evidence from a Nationwide Ramdomised Experiment, Economic and Political Weekly, Vol. 39, No. 9, pp Drèze, J. (2005). Time to Clean Up, Times of India, Mumbai Edition, August 13. Ghatak, Maitreesh and Maitreya Ghatak (2002). Recent Reforms in the Panchayat System in West Bengal; Towards Greater Participatory Governance, in Economic and Political Weekly, Vol. 39, No. 9, pp Ghildiyal, S., More women opt for rural job scheme in Rajasthan, Times of India Mumbai Edition, June 11. GOI (2006). Economic Survey , Ministry of Finance, Government of India, New Delhi. Goyal, Ashima (2006). Intentive Structures in the Employment Guarantee Scheme, IGIDR, Mumbai. IDFC (2001). Six steps to Accelerate Privatisation of Electricity Distribution, IDFC, Mumbai. Johnson, Kirk (2002). Television and Social Change in Rural India, Sage Publications, New Delhi. Kumar, Sudhir (2005). Indian Railways: A Turnaround Story, presentation made in ASSOCHAM seminar on Rail Freight Corridor, 30 June (mimeo). Menon, S. (2006). Viilage Dole takes Baby Steps amid Apathy, Graft and subsequent series of articles on NREGS, Business Standard, August 7. MOP (2006). Draft Hydro Power Policy (May 2006), Ministry of Power, New Delhi. Panda, M. Mishra, S. Kamdar, and M. Tondare (2005). Evaluation of Food-for-Work Component of Sampoorna Grameen Rozgar Yojana in Selected Districts of Maharashtra, IGIDR, Mumbai: Report submitted to the Planning Commission. Planning Commission (2005). Draft Report of the Expert Committee on Integrated Energy Policy, Planning Commission, Government of India, New Delhi. (2006a). Towards Faster and More inclusive Growth, An Approach to the 11th Five Year Plan, Planning Commission, Government of India, New Delhi. (2006b). Public Private Partnership in Highways, Model Concession Agreement, Planning Commission, Government of India, New Delhi. Radhakrishna, R. (2005). Food and Nutrition Security of the Poor: Emerging Perspectives and Policy Issues, Economic and Political Weekly, April 30, pp Rao, K. (2005). Should EGS be Universalised? The Economic times, August 23. Rastogi, Anupam (2003). The Infrastructure Sector in India in 3iNetwork, India Infrastructure Report 2003: Public Expenditure Allocation and Accountability, New Delhi: Oxford University Press. Sengupta, N. (2002). Traditional vs. Modern Practices in Salinity Control, Economic and Political Weekly, 37(13), March 30. (2001). A New Institutional Theory of Production: An Application, New Delhi: Sage. Terhal, P. and I., Hirway (1998). Rural Public Works and Food Entitlement protection: Towards a Strategy for Preventing Hunger, in R. Radhakrishna and A. N. Sharma (eds.), Empowering Rural Labour in India: Markets, State and Mobilisation, Institute for Human Development, New Delhi. Terhal, P., I. Hirway, R. Radhakrishna, J.H. de Goede (1992). Towards Employment Guarantee: Report of the Indo-Dutch Fact Finding Mission, Government of the Netherlands: Rotterdam; Government of India, New Delhi. TRAI (2006a). Allocation and Pricing of Spectrum for 3G Services and Broadband Wireless Access, Consultation Paper No. 9/ 2006, Telecom Regulatory Authority of India, New Delhi. (2006b). Issues relating to Convergence and Competition in Broadcasting and Telecommunications, Consultation Paper No. 1/2006, Telecom Regulatory Authority of India, New Delhi. (2006c). Press Release No. 66/2006, Telecom Services Maintain Its Growth in June 2006, Telecom Regulatory Authority of India, New Delhi. V. Santhakumar (2006). Understanding Social Opposition To Privatising Public Utilities, The Centre for Development Studies, Thiruvananthapuram. Vaidyanathan, A. (2005). Employment Guarantee: Need for Involvement of States, Economic and Political Weekly, August 13. Virmani, A. (2005). Contribution to Economic Times debate Should NREGS be Universalised?, Economic Times, Mumbai Edition, Tuesday, August 23. Voice & Data (2006). The Eleventh Annual Survey of the Indian Communications Industry (Vol II). World Bank (2004). Country Strategy Paper for India, The World Bank, Washington. (2006). Reforming Public Services in India: Drawing Lessons From Success. World Bank: Washington.

52 28 India Infrastructure Report RURAL INFRASTRUCTURE, PANCHAYATI RAJ, AND GOVERNANCE T.R. Raghunandan INTRODUCTION The rural infrastructure challenge for India is a unique one in many respects. The technologies involved are hardly complex but users are dispersed, demand supply gap substantial, and there are several critical implementation issues. Creation of infrastructure must be backed by reliable systems of service provision and maintenance. While the need to create rural infrastructure is urgent and excites everyone, the normal bias of the technologically equipped elite is to design systems that are top driven. Top down strategies assume, sometimes with a touching naivete, that scales of efficiency are achieved by mass production and, therefore, proceed with project mode (or mission mode a more fashionable term in government circles!) implementation. Concerns about local participation are brushed aside as being inconvenient and irrelevant by mission mode managers. Local leaders are ignored as being corrupt and ignorant and irrelevant to the drive for achievement. Targets are achieved, the glossy presentations are made, awards are distributed and projects wound up, in a blaze of glory. A few years later, the same debates about infrastructure inadequacies rise again and we are back to square one! That infrastructure creation imposed from above has not made much difference, particularly in certain sectors, is now staring the mission mode mentors in the face. The rural countryside is dotted with decaying bridges, potholed roads, crumbling buildings, electricity lines that carry no power, and dry water supply schemes. Obviously, something has gone wrong somewhere. Therefore, the issue of the sustainability of the infrastructure created is gaining visibility both in policy as well as media space. Considering the ferment in which Panchayati Raj is now caught up, it is hardly surprising that there are several shortcomings of the institutional and funding approach to local rural infrastructural development, particularly when seen from the perspective of the panchayats. Keeping in mind both the institutional mechanism and objectives of Panchayati Raj and improving rural infrastructure, this chapter lays down suggestions on constructing better frameworks for reform. Designing such frameworks will entail detailing the safeguards that ought to be put in place. Equally important is the need to ensure that the fiscal transfer mechanism, through a variety of means, conforms with the letter and spirit of the provisions of the Constitution relating to panchayats. We describe the steps that have been recently taken to provide impetus to the empowerment of panchayats. The general principles that go into a robust institutional design of Panchayati Raj, including the safeguards, internal housekeeping practices, checks and balances, and mechanisms to promote genuine peoples participation are outlined. Following this, we detail specific recommendations in respect of reforming ongoing initiatives directed at improving rural infrastructure, focusing on the important sectors that comprise it. THE CONSTITUTION AND THE PANCHAYATS Constitutional provisions relating to the establishment, powers, and responsibilities of the panchayats were introduced through the 73rd Amendment in Under Article 243B of the Constitution there shall be constituted in every state, panchayats at the village, intermediate and district levels in accordance with the provisions of Part IX. In states with a population not exceeding twenty lakh, panchayats at the intermediate level may not be constituted. Article 243C empowers states to make provisions through law for the composition of panchayats, subject to the provisions of Part IX of the Constitution. Reservation of both seats and leadership positions for the

53 Rural Infrastructure, Panchayati Raj, and Governance 29 Scheduled Castes, tribes, and women are provided in Article 243D. Article 243E provides for a normal duration of five years for panchayats and a gap of not more than six months between the expiry of the period and the conduct of the elections for the next term of the panchayats. Article 243K invests the authority of preparing the electoral rolls and conducting elections in the state Election Commission. Article 243F empowers the state government to make laws providing criteria for disqualification of candidature from panchayat elections. Under Article 243J, the state can legislate with respect to maintenance of accounts by the panchayats and their audit. Constitutionally mandated Panchayati Raj prescribed reservations for deprived classes and women in panchayat seats and leadership positions. Today, more than 21 lakh representatives stand elected to the three levels of panchayats. Of these more than 40 per cent are women, 16 per cent belong to SCs and 11 per cent belong to the STs (Table 2.1). At the gram panchayat (GP) level, each Panch s constituency comprises about 340 people (70 families), making India the largest and most intensely democratic country worldwide. Table 2.1 Composition of Panchayats Panchayat Number Elected Women SC ST level represent % % % atives District Panchayat , Intermediate ,10, Panchayat Village or Gram 2,34,676 20,73, Panchayat Source: MOPR (2006). However, political empowerment is not the sole objective of Panchayati Raj. The powers, authority, and responsibilities of panchayats are stated out in Article 243G, which is quoted below, so as to reveal its scope and ambit. Subject to the provisions of this Constitution, the Legislature of a state may, by law, endow the panchayats with such powers and authority as may be necessary to enable them to function as institutions of self-government and such law may contain provisions for the devolution of powers and responsibilities upon panchayats at the appropriate level, subject to such conditions as may be specified therein, with respect to (a) the preparation of plans for economic development and social justice; (b) the implementation of schemes for economic development and social justice as may be entrusted to them including those in relation to the matters listed in the Eleventh Schedule. Article 243H speaks of the funds of the panchayats and their powers to impose taxes. Here too, the Legislature of a state may by law, authorize and set out procedures for panchayats to levy, collect and appropriate such taxes, duties, tolls, and fees. The state legislature may assign to a panchayat such taxes, duties, tolls, and fees levied and collected by the state government for such purposes. Subject to certain conditions and limits, it may provide for making such grantsin-aid to the panchayats from the Consolidated Fund of the state. The state can also provide for constitution of such Funds for crediting all such moneys received, and for its withdrawal. Article 243I states that every five years a state Finance Commission shall be constituted to review the financial position of the panchayats and to make recommendations to the Governor as to the principles which should govern: (i) the distribution between the state and the panchayats of the net proceeds of the taxes, duties, tolls, and fees leviable by the state, which may be divided between them under this Part and the allocation between the panchayats at all levels of their respective shares of such proceeds; (ii) the determination of the taxes, duties, tolls, and fees which may be assigned to, or appropriated by the panchayats; (iii) the grants-in-aid to the panchayats from the Consolidated Fund of the state; (a) the measures needed to improve the financial position of the panchayats; (b) any other matter referred to the Finance Commission by the Governor in the interests of sound finance of the panchayats. Article 243ZD creates Committees for District Planning at the district level, which shall consolidate the plans prepared by the panchayats and the municipalities in the district and prepare a draft development plan for the district as a whole. This committee has a composition that gives representation to both members of panchayats and municipalities in the district. In preparing the draft development plan, the District Planning Committee (DPC) shall clearly spell out the way forward for the integrated development of infrastructure and environmental conservation and the extent and type of available resources, whether financial or otherwise, in matters of common interest between the panchayats and the municipalities including spatial planning, sharing of water, and other physical and natural resources. The duty of the DPC is to forward the development plan, as recommended by such Committee, to the government of the state. Article 243N sets a one-year limit to the continuance of any provision of any law relating to panchayats that is in force in a state immediately before the commencement of the

54 30 India Infrastructure Report 2007 Seventy-third Constitution Amendment Act, 1992 (73rd CAA), which is inconsistent with the provisions of Part IX. In Article 243N the premise is implicit that after one year of coming into force of the 73rd Amendment, no provision of any law that relates to panchayats can exist. In other words, the panchayat law enacted under the provisions of part IX of the Constitution would gain precedence over any provision of any law. It is thus clear that legislations empowering panchayats with powers and responsibility have a special and predominant status. The spirit of Part IX of the Constitution is that the panchayats are expected to be constituted and to function as units of rural local self-government. The emphasis is to empower them with certain functional mandates, give them a significant degree of autonomy and impart to them an element of self-reliance and self-sufficiency through fiscal transfers, taxation powers and tax assignments (MOPR, 2006). The expressions in Article 243B relating to the constitution of panchayats are very similar to those in Article 79 relating to that of Parliament and Article 168 relating to that of the Legislatures in states. Article 243L, which speaks of the creation of the State Finance Commissions, has a wording similar to Article 275 related to the constitution of the Finance Commission regarding recommendations to the President as well as the distribution of the net proceeds of taxes between the Union and the states and other related matters. The expressions used in Article 243K with respect to the State Election Commission are similar to those used in Article 324 relating to the Election Commission. In fact, it is not farfetched to suggest that the relationship between the state and the panchayats is designed on lines similar to that of the Centre and the state, with the notable difference being that there are no legislative powers conferred on panchayats, but a representative list of functions that may be assigned to them, in the Eleventh Schedule of the Constitution. ROADBLOCKS IN EFFECTIVE FUNCTIONAL TRANSFER TO PANCHAYATS A reading of the Constitutional provisions gives the impression that by themselves they would have been an effective trigger for the empowerment of panchayats. However, there has been a decade long lag between the constitutional mandate and effective functional transfer to them. The reasons are several. First, though the Constitutional provisions make it clear that panchayats shall be set up at the district, intermediate, and village level, the extent of empowerment of these panchayats is left to the state governments concerned to be determined through their enabling legislations. One view is that Article 243 G, which speaks of empowerment of the panchayats does not make it mandatory for a state to endow panchayats with all powers and authority as listed in Schedule XI. Protagonists of this view would argue that the use of the word may, gives ample discretion to the state to qualify the extent of the functions that it desires to devolve to the panchayats. They would also argue that since the Article speaks of the implementation of plans entrusted to the panchayats, there is considerable scope in it to treat panchayats as implementing agencies. However, a reading of Article 243 G in its entirety would show that while states do have a degree of flexibility in empowering the panchayats, such flexibility is considerably limited by the imperative that the endowment of powers and authority on the panchayats ought to be as may be necessary to enable them to function as institutions of self-government. In other words, such endowment has to be real and not cosmetic. Nevertheless, since the language of Article 243 G is not one of compulsion and the Eleventh Schedule is only an indicative list of the powers that may be transferred to the panchayats, states continue to believe that they are not duty bound to make such transfers and many have not done so. Second, until 2003, several states, in spite of the mandatory provisions of Part XI relating to the creation of panchayats, did not constitute them and conduct elections to them (Mathur, 2003). Arguably, such violation of the provisions of the Constitution could be dealt with by the imposition of President s rule under Article 356, but instances of indefinite postponement of panchayat elections have never been construed to mean a constitutional breakdown in the state. Third, even in states that have passed strong and sweeping legislations assigning most of the powers and functions listed in the Eleventh Schedule to panchayats, formal transfer of functions has not been matched by the concomitant transfer of funds for performing these functions. Thus in most states, panchayats are left with a large number of unfunded mandates. Caught in a cleft of functional responsibility and insufficient financial support, panchayats are hardly equipped today to function as effective institutions of self-government. As one observer states, most states have created panchayats and allowed them to die. 1 Fourth, as the Prime Minister stated while addressing the Chief Ministers on 29 June 2004, many studies of effective decentralization reveal an interesting paradox that it needs a visionary leadership above to ensure decentralization. 2 In the absence of such leadership, states have often got away with lip service to decentralization through legislations, which 1 Dr George Mathew, making a presentation to the State Ministers on Panchayati Raj during the 6th Round Table of Panchayati Raj Ministers held on 28 and 29 November 2004 at Guwahati. 2 This was the first time that the Prime Minister addressed the Chief Ministers after taking office, at a conference on Poverty Alleviation and Rural Prosperity through Panchayati Raj, held in Delhi on 29 June 2004.

55 Rural Infrastructure, Panchayati Raj, and Governance 31 the panchayats themselves have not lobbied for vigorously, to enforce. The last argument is against devolution itself although, of late, this is being rarely heard. This is that panchayats cannot efficiently deliver government services. In most states, departments that were entrusted with service delivery are discovering, as the Prime Minister said, that Panchayati Raj is the medium to transform rural India into 700 million opportunities. 3 Panchayats are proving through a number of innovations that they are not only capable but are also better than departments in the delivery of a variety of local services to the people. Being closer to the people, they are also more accountable to them. Unlike departments, panchayats, particularly village panchayats, have gram sabhas to hold them accountable for their functioning. The Argument for Panchayats Before embarking on a discussion on the role of panchayats in rural infrastructure, it is necessary to squarely address oftrepeated arguments against the entrustment of functions or implementation by panchayats. 4 The most frequent argument made against devolving powers and responsibilities to panchayats for rural infrastructure creation is the one that they lack capacity to manage the enhanced powers that are given to them. Skeptics, particularly in line departments, feel that capacity building of local governments ought to precede the devolution of powers. However, supply of capacity before giving true powers leaves panchayats confused about how they should use their capacity. On the contrary, if one truly empowers local governments and holds them accountable for their newly earned responsibilities, they have an incentive to define and seek out the capacity support they need. Capacity building then becomes demand driven. Thus, devolution itself becomes a trigger for accelerating capacity building. In fact, devolution could quickly create conditions where higher governments and departments may be found wanting in their ability to supply the capacity that panchayats require to function effectively, be it training, technical support, or facilitation of staff, if they are not adequately prepared. The second argument against devolution is that panchayats are crippled by adversarial politics and are prone to elite capture. The statistics speak of a different picture. In terms of political 3 Speech to Chief Ministers on 28th June One might say, quite justifiably, that all these arguments can be swept away with just one assertion, that creation of and devolution to panchayats is a constitutional imperative. However, it still makes sense to consider these arguments, if not for any other reason, other than that they crop up often during discussions on reform, forcing those who suggest reform to constantly backtrack to address first principles of devolution. representation, the panchayats in India are run by more than 2.1 million elected representatives, participating in what is the most intense democracy in the world. Of these about a quarter belong to the Scheduled Castes and Scheduled Tribes. While the representation of women in higher elected tiers is low and often declining, at least a third of panchayat members are women. 5 While instances of elite capture are reported, it is hard to believe that such a large number of representatives from the poor and deprived would not assert themselves in local decision making. The third argument against devolution is the popular and loosely used statement that all that is decentralized is corrupt. It is not that panchayats are singularly free of corruption, but there is no hard evidence that corruption has increased due to devolution. Several of these assertions are based on impressionistic and anecdotal information, often gathered second hand. What is perhaps true is that since panchayats are much closer to the people than other levels of government, a lot of corruption is easily revealed to the public eye and thus it looks as if it has increased. However, is not the exposure of corruption through decentralization a necessary step to its eventual elimination? The fourth argument is based on an unidentified fear, that devolution would spell the death knell for line departments, felt in both state and central departments. However, given the experience of countries that have undergone big bang devolution, this is an erroneous fear. Far from marginalizing departments, devolution may actually increase their work in the medium term. Effective devolution necessitates a strong central ability to monitor its progress (Roy, 1999). What would change after devolution would be the priorities of the department. From implementing schemes by monitoring progress through achievement of numerical and financial targets, making payments, devising guidelines and then issuing clarifications on them, departments will be more busy providing capacity through training, technical support and staff deployment, developing standards, disclosure mechanisms, and independently monitoring outputs and outcomes. 6 Even in the long term departments will not disappear. They may fade away at one level and re-emerge at the level of the panchayats. In fact, government job opportunities may actually increase over the long term, except that their growth will be at the local level. In the overall analysis, panchayats have several comparative advantages in local development. The unassailable constitutional and legal position is that they have been indeed entrusted 5 In Karnataka, nearly 46 per cent of panchayat members are women. Contrast this with just 6 women members of the legislative assembly out of 224 members, less than 2 per cent! 6 What is the difference? Outputs are things you can control, such as development of ground rules, monitoring formats and so on, while outcomes are what you hope your outputs will propel.

56 32 India Infrastructure Report 2007 with the responsibility of delivering essential services such as water, sewerage, primary education and health services, and economic development services such as roads and minor irrigation. The fact that panchayats usually have a range of service responsibilities means that they can bring a multidimensional approach to addressing development, whereas a line ministry or even a community based organization may be single-issue based. Panchayats, if given a chance, could better match resource allocation to local preferences, including those of the poor, if given the right incentives, through local level participatory planning. Underlying all of this is that panchayats have the advantage of better information. Each panchayat may face a different situation and probably knows better the dimensions of poverty in their local areas and the kinds of bottlenecks to progress that must be removed. In other words, because they are closer to local development, panchayats have a greater chance of successfully tackling it. RECENT DEVELOPMENTS IN PANCHAYATI RAJ The first decade after the 73rd Amendment saw very little change in the way that central and state departments dealt with panchayats. Most line departments continued to function more or less in the same manner as they did before the 73rd Amendment. Panchayats have been hardly recognized as having any autonomy or responsibility. They have at best been perfunctorily involved in implementation and at worst, ignored and supplanted by parallel agencies in implementing departmental programmes. Since departments at the Centre predominantly obtain their feedback on performance and implementation of existing schemes from their counterparts in the states there has been a lack of information about the contemporary status of panchayats. Therefore, several stereotyped prejudices against their capacities still continue to exist at various levels. In June 2004, the Government of India created a Ministry of Panchayati Raj (MoPR), to primarily oversee the implementation of Part IX of the Constitution. A detailed consultation on the scope of the Ministry s work began in the Conference of Chief Ministers on Rural Poverty Alleviation and Prosperity through Panchayati Raj organized by the Government of India at Delhi on 29th and 30th June, Speaking at the conference, the Prime Minister requested all Chief Ministers to consider if we should adopt a system of providing block grants to districts based on their incidence of poverty to plan and implement strategies that optimize their resource potential. The PM asked whether we have too many schemes, which are fragmented in concept, are rigidly designed and impose national parameters on highly differentiated local realities in terms of resource endowments or felt needs. He sought to know whether the compartmentalization of our effort in multiple schemes in a ministry or ministries both at the centre and in the states without a core vision make this investment sub-optimal. He also asserted that before we set this right at the centre we cannot be asking the states to do so. He signed off by saying that incrementalism will not take us very far as sometimes the fault may be in the very design of the programmes imposed from above. In accordance with the decision taken in the Conference of Chief Ministers on 29th and 30th June 2004, the MoPR organized seven Round Tables around the country and discussed almost all subjects pertinent to Panchayati Raj (Table 2.2). Table 2.2 Round Table Conferences on Panchayati Raj Date Location Subject for discussion 23rd and 24th July 2004 Kolkata Effective Devolution, comprising Functions, Functionaries and Finances, as well as empowerment of Gram Sabhas. 28rd and 29th Mysore Planning and Implementation, including the question of parallel bodies, Rural Business August 2004 Hubs and so on 23rd and 24th Raipur Reservations in Panchayati Raj, comprising Scheduled Tribes (including implementation of September 2004 PESA), Scheduled Castes and Women. 7th and 8th Chandigarh Panchayati Raj in Union Territories; Panchayati Raj jurisprudence. October th and 29th Srinagar Annual Reports on the state of the panchayats (including preparation of a Devolution Index) October th and 29th Guwahati Panchayati Raj Elections and Audits November th, 18th and 19th Jaipur Capacity Building and Training for Panchayati Raj Institutions, IT enabled e-governance December 2004 for panchayats. Source: Compiled by author.

57 Rural Infrastructure, Panchayati Raj, and Governance 33 These Round Tables evolved by consensus, a set of around 150 points for action touching upon 18 dimensions of Panchayati Raj, which have been put together in a compendium that was adopted unanimously at the conclusion of the last Round Table in Jaipur. Taken together, they comprise a time bound action plan for achieving full devolution of functions, functionaries, and finances to PRIs in accordance with the letter and spirit of the Constitution. The implementation of this time bound plan for devolution of powers and responsibilities would call for close coordination between the Government of India, the states, and the Union Territories, as also between the MoPR and all Ministries of the Government of India, particularly those dealing with the twenty-nine functions that can be assigned to panchayats under the Eleventh Schedule of the Constitution. In order to operationalize the Action Points of the Round Tables, one of the main tasks of the Ministry of Panchayati Raj is to ensure that Central Government programmes and schemes, including those on infrastructure development, are compatible with the letter and spirit of the Constitutional provisions relating to panchayats. The focus is on the policies that govern the transfer of funds to states through Centrally Sponsored Schemes (CSS). The approach is to articulate the viewpoint of the panchayats to all ministries and other bodies, such as the Planning Commission, which have a critical role to play in the transformation of schemes to become compatible with panchayats. The current debate on the reform of CSSs is quite different from those that preceded it, because no longer are we considering reforming them in the context of the Centre and the states alone, but are joined by the panchayats too as important stakeholders in them. GENERIC FEATURES OF A WELL DESIGNED PANCHAYATI RAJ Reform of fiscal transfers and guidelines of infrastructure programmes have to conform with what are recognized to be elements of good institutional design for local body functioning. There are four pillars on which good design rests, namely, designing, planning, and implementation system, system for good accountability, elimination of mismatch between functional and financial assignments, and independent revenue base. Designing, Planning and Implementation System The first imperative in designing, planning and implementation systems involving multiple levels of government is to ensure role clarity. Assigning clearly defined activities to each level of government is essential both for efficient delivery of services as also for people to hold these levels accountable for their performance. When local governments are assigned clear tasks, devolved funds and made accountable for their performance of these newly assigned responsibilities, they have a big incentive to demand the capacity required for effective performance. Thus role clarity catalyses capacity building from being supply driven to being demand driven. Empowered panchayats with clear roles assigned through activity mapping would also begin to demand the staff for effective performance. Therefore, activity mapping can spur appropriate placement of functionaries for better service delivery. However, ensuring role clarity in the panchayat context is easier said than done. One of the problems that plagues Panchayati Raj is that there is often very little rational thinking concerning which of the disaggregated activities pertaining to a sector ought to be devolved, based on an objective consideration of the economies of scale and scope, capacity, externalities, national or local nature of public good, heterogeneity, ease of monitoring, enforceability, and proximity. This has led to most devolved subjects ending up in a kind of concurrent list, with different tiers of government sharing responsibility, which seriously undermines accountability. The answer to this problem is to undertake activity mapping relating to devolved functions with a view to attributing each activity to the appropriate level of panchayat, keeping in mind the principle of subsidiarity. To work well, activity mapping has to conform to certain objective principles. Poorly designed activity mapping could be worse than lack of role clarity it could leave local governments confused and ill equipped to perform functions. This would expose them to criticism both from higher level governments and the people. In undertaking activity mapping, the questions that have to be answered are, first, which level of government should be responsible for what and, second, which arrangements between governments are likely to work for better performance. These questions are relevant for a number of sectors that have been (or are to be) devolved to panchayats, including rural infrastructure creation and maintenance (Box 2.1). The third set of principles that guides where an activity ought to be slotted relates to public accountability. The following questions would arise in this regard: Is the activity discretionary? If so, it is best performed lower down, to enable transparency? Is it transaction intensive? If so, again is it best performed lower down? Who can best judge performance? If performance appraisal requires technical skills, then it could be pushed higher up. Closely linked with the issue of role clarity is that once a role is assigned to panchayats, then it alone must perform it. Setting up of parallel bodies is a pernicious and frequently used manner of marginalizing constitutionally endowed panchayats and usurping their legitimately endowed powers. Distressingly, the tendency to create separate societies within government, or setting up local boards, area development authorities, DRDAs and so on are actions that make a mockery

58 34 India Infrastructure Report 2007 Box 2.1 Elements of Activity Planning Activity mapping does not mean that subjects are devolved wholesale they need to be unbundled into activities and assigned to different levels of government at the level of such dis-aggregation. Activity mapping also ought not to be unduly influenced by the way budget items or schemes are arranged. Schemes may specifically relate to one activity or sub-activities, or might comprise of several activities, but activity mapping must be undertaken in accordance with an objective standard. Finally, there is no gain or loss of power through activity mapping; just role clarity. Activity mapping can actually increase the role of higher level governments, though they would not be doing the same things that they were doing before. Activity mapping can be approached and responsibilities allocated across levels of government, including panchayats at the district, intermediate, and village levels through specific and logical steps. First, each function ought to be unbundled into activities that are consistent with devolution. Second, each activity can be tested against certain public finance characteristics so as to determine where they might be assigned. These are described below. 7 ECONOMIES OF SCALE & SCOPE Economies of scale can determine where a particular activity needs to be positioned. Economies of scale tend to push the service towards higher levels of government. Conversely, if some activity is scale neutral in implementation, it may be preferable to push it down to the lowest level for implementation. Closely related is the issue of economies of scope. Some services may be linked in ways that makes it more efficient for one tier of government to provide all of them more efficiently, when bundled together. A good example is multivillage water supply projects, which can be managed by higher level local governments (such as ZPs in Maharashtra) or undertaken by associations of local governments (such as in the proposal to run multivillage water supply through gram panchayat associations in Karnataka) or contracting out to regional providers. EXTERNALITIES If the undertaking of a particular activity in a particular jurisdiction has a wide ranging effect on other jurisdictions, (i.e., spillover externalities), then such activities ought to be undertaken at a higher level. For instance, culling poultry to contain bird flu has to be managed at a higher level than gram panchayats, because the vector does not respect gram panchayat boundaries. EQUITY Sometimes a particular activity can indeed be undertaken efficiently at the local level, and has no externalities, but in the interests of equity, a uniform growth pattern across jurisdictions is desirable. Such activities, for the purposes of equity, have to be dealt with at a higher level. HETEROGENEITY The more heterogeneous the nuances of the activity, the lower down it ought to be performed. For instance, the constitution of midday meals varies widely across states, because of local food habits. Therefore, it is better performed at the lowest level. of Panchayati Raj. Over time, however, there is an increasing disquiet about such practices and in some states, the discontent is spilling over into court litigations, where panchayats have questioned the locus standi of such bodies to undertake work within the assigned functional domain of panchayats. In the First Round Table of State Ministers of Panchayati Raj in Kolkata it was agreed that all states and UTs would undertake activity mapping by the end of , using the activity mapping model that evolved in the Ministry of Rural Development in the Report of the Task Force on Devolution of Powers and Functions upon Panchayati Raj Institutions (August 2001). Though this target has not been achieved in all states, there has been considerable progress on activity mapping with respect to each state (Table 2.3). 7 I am grateful to Mr. Lantt Pritchett for the ideas that have been elaborated here. While several states have undertaken activity mapping, it can still be considered work in progress. Much of the activity mapping still gives panchayats a marginal role. Concurrency is rife in the matrices of activity mapping and the precepts described in Box 2.1 are yet to gain ground. However, it is notable that in states that have done well in Panchayati Raj, activity mapping has been undertaken with reasonable clarity. System for Good Accountability The second cornerstone of good institutional design is to build systems for the accountability of these bodies, both upward to regulatory structures as also downwards to the people they serve. In this connection, the Round Tables of State Ministers of Panchayati Raj arrived at several action points that are being progressively implemented. These include strengthening the

59 Table 2.3 Progress on Activity Mapping in States Rural Infrastructure, Panchayati Raj, and Governance 35 State Transfer of Details of Latest position Subjects through activity mapping legislation undertaken 1 Andhra Pradesh 17 9 Committee constituted under Special Chief Secretary has held 3 meetings and submitted its formulation. This is being considered by a Group of Ministers. 2 Assam Assam s activity mapping done three years ago is in the form of a consolidated executive order and has remained on paper and individual departments have not operationalised this order fully through executive orders transferring funds and functionaries. Eight departments have passed partial orders. 3 Arunachal Pradesh 29 An officer of the state government has been assigned to prepare the activity map, with technical assistance from the Ministry of Panchayati Raj and an NGO, PRIA. 4 Bihar 25 Activity mapping is to commence after the recent conduct of elections in Bihar. 5 Chhattisgarh Activity maps for 27 items have been prepared. However, in spite of several workshops conducted by the PR department to discuss activity mapping, no progress has been made to issue the necessary executive orders in this regard. 6 Goa functions have been devolved to village panchayats and 6 to ZPs under the legislation itself. 7 Gujarat Activities mapping has been done for 14 subjects. 5 subjects have been partially devolved. With respect to 10 functions, activities are yet to be devolved. The matter has been taken to the State Cabinet for policy decisions on identification of funds, functions and functionaries. 8 Haryana 10 Activity mapping in respect of 10 subjects released on in the joint presence of the Chief Minister, Haryana and MPR. 9 Himachal Pradesh departments had issued orders delegating powers to panchayats in respect of their schemes. 10 Karnataka Activity mapping completed in respect of all 29 items in August This was followed by another exercise of devolution of funds through the state Budget. A GO was issued in October, Activity mapping has been given full effect through fiscal devolution in the budget pertaining to 26 subjects completed with effect from Kerala activities relating to 19 functions have been devolved earlier. Kerala is revisiting this responsibility mapping exercise currently. In this respect a new activity mapping matrix has been prepared, which is very detailed and unique, in the sense that it covers municipalities as well, and lists out the activities in respect of each function that ought to be performed at the state level. Untied funds are being devolved to panchayats in respect of devolved functions. 12 Madhya Pradesh 23 7 For 7 or 8 activities, activity maps were prepared by an NGO, Samarthan. The same NGO has been requested to undertake this for all 23 subjects devolved. 13 Maharashtra 18 Powers have been devolved to panchayats under the Panchayati Raj legislation itself. (contd)

60 36 India Infrastructure Report 2007 Table 2.3 (continued) State Transfer of Details of Latest position Subjects through activity mapping legislation undertaken 14 Manipur Activity mapping of 22 subjects completed. 15 Orissa 25 7 Activity mapping has been issued in October in respect of 9 subjects, in the presence of the Minister and the Chief Minister. 16 Punjab 7 Draft activity mapping has been prepared for all departments in a detailed fashion. This was circulated to all Ministries and has not been issued yet. However, in certain sectors such as Health and Education, significant work has been undertaken doctors & rural dispensaries have been handed over to ZPs. Existing doctors have been shifted to city hospitals and new recruitments will be at the ZP level primary schools are being transferred to the Panchayat Samiti and teachers being recruited at that level. 17 Rajasthan The activity mapping exercise was started for 18 departments and has been completed for 12. An interesting aspect of activity mapping undertaken is in respect of tourism. This is being considered by a Cabinet sub-committee chaired by Home Minister, Mr Gulab Chand Kataria. 18 Sikkim 28 Activity mapping is nearing completion. 19 Tamil Nadu 29 Tamil Nadu claims to have issued instructions for devolving all subjects to Panchayati Raj. GOs have been issued to devolve certain activities relating to the functions devolved, but these remain on paper. In January 2006, meetings were held with panchayat presidents on activity mapping, but work has since stopped due to election notification. Rural Roads, Water Supply, Sanitation and Rural Housing Schemes have been taken up for discussion. 3rd State Finance Commission is also addressing this issue. 20 Tripura In 1994, orders were issued devolving for 21 subjects. With respect of 8 subjects orders are awaited because of operational problems related to 6th Schedule. 21 U.P. 12 Activity mapping was completed in respect of 32 departments as part of the recommendations of a committee (Bholanath Tiwari Report). However, this report has not been implemented. 22 Uttaranchal 14 9 Activity mapping in respect of 9 departments completed and under consideration of the government. GOs for devolution of 3 departments issued. 23 West Bengal Activity mapping has been completed and orders issued in respect of 15 subjects on gram sabha, a good system of audit, no mismatch between functional and financial assignments, and having a strong revenue base. Strengthening the Gram Sabha The gram sabha can be a powerful instrument of downward accountability, if properly empowered and convened regularly. Ideally speaking a good framework for empowerment of gram sabhas would be that at the minimum, it will have powers to approve plans, programmes, and projects before they are taken up for implementation by the panchayat at the village level. It would identify beneficiaries of poverty alleviation and other programmes and issue certification of utilization of funds by the panchayat at the village level for the above programmes. In the context of infrastructure development, this would also mean that gram sabhas have the power to undertake community contracting, both for construction of rural infrastructure projects and their maintenance.

61 Rural Infrastructure, Panchayati Raj, and Governance 37 Putting in Place a Good System of Audit, including Social Audit There is a need to establish simple and easily comprehensible audit and accounting standards for PRIs to cap, reduce, and eventually eliminate scope for corruption. These standards could focus on identifying when transactions should be looked into, what should be monitored, transaction documentation, and transaction disclosure. A system for internal audit will need to be established to complement external audit. There is a need to establish Public Accounts Committees (PACs) or PR Committees specifically for PRIs. This will have to be complemented with an appropriate Fiscal Responsibility Act for elected local authorities. Outsourcing of accounting by panchayats through standard contracts and automation and computerization of accounts would be imperative. Social audit systems will need to be necessarily implemented at gram sabha and higher levels. Preparation of Social Audit Policies based on best practices available in different states and consideration for their adoption by state governments will be required. Last but not the least, the Right to Information legislation would provide a powerful tool for downward accountability. No Mismatch between Functional and Financial Assignments Simultaneous with role clarity and building a system of accountability, there is a need to ensure that the fiscal transfer system complies with functional assignments. Finance must follow function (Roy, 1999). If money is not transferred swiftly and without diversion to the bodies to whom the functions concerned are devolved, Panchayati Raj is meaningless. Unfortunately, this is the very area where both, the central and the state Governments have been remiss. Fund transfers from higher level governments are often necessary in ensuring the achievement of certain universally recognized broad national priorities in terms of improving the human quality of life. These fund transfers would also cover rural infrastructure as well. However, there is a need to realign most of them to take into account the reality of functional devolution to Panchayati Raj (Box 2.2). In order to come up with specific modalities for operationalising the objective of the National Common Minimum Programme (NCMP) that funds that are to go to panchayats are neither delayed nor diverted, a Committee with the Additional Secretary (Panchayati Raj) as Chairperson and representatives from Ministry of Finance as Members among others, went into this issue in detail and submitted its report in May, The Committee s terms of reference included an examination of the feasibility of maintaining a data base of the bank accounts of all the 240,000 Panchayati Raj institutions, feasibility of electronic transfer of funds under the current banking system and feedback mechanism on actual crediting of funds into the accounts of PRIs. The Committee concluded unanimously that maintenance of data base of panchayat accounts state-wise and setting up of feedback mechanism were quite feasible. Implementation of the recommendations of the Committee is now being attempted in sending funds recommended to be devolved by the 12th Finance Commission to panchayats through bank accounts directly from the consolidated funds of states. Need for a Strong Own Revenue Base for Panchayats The last pillar of a good institutional design for Panchayati Raj is the need to have a good own revenue base. This is particularly important in the context that most infrastructure assets created in rural areas, will at some stage or the other, be handed over to local panchayats for maintenance, and these will be substantially required to be funded through local user charges or other own revenues. The First Round Table of State Ministers of Panchayati Raj at Kolkata recommended that steps be taken to encourage PRIs to raise their own resources, especially through the provision to appropriate revenues raised by them for their own purposes, in accordance with Article 243H of the Constitution. A study of various state legislations indicates a menu of 24 taxes, duties, tolls and fees levied by village panchayats. However, there is a need to utilize fully the potential of panchayats to raise taxes. In several states, this is a neglected aspect of panchayat empowerment. While there is a popular impression that panchayats are disinterested in collection of taxes, that the poor would suffer and that this is politically inadvisable, several good practices are emerging where panchayats, on their own, have taken steps to collect taxes. The confidence in panchayats raising local revenues is also reflected in a number of economic action programmes (EAPs) and CSSs are now insisting upon a local community contribution for scheme sanction obviously, this would require the participation of local panchayats for collection of contributions. Prominent among these is the Swajaldhara scheme of the Department of Drinking Water Supply, housing, and sanitation sectors. Several measures are required to facilitate improvements in panchayat revenues. At present, inadequate data are available on panchayat tax collection. Gaps exist in the demand collection and balance statistics, the legal provisions and executive orders issued by states, training programmes, if any, conducted by them for enabling panchayats to collect taxes, details of incentivisation structures, and of any innovations. The collection of data would need to be followed by developing own revenue policies in states. Identifying the policy gaps that

62 38 India Infrastructure Report 2007 Box 2.2 Rural Decentralization: Fiscal Maladies Kala S. Sridhar In India, the 73rd and 74th Constitutional Amendment Acts (CAA) of 1992, respectively, recognized rural local bodies and urban local bodies (ULBs) as the third tier of government, and attempted to transfer a minimum level of decentralization uniformly across all the states. For the rural local bodies, the 73rd CAA provided for a three-tier structure called the Panchayati Raj Institutions or PRIs. The gram/village panchayat (GP) at the village level; panchayat samiti at the intermediate (block/tehsil/mandal/taluka) level; and zila parishad or district panchayat at the district level form the three tiers of PRIs. Broadly, the functions identified for transfer to PRIs are (i) literacy (adult literacy) and elementary education; (ii) primary health and sanitation; (iii) rural water supply; (iv) rural roads; (v) housing for the poor; (vi) nutrition, children, women and crèches; (vii) livelihood and employment guarantee; and (viii) rural electrification. In conformity with the 73rd CAA, all Indian states have passed relevant legislation establishing a three-tier system of panchayats. Political decentralization to local bodies has been more or less successful in India, as a study by World Bank (2000) points out. With the first round of elections to PRIs and ULBs having been held in most states, a sizeable number of elected representatives (approximately 260,000 to PRIs and over 60,000 to ULBs), who bear responsibility for taking decisions, have been elected in the country s local government system (Mathur, 2003). These democratically elected representatives are expected to express preferences of the local communities they represent. However, as far as administrative decentralization is concerned, there is no clear demarcation of the devolved functions between the three tiers of the panchayats yet. Even where roles are defined, few states have matched responsibilities of their PRIs with the necessary administrative reforms, such as staff transfer, issuance of orders, and changes in administrative rules. This has generated an uncertain situation, threatening accountability (World Bank, 2000). Fiscal decentralization in India has been the weakest; generally considered low by international standards, the Indian decentralization story exhibits enormous disparity across states. Kerala, where 35 per cent of plan expenditures had been devolved to PRIs as broadly earmarked transfers, was second only to Colombia in fiscal decentralization and was further ahead of big decentralizers such as Poland and Chile. Other Indian states such as UP and Rajasthan lagged far behind on these measures of fiscal decentralization (World Bank, 2000). It is useful to understand that finances of panchayats in India consist of: a. Own sources, i.e., taxes assigned by the state panchayat Acts to the local bodies, which are levied and collected by them. Own sources also include non-tax revenues such as fees and fines, user charges for services, and rent from property. b. Shared taxes that are collected by the states with a share of the proceeds being disbursed among the local bodies of the state; c. Grants from the state/central government (which may be tied or untied). Table B2.2.1 Revenues and Expenditures of PRIs (All Tiers) at All-India Level Revenue (in Rs crores) Own Tax Own Non-Tax Total Own Revenue Assignment + Devolution Grants-in-Aid Others Total Other Revenue Total Revenue % of Own Source to Total Revenue 6.71% 5.99% 6.10% 6.38% 6.84% Expenditure (in Rs crores) Revenue Expenditure Capital Expenditure Total Expenditure Source: TFC (2004). The PRIs are heavily dependent on external financial resources, most of which tend to come from their state governments (Table B2.2.1). This table does, of course, conceal the wide variation across the states in terms of their self-reliance. Besides, the degree of selfreliance also varies across the tiers of the PRIs. Mathur (2003) highlights the extent to which the three tiers of PRIs are dependent on transfers from state and central governments. According to his study the position of gram panchayats is much better than the other two tiers, namely, Panchayat Samitis and District Panchayats.

63 Rural Infrastructure, Panchayati Raj, and Governance 39 This is not the end of the distress story of PRIs. Most of the funds reported in PRI budgets are not within the control of local elected authorities. In fact, given the meagre own source revenues of the panchayats, the disparity in administrative and financial resources available to centralized bureaucrats dealing with a village, and elected leaders (for example, the village panchayat leader) at various tiers of PRIs, could be quite revealing for a democracy like India. Take the example of administrative resources (staff). While few states have matched responsibilities of their PRIs with staff transfer, the power to transfer and promote bureaucrats dealing with a given village(s) rests with the state government. Under such circumstances, centralized bureaucrats dealing with a certain village(s) would be accountable only to the states, not to the local community to which they are assigned. Further, rural participation in local government tends to lag because people perceive little benefit from GPs, given the scarce financial and administrative resources at their disposal. Elected PRI representatives themselves, at every level, feel marginalized. These findings were based on a field investigation that was carried out in six districts of Rajasthan and Madhya Pradesh to assess the preparedness of rural constituents to participate in and seize the opportunities created by decentralization (World Bank, 2004). A study on Karnataka by Rao et al. (2004) found that the various tiers of PRIs in the state (district, taluk (block) and village panchayats) had together implemented 371 plan and 228 non-plan schemes in the state in In most of the schemes, these local bodies were required to merely distribute salaries to the school teachers in government schools and health care workers in public health centres and district hospitals. This meant that there was little flexibility or autonomy for panchayats in allocating expenditures in accordance with the needs and preferences of the community. This study also found that the developmental role of rural local bodies was, in fact, used to largely satisfy their pre-decentralization commitments with 80 per cent of their spending on salaries, transfer payments to individuals or institutions, and 16 per cent on specified schemes, leaving a meagre 4 per cent for spending on schemes preferred by them! The Planning Commission s Report of the Expert Group (2006) on planning at the grassroots level, in its action programme for the eleventh five year plan, lays down that for state governments to financially empower panchayats, they must undertake a detailed analysis of their annual budgets, both non-plan and plan, with a view to separating out the allocations that would need to be transferred to panchayats in accordance with the activities devolved to them. This expert group report points out that this exercise would require a reworking of the formats for the preparation of state budgets to provide for a panchayat sector which can be structured as an annex to the budget. The panchayat sector budget would then give details of the fund transfers that would go to panchayats. The report points out that such a disaggregation of the budget would give a clear idea of funds allocated to each panchayat from the concerned state budget. Such a system has been in vogue in some states (such as Chhattisgarh, Karnataka and Orissa) that have made substantial progress in establishing effective panchayati raj and could be adopted by all states. The expert group s report points out that fund release need not be from each state level department to panchayats. Rather, the panchayat sector budget is best operated by one department, say the (state s) finance department, which can release these funds to panchayats in a periodic fashion, preferably once a month, through a composite order, listing out the line items in respect of which funds are released. In Chhattisgarh, in fact, funds for schemes are passed through a democratic process headed by the Adhyaksh (chairman) and members of the panchayat/parishad. Hence the issues of the availability/accessibility of funds to a state-level bureaucrat dealing with a given village, does not arise in such states. In Orissa, the district and GP level budgets are separately available, but the data are not more detailed than that. It is a pity that we cannot say much about democratic decentralization to panchayats as far as financial and other resources are concerned, based on the data available. This highlights the need for an information system for grass root level planning that has to be put in place for urban and rural local bodies at village, block and district levels. As the expert group report (Planning Commission 2006) points out, even the state Finance Commissions, in most states, have not compiled economic, demographic, and fiscal information at the local body level. But a few states have taken some proactive steps in this regard. The government of Karnataka has initiated an information system (Samanya Mahiti) that provides information about basic amenities available in all the hamlets of Karnataka. Information on over 350 parameters covering 21 sectors is available for each hamlet. This information can be viewed either at the level of the hamlet, village, hobli, gram panchayat, taluk panchayat, zila panchayat, district, or for the entire state pertaining to any of the 21 sectors. This data is collected by zila panchayats of the respective districts and overall activity is monitored by the department of rural development and panchayat raj. Fiscal decentralization makes sense only when the lower tiers of government and democratically elected leaders are fully empowered in terms of funds and functionaries, along with functions. But in most of the states, the evidence reviewed shows that there is neither transparency nor reliable information regarding the fiscal situation of PRIs and their expenditure authority. It does seem that the development of disaggregated data bases is crucial for ensuring and monitoring real decentralization. Specifically, the greater the extent of decentralization desired, the more disaggregated the available information or data should be. Note: I thank Anupam Rastogi, M.Govinda Rao, T.R.Raghunandan, Hiremath and Surendra Nath Tripathi for their help. I thank the Government of Karnataka, Ministry of Rural Development and Panchayati Raj, for answering my questions regarding Samanya Mahiti. Any errors remain mine.

64 40 India Infrastructure Report 2007 exist in each state, as also studying their strengths and weaknesses, is required. Another way to spur own tax collection is to identify champions who have created an enabling environment for panchayat taxation and using them as roving consultants to help design state specific solutions. These would include legislative changes, drafting of model executive orders, designing training programmes, and developing local software solutions for tax management. This can be undertaken primarily by networking and using those who have spearheaded such approaches in other states successfully. CAPACITY BUILDING Effective implementation of the provisions of Part IX of the Constitution will require building of the capability of panchayats in the fullest meaning of the term, which encompasses training, provision of adequate functionaries, technical assistance, and a host of other support to panchayats. It is universally acknowledged that the greatest challenge facing all stakeholders is to ensure the capability of panchayats to effectively perform the responsibilities entrusted to them. That role clarity and accountability will be a motivator for capacity building measures has been already explained. However, the absence of training continues to be used as an alibi for non-devolution of functions, or for disempowering panchayats, despite the well-grounded fact that the exercise of responsibilities is, in itself, the optimal mode of training. Such capacity provisioning has to be a continuous and sustained process and cannot remain limited to a few erratic and non-regular episodes of training. It is a multifaceted exercise aimed at promoting effective functioning of panchayats, of which training is but one aspect and, which must be periodically repeated as a longer and continuous process of transformation and development with the active participation of all the stakeholders involved (Box 2.3). Along with training, when panchayats are entrusted tasks of planning and implementation, fundamental changes are required in departmental processes to better empower local officials to deal with local needs. Creating a pool of technically competent staff or other agencies at the intermediate panchayat level is another form of capacity creation for Panchayati Raj. Ideally speaking, Extension Centres should be set up at each intermediate panchayat level, staffed with a few resource persons who would provide technical support to the panchayats, as follows: 1. An engineer to technically review panchayat level infrastructure construction projects and provide support for preparation of estimates, procure tenders, and monitor quality; 2. An accountant to assist gram panchayats to follow prescribed financial guidelines, provide assistance where needed, and to collate panchayat accounts at the block level for transfer to the district; 3. A social specialist, to assist panchayats in conducting decentralized participatory processes for planning, mobilize the poorest and vulnerable groups to attend gram sabhas and ward sabhas. Running of the resource centers could be organized either through (a) the district or intermediate panchayat, (b) the State Institute of Rural Development (SIRD), supported by the district or intermediate panchayat, (c) a collective of the panchayat members themselves, wherever such networks have been created and are strong, and (d) an NGO, associated with the panchayat member network or panchayat representatives. These arrangements would ensure that the O&M requirements are met through appropriate agreements. Whatever the model adopted, panchayat members will be fully associated with the governing arrangements for the running of the resource centers. Even after training of all stakeholders is completed, there would be a need to provide a speedy channel of clarification and information, to those involved in the implementation of the programme. Helplines can provide continuous online support to trained persons and link help seekers with providers. While in the long term IT would provide an interactive mechanism of seeking and getting clarification, considering the low penetration of IT in gram panchayats, telephone helplines should be set up. ROLE OF PARALLEL BODIES OF CENTRAL AND STATE GOVERNMENTS * Parallel bodies are set up by the central or state governments to plan and/or execute development projects in areas which are in the functional domain of local governments, using funds provided by the central or state governments or donor funds. They are called parallel bodies because they have a separate system of decision making on resource allocation and execution of projects independent from the Panchayati Raj set up. These parallel bodies could be manned by bureaucrats, elected representatives and even non-officials and community representatives. They have considerable autonomy, flexible procedures and function in isolation directly reporting to the state government and sometimes to the central government. Examples of parallel bodies are DRDAs, FFDAs/BFDAs, Forest Development Agencies (FDAs), societies set up for SSA, societies set up for different health programmes like Blindness Control, TB Eradication, AIDS Control, Filariasis * This part of the chapter is jointly written with S.M. Vijayanand. Views expressed here are those of the authors in their personal capacities based on professional experience in decentralization. This part draws from the paper of the authors on this subject which was circulated in the Second Round Table of State Ministers of Panchayati Raj held in Mysore, in August 2004.

65 Rural Infrastructure, Panchayati Raj, and Governance 41 Box 2.3 Capacity Building of Elected Representatives of Panchayati Raj System Neeraj Gupta The Panchayati Raj system with 2,34,676 gram panchayats of 20,73,715 elected representatives is the backbone of democracy in India. However, it has been found that elected representatives, especially women and backward classes, are not able to participate meaningfully in the system of local governance and effectively contribute in the development of their constituency. Generations of subjugation 8, lack of understanding amongst elected representatives about their duties and rights as per the 73rd Constitutional amendment, illiteracy and low skill levels of elected representatives and dominating behaviour of the states or the administration are some of the factors that contribute to these internal biases in panchayat functioning. Panchayats can become effectively responsible for all key areas of village life with empowerment of elected representatives and capacity building of Panchayati Raj Institutions. The capacity building efforts of elected representatives that were carried out on adhoc basis in the initial years of the establishment of Panchayati Raj system are now being evolved into systematically designed training modules. However, such standardized modules developed by the state level training institutes or any other nodal agency often neglect specific needs of different groups like the illiterate or neo-literate populations. Elected representatives in the lowest rung of governance are a highly diverse group each requiring customized training attention. For example, training requirements of the elected women representatives may include basic elements such as putting their signatures on a revenue stamp something that may not be anticipated in the brainstorming sessions in the training institutes. The challenge before the trainers is to incorporate into effective training modules diverse requirements of different groups. This indeed is an enormous task, given the sheer number of elected representatives in need of training. To cover the large number of elected representatives innovative steps have been taken in different states. In Rajasthan systematic approach to training of PRI functionaries has been adopted from 2000 onwards. The State Institute of Rural Development, Jaipur developed training modules after needs assessment and trained 100 persons as master trainers. With the help of 20 NGOs district level training teams were organized for which 1500 trainers were developed women gram panchayat leaders received training in 55 residential camps of one-week duration. 750 camps were organized for elected women representatives. Thus about 32,000 women leaders were trained in less than a month in a campaign mode. At sub-block level, camps were organized for ward panchs where about 65,000 persons participated. One week residential camps were organized at block level for joint training of sarpanchs and panchayat secretaries. In this way Training for All goal was achieved, through decentralized block/sub-block based training camps in a cascade mode within a month (15 Sep 15 Oct 2003). The training impact studies conducted in 2004 with the help of NGOs have shown promising results. 9 The biggest challenge is development of institutions at local level which can cater to the training needs of the elected representatives. At present National Institute of Rural Development (NIRD) is the country s apex body to undertake training, research, and consultancy in rural sector. State Institutes of Rural Development have been established in all states either as independent bodies or as a part of the State Administrative Training Institute. The Ministry of Rural Development extends limited financial assistance to the states directly and through the Council for Advancement of People s Action & Rural Technology (CAPART) for conducting training and awareness generation programmes on Panchayati Raj. Decentralization of training to grass root level is essential to bring any change in the knowledge and skill levels of the elected functionaries. Another challenge before training is a dearth of trained trainers who could facilitate high quality learning. Most of the trainers available in the national and state level training institutes come either from the college education system where sage on stage formula of imparting learning is predominant; or they come from administrative machinery where autocratic ways of functioning dominate. Thus, training sessions are mostly limited to a series of lectures and presentations. Efficacy of such training is questionable, especially when a majority of the participants do not have formal educational background. No systematic efforts have been made anywhere in the country to evaluate the impact of training. Although some efforts have been made to address the concerns relating to training and capacity building programmes, the sporadic efforts that have been made in this direction are limited to end of the course feedback by the participants. Evaluation of training impact is yet to be institutionalized in the training process. The Seventh Round Table of Ministers in-charge of Panchayati Raj proposed that the training and communication should be a continuous, ongoing process. 10 If the concerns raised in this round are addressed the training is likely to be more meaningful. Note: The views expressed here are of the author. 8 The word panchayat refers to a traditional body of the five elders in a village who speak on behalf of the people and mediate conflict. Representation of women and the lower classes in such panchayats is not heard of. The 73rd CAA has given rise to new terms as sarpanchpati or sarpanch-bahu that reflects the real status of elected women representatives. 9 Dr Anita s presentation made during Seventh Round Table Conference on Panchayati Raj, December 2004 at Jaipur ( )

66 42 India Infrastructure Report 2007 Eradication, District Project Management Units of Externallyassisted Projects and so on. User Group-Based Organizations, Community Based Organizations (CBOs) for water supply, irrigation and so on are not per se parallel bodies; but they could become so if there is no conscious decision to structure their relationship with PRIs. It is possible to classify the parallel bodies into first generation organizations such as DRDAs, Societies, Project Management Structures, and Review Committees. First Generation Organizations District Rural Development Authority (DRDA) evolved from early establishments like the Block Development Councils and District Development Councils and was an expanded version of Small Farmers Development Agency and Marginal Farmers and Agricultural Labour Development Agencies which were set up in the mid-1970s. DRDA Clones The DRDA model has been replicated by the Ministry of Agriculture and Ministry of Environment through FFDAs/ BFDAs and FDAs. They are set up on the lines of the DRDA. Societies In order to ensure non-diversion and non-lapsing of funds for priority health programmes the Ministry of Health and Family Welfare has set up several societies at the district level. These societies are put in charge of implementing certain national programmes like Control of Blindness, Eradication of TB, Control of AIDS, Eradication of Filariasis and so on. Project Management Structures They are usually set up to implement externally assisted projects in areas such as water supply, irrigation, watershed management and so on. They are temporary in nature and are coterminous with the project. Review Committees With or Without Formal Executive Functions Such committees are created initially as review committees headed at the district level by the District Collector, with departmental officers as members. Though constituted with the primary function of reviewing and monitoring, they began to be used by governments as executive bodies, with a large level of non-formal direction and control. Though often meant to be temporary and purposive and intended to bring together different persons responsible for decision making, in practice, they often perform and supplant PRI decision-making functions. A worse form is committees exercising vigilance control over PRI functions. These bodies can be created easily through Government Orders and once created, they tend to survive and create precedents for more such bodies. In the DRDA type organizations there are non-official members in the decision making body. Societies and Project Management Organisations are purely bureaucratic and the Review Committees consist of professionals drawn from the Government and from outside. The origins of the parallel bodies can be traced to one or more of the following reasons: 1. To provide professional support, often multi-disciplinary and of supra departmental nature, for implementation of a programme. 2. To provide for non-official participation in decision making, especially of MPs and MLAs. This was appropriate in the pre-panchayati Raj era. 3. To facilitate easy and accountable funds management through: a. direct receipt of funds from Government of India. b. parking of funds in interest drawing account in commercial banks outside the government treasury system to avoid risks of ways and means restrictions on fund flow. c. tracking of utilization of funds through implementing agencies. d. proper account keeping through double entry systems. e. providing utilization details and other financial management information requirements of the Government of India. f. following up of release of funds from the Government of India. g. provision of a flexible organizational system for quick decision making, easy procurement of goods and services etc. The experience of functioning of these organizations shows that in respect of securing non-diversion of funds they have all been effective. However, in planning and in ensuring transparency and participation the achievements are limited. Similarly, the professional expertise has been limited to departmental expertise and there is not much difference between department and these agencies in this respect. CBO, SHGS AND USER GROUPS CBOs, SHGs and even User Groups can exist as autonomous social groups necessary for augmenting social capital and deepening democracy or as government-organized groups for implementation of specific programmes like water supply, irrigation, watershed management or poverty reduction often with donor-support. There is a need to differentiate between

67 Rural Infrastructure, Panchayati Raj, and Governance 43 the two. The former are entitled to absolute freedom of action and can even challenge PRIs through public action. But the latter groups, organized for specific purposes around the promise of a benefit and recipients of public development funds, have to be considered differently. The objectives behind setting up such groups include participatory planning, involvement in implementation, local resource contribution, potential to develop as interest groups, inculcating culture of self-help, facilitating NGO involvement, ensuring sustainability through takeover of operation and maintenance functions, and empowerment of communities. Problems arise when these CBOs are loosely equated with PRIs as people s groups or proposed as efficient substitutes of corrupt or political PRIs. PRIs are local governments performing a range of governance and development functions. They are not uni-dimensional social groups or project implementation agencies; they are political entities. They are accountable to the entire population of a panchayat and not just to a small circle of beneficiaries. The crucial point to be noted is that the groups are created by governmental departments or agencies exercising functions which are in the domain of PRIs. They are perceived as more efficient and less corrupt. Strangely enough bureaucrats and NGOs are more at ease with such groups than with PRIs. However, there is little hard evidence to show that such groups are free of all the evils that are supposed to bedevil PRIs, such as politics, sharing of spoils, corruption, and elite capture. There are also serious questions about the sustainability of such groups. There is an opportunity cost for honorary participation of people in such groups. People may be very active when there is fund flow and capacity building support, but tend to lose interest when faced with the more mundane tasks of maintenance of assets and collection of user charges. Thus, creation of beneficiary groups has substituted delegation of functions and powers and replaced democratic decentralization. It is in this context that they become parallel bodies for reasons such as the following: 1. State continuing to perform local government functions through CBOs. 2. Line agencies by-passing elected PRIs and directly dealing with CBOs. 3. CBOs utilizing funds and performing functions in the legitimate sphere of PRIs without their knowledge. 4. CBOs having not even symbolic accountability to elected PRIs even when they are using public funds or utilizing the natural resources of the locality. 5. CBOs being politically manipulated by the State Government, often to undermine the political legitimacy of PRIs in such cases they become parallel power centres. 6. CBOs being nurtured as developmental substitutes of PRIs through generous infusion of funds even while starving the PRIs of resources. 7. CBOs duplicating the work of PRIs and engaging in turf wars. CBOs can indeed realize all the stated objectives besides enriching social capital if they are seen as the community wings of PRIs, as thematic or sectoral sub-systems of PRIs and as the next step in democratic decentralization. CBOs should draw their powers and resources from PRIs, not in a relationship of subordination or agency-function but in a spirit of social contact. That is, the autonomy of CBOs would be well-protected even while being accountable to PRIs. Such an approach would strengthen both PRIs and CBOs and release synergies, paving the way for a symbiotic relationship. Hence, there is an urgent need to issue a policy directive on these lines, especially to donor agencies. Kerala offers the best example of such an approach yielding excellent results. Its international best practice in poverty reduction, Kudumbashree, is essentially a State Mission working through village panchayats and urban local governments to foster a self-help movement among BPL families through their women folk to combat poverty. Even in a sharply adversarial political set up, village panchayats have uniformly supported the women s network, which in turn has matured into a powerful demand factor. Similarly, the World Bank supported Rural Water Supply Project is implemented through village panchayats, which in turn use beneficiary groups for project planning, execution, and asset management. In Karnataka, this is a fast developing area of PRI reform. Multilateral agencies that have created implementing structures through parallel agencies without any connection with PRIs, are fast realizing that better and faster results can be achieved through PRIs. The linkage between gram panchayats and CBOs is being designed by positioning the CBOs as standing sub-committees of the gram panchayats. These sub-committees, unlike other sub-committees that are supposed to have representation only of sitting members, have wide discretion in co-opting and including citizens in them. WAY FORWARD Role of PRIs Ideally speaking, panchayats should be implementing programmes. However, even if they are not doing so currently, they can play a key role in monitoring the implementation of these programmes through certain simple and easy to install systems. First, panchayats at all levels can be considered as units for data collection and aggregation in respect of developmental schemes. Ideally, the planning and implementation of every rural infrastructure scheme ought to be monitored at the village panchayat level, with appropriate aggregation of information at the intermediate and district panchayat levels. This will

68 44 India Infrastructure Report 2007 necessitate the creation of a database of village panchayats, giving details of the villages and habitations that come within the jurisdiction of each panchayat, thus enabling all such schemes to be monitored over standard geographical areas conforming to the jurisdiction of the rural local bodies concerned. Once village to panchayat correlation data is available, data in respect of the planning and implementation of such schemes can be re-arranged and maintained on the internet. It must be ensured that perspective and annual plans in respect of each scheme are prepared by the panchayats concerned. All monitoring formats for such schemes prescribed by the Ministries concerned can be consolidated into a simple standardized monthly return that would be universally applied for monitoring purposes at each panchayat level from the village panchayat upwards. This return should also be available for downloading from the National Panchayat Portal (NPP). Currently, performance of panchayats is being aggregated at the District level for the purpose of monitoring. Districts are considered the basic units for the furnishing of utilization certificates. This tends to average out performance of individual panchayats, so that the best performing panchayats have to wait till the district has reached the threshold prescribed before receiving the next installment of funds. In order to encourage well performing panchayats by ensuring smooth fund flows directed towards prompt implementation, it is proposed that progressively, monitoring will be taken down to each panchayat level. In the first instance, the intermediate panchayat can be adopted as the basic unit for monitoring of progress, submission of utilization certificates and release of funds (like the Nirmal Gram Puraskar). Panchayats will need to be fully involved in the monitoring process by development of yardsticks for monitoring through discussion at the panchayat level, introducing a system of peer reviews, consolidation of data relevant to a particular indicator and comparing it with the best possible status, as well as the minimum actual level of achievement in the intermediate panchayat area, adoption of a system of ranking between panchayats aimed at providing a development database of the area and preparation of a model citizens charter covering all the flagship schemes and circulation for adoption by all panchayats. It is also necessary to prepare databases of independent quality assessments covering implementation of such schemes. Parallel Bodies in post-73rd CAA Era In the new legal context created by the Constitutional amendments, political context brought in by functioning of elected bodies, development context giving primacy to participatory development, and administrative context giving importance to transparency and accountability there is a need to revisit the raison d etre of these bodies. As the Constitution mandates that planning for economic development and social justice and implementation of such plans should be the responsibility of the PRIs and as it further provides for transferring schemes in the functional domain of PRIs to them, the parallel bodies have become redundant. As fully elected PRIs are in place there is no need for semi-bureaucratic structures with partial role for non-officials because of the following reasons. 1. They compete for political space and usurp the legitimate space of PRIs. 2. They contest the very rationale of PRIs and question the conceptualization of PRIs as institutions of local-self government. They reduce PRIs to the status of yet another organization. 3. They challenge the idea of functional domain of PRIs. 4. They mock at the PRIs through superior resource endowments and visible patronage systems. 5. They are bureaucratically controlled and propelled. 6. Several of the arguments quoted by proponents of parallel bodies, such as protection of funds from diversion have now weakened because such protection is easily achieved even through PRI. The Constitution envisages harmonization not only of laws but also of institutional mechanism with the Panchayati Raj System. The principle of concomitance cannot be limited to just laws but it extends to institutional arrangements as well. Viewed in this sense such institutions have to be harmonized with the PRI set up or else they become ultra vires the Constitution. There are different possible courses of action to deal with parallel bodies. They include: 1. Taking recourse to total merger as in Karnataka. It is worth noting that nearly seventeen years after the merger of DRDAs with Zilla Parishads, the performance of Karnataka in implementation as well as in ensuring financial propriety has been among the very best in the country. This is the best proof of the redundancy of the DRDA (and likewise other parallel bodies) in a system with strong PRIs. 2. Retain the professional component of these parallel bodies as Cells or Units within the Zilla panchayat, carrying out their professional roles including management of funds and reaching out to all implementing agencies. 3. Modify the powers of the existing bodies. While retaining their identity as charitable societies they could be subject to the condition that all decision making would be by the elected PRIs and their autonomy would be restricted only to fund management. 4. Restructure the parallel bodies with only PRI representatives and professional staff. 5. Substitute the Chairperson of the parallel bodies and bring in the elected head of the Zilla panchayat. The course of action to be followed by a state government depends on the level of decentralization and its commitment

69 Rural Infrastructure, Panchayati Raj, and Governance 45 to strengthening PRIs. Obviously, the best option is the first one. In any case it should be accepted as the ultimate option which has to be adopted sooner or later, the exact time being determined by the pace of decentralization in a particular state. The other options could be adopted only as interim arrangements. The second option would result in an artificial entity embedding itself in the PRI body resulting in irritation. In the third and fourth options the parallel structures get only artificially linked to the PRI system. The separate identities would promote divergence and conflict. The worst option is making the elected head of a PRI the Chairperson of a parallel body. The elected head cannot be taken to represent the whole PRI and the functioning of the elected head in a different organizational set up cannot be equated with his functioning in a PRI set up. It is only a cosmetic solution. It could split the persona of the elected head into mutually conflicting faces. It has to be admitted that parallel bodies debilitate the growth and the process of achieving maturity of PRIs as institutions of local self government. Half way solutions are not possible. Winding up the parallel bodies does not really affect any interest. The professionals can be retained in the new set up also and special procedures can be designed to insulate fund management and provide flexible functioning. In fact, merger will add to the resources of PRIs and enlarge their sphere of action. Outright merger is perhaps the single most significant and effective decision which the Government of India can take to strengthen PRIs. If CBOs and PRIs work in a disparate manner, the democratic gains cancel themselves out. But if they work symbiotically each having a well-demarcated functional space and a well-structured working relationship, then the democratic gains are multiplied. Such are the dynamics of this relationship.

70 46 India Infrastructure Report 2007 REFERENCES Mathur, Mukesh (2003). Panchayati Raj Institutions and the state Finance Commissions A Report, in 3iNetwork (ed.), India Infrastructure Report 2003: Public Expenditure Allocation and Accountability, Oxford University Press, New Delhi. MOPR (2006). Annual Report of the Ministry of Panchayati Raj , Government of India, New Delhi. Planning Commission (2006). Planning At the Grassroots Level: An Action Programme for the Eleventh Five Year Plan, Report of the Expert Group, March, Planning Commission, New Delhi. Rao, Govinda M., H.K.Amarnath and B.P.Vani (2004). India: Fiscal Decentralization to Rural Governments, Report No IN (January), World Bank Rural Development Unit, South Asia Region, New Delhi. Roy Bahl (1999). The Rules of fiscal Decentralization, Georgia State University, Georgia. TFC (2004). Report of the Twelfth Finance Commission ( ), Twelfth Finance Commission, Government of India, New Delhi. World Bank (2000). An Overview of Rural Decentralization in India, World Bank, New Delhi. (2004). Reducing Poverty Sustaining Growth Scaling Up Poverty Reduction A Global Learning Process, Conference in Shanghai, May 25 27, www1.worldbank.org/publicsector/ civilservice/ june2004seminar/ruraldecent.pdf

71 3 FINANCING OF RURAL INFRASTRUCTURE Vijay Mahajan, Preeti Sahai, and Sandeep Pasrija INTRODUCTION Economic growth and human development are strongly determined by the prevailing infrastructure development scenario. Rural infrastructure in India in terms of its roads, electricity supplies, telecom facilities, irrigation systems, water supply and sanitation, market yards, schools and health centres is woefully short of demand. It is almost totally publicly funded, and the governments at the centre and the states, have severe budgetary constraints. The local governments zilla parishads and panchayats in case of rural areas are largely dependent on central and state government disbursals, and are thus hardly ever in a fund surplus situation to spare money for infrastructure investment. Rural communities themselves are impoverished and unorganized, so community financing of infrastructure is not possible beyond an occasional piau (communal source of drinking water) or dharamshala (resthouse or shelter). In this context the role of private capital in filling the need gap acquires tremendous importance. Seventy per cent of Indians live in villages and rural infrastructure is a key determinant of rural development and economic and social well-being. In this paper we try to understand the prevailing financing options for rural infrastructure and attempt to identify viable alternatives towards bridging the gap. For our purpose we extend the standard elements of infrastructure (roads, irrigation, water and sanitation, telecom, and electricity) to include agroprocessing and marketing facilities within the ambit of rural infrastructure needs. This is driven by the fact that the positive impact of these services on agriculture-based economic activity in rural areas is significant, the user group for them is large and the investment required is lumpy. In the initial sections of the chapter we lay out the basic attributes of the rural infrastructure sector in terms of its economic, social as well as political aspects, features, and compulsions in order to draw implications for existing financing practices. This is followed by a brief assessment of the demand supply gap that exists in rural infrastructure segregated by service, that is, water and sanitation, roads, irrigation, electricity, telecom, agro-processing, and marketing. Detailed discussions of prevailing funding options and avenues are followed in the subsequent sections by an examination of viability of new options in the resource generation. ATTRIBUTES OF RURAL INFRASTRUCTURE AND INTERLINKAGES WITH FUNDING ISSUES Economic Parameters and Decentralization Possibilities across Services Institutional and financing arrangements relevant for service provisioning will be derived from the nature of the infrastructure in question, in terms of its public good versus private good characteristics (a rural road tends to be public in nature, an in-house electric connection is a private good); and the scale of the service whether the service helps a single community or many communities. Even for most heavy capital investment intensive infrastructure, some part of the recurring expenditure can be paid by the consumers. It is critical that policy-makers recognize the need to balance cost sharing strategies with objectives of maximizing outreach to the poor. As a rule, the potential for private sector interest in providing infrastructure increases as the activity shifts from public to private. A shift from smaller to more extensive coverage also tends to transcend community-based solutions (World Bank, 2006a). We characterize rural infrastructure based on parameters such as investment required, extent of incremental expenditure, consumers willingness to pay, and scale economies (Table 3.1).

72 48 India Infrastructure Report 2007 Table 3.1 Categorization of Rural Infrastructure Health Education Energy Water and IT/Telecom Roads Canal Sanitation Irrigation Scale Economies Low Low Moderate Moderate V. High V. High V. High to High Initial Investment Moderate Low Moderate Moderate V. High V. High V. High to High Recurring Expenditure 1 Moderate Low High Moderate Moderate Low Low Willingness to pay High Moderate High High Moderate Nil High to High to High Source: Computed by author. Health and education delivery can be decentralized to the local level. However, resource needs for research, training to different cadres of health/education workers, curriculum development and so on are significant and require centralized infrastructure. Similarly, promotional activities required to run both health and education facilities are significant and require large administrative machinery to deliver. Information Technology (IT) related services typically require huge basic infrastructure to extend services. For water services, it is less the connection to a physical network and more the access to organizational and professional skills that drives utility expansion. Measured by scale economies, electricity falls somewhere between IT and water. Unlike telecom, electricity can be decentralized to local levels, without being necessarily connected to a larger regional or national network. This is a viable solution for remote areas, where establishing transmission links from a larger network is prohibitively costly, given the size of the rural market. Private entrepreneurs in India are already selling power generated micro-hydel and wind-based renewable energy generation systems to large grids. The next step could be to enable them to distribute power in localized rural areas. Rural power distribution was prioritized by several pioneering projects of the Rural Electrification Corporation, using rural electric supply cooperatives. One of these, in Ankapalle in Vishakhapatnam district of Andhra Pradesh, is an example of a robust community institution owning and managing an important rural infrastructure facility. (See Box 6.1.5) Social Attributes That the term infrastructure was traditionally used interchangeably with social overhead capital sets the tone for 1 Expenditure on continued provision of the service includes expense on salaries of doctors and teachers, maintenance of the power plant, maintenance of the water structures and so on. how it has been viewed by policy-makers and stakeholders alike as a need that must largely be addressed by the government. In India, even sixty years after independence the government plays an overwhelming role in financing, building, and maintaining infrastructure. Public infrastructure faces disuse and apathy at the hands of its target segment, its users. There are often no clear incentives to maintain public infrastructure at the local level. In addition, factors which have created an institutional environment for low maintenance of infrastructure include the non-excludability of public infrastructure, concern for social justice leading to absence of or low user fees, and ownership and operation by a public bureaucracy. The government mostly limits its role to infrastructure creation, without creating a local institutional set-up with user participation, which has a stake in the maintenance, use and other issues such as billing, recovery of payments and so on. Thus, in the interest of more effective infrastructure services, the rules of the game will have to be redefined. Political Attributes of Infrastructure Allocation of resources for infrastructure creation is as much a subject of political decision-making as anything else. Such allocation is often based on parameters that go beyond the infrastructure deficiency of an area, or its people, or even the efficiency of resource use. Infrastructure requires large, lumpy investments, and politicians use this as an opportunity to bestow visible patronage on their constituents. The elected representatives to the government often waive user charges for political mileage and gains from their voter base. This creates distorted responses on the part of the consumers and also adversely affects their attitude to infrastructure, and willingness to pay for it. This offers perverse incentives to the users to misuse infrastructure services and get away with inadequate or no payments. Electricity and water, for example have been the focus of competitive populism (Vaidyanathan,

73 Financing of Rural Infrastructure ). Raising water rates is considered as an electoral disaster, regardless of the political party doing it. Similarly, waiving electricity bills, or announcing free power for farmers is an infamous yet popular pre-election promise. DEMAND SUPPLY GAP IN RURAL INFRASTRUCTURE Rural areas are often perceived to generate low demand for infrastructure services, thus imposing a major constraint on the viability of rural infrastructure projects. While demand for connections is often lower than comparable urban areas, many studies show that a high number of rural customers are often willing to pay and to consume more than is commonly expected. Precise quantitative measures of rural demand will be difficult because estimating demand is complex. If willingness and/or ability to pay are measured before a service is introduced, they may lead to underestimation of the potential demand. The impact of education or information about the service is much higher when the service is visible, and to this extent most estimations account for demand inadequately (Econ One Research, 2003). The ensuing section attempts a rough estimation of the demand-supply gap in different sectors and some broad diagnosis of how the system has addressed the respective infrastructure sector needs over time. This section gives some idea, not only of the gap, but also the current outreach of infrastructure services. The full picture, however, is not complete without understanding the quality of service delivery. The actual demand is likely to be higher than what these figures convey to the extent that infrastructure was created but lies defunct or underused due to partial or discriminatory access. Water and Sanitation The Rajiv Gandhi National Drinking Water Mission, states that (as of 2005) about 96 per cent of rural habitations can be categorized as fully covered by drinking water provisioning services, and 35 per cent of population has access to sanitation facilities. 2 An evaluation by UNICEF in 2004 assesses that only around 40 per cent of the below poverty line (BPL) families use constructed toilets compared with 80 per cent of the above poverty line (APL) households using the same. To project this to the current scenario, with a population of approximately 1100 million, 75 per cent rural population, and 65 per cent of this population un-served by sanitation facilities, we have around 536 million people to cover. Assuming a household of 5.5 persons, this translates to a little less 2 Figures based on the Comprehensive Action Plan, 1999, baseline assessment. Table 3.2 Access to Water and Sanitation Services by the Rural Population % Population with no access to Water % Population with access to Sanitation Source: NSSO (1999), NSSO (2003). than 100 million households, who need to be provided sanitation facilities. According to the Bharat Nirman Plan, by 2009 around 33 million people across 55,067 habitations have to be provided access to water. Roads The demand for rural roads can be better understood by the demand for vehicles. In the period , rural roads grew by around 15 per cent, whereas the estimated growth in demand for scooters was 56 per cent, and that of bicycles was 28.5 per cent. The availability of road infrastructure is, in general poor for smaller villages with less population (Table 3.3). Table 3.3 Village Connectivity by Size of Village Population Connectivity in 1995 (%) Less than to Greater than Source: Bery et al. (2004). As per the Tenth Plan document, there are around 100,000 unconnected habitations with population of more than 500 persons. The average distance from a village to an all-weather road is 2 km, and on an average 52 per cent people living away from the main village do not have access to all-weather roads (Bery et al. 2004). Irrigation The water use efficiency in Indian agriculture is one of the lowest in the world, at around 30 per cent to 40 per cent, as against an ideal of 60 per cent. The utilization of created potential is poor at around 86 per cent for all types of irrigation schemes. This gap between the potential created and utilized has widened over time from around 5 per cent in the first three Plans to about 11 per cent from the Seventh Plan onwards. 3 3 Some of this is also due to higher estimates of potential adopted for certain projects (Desai, 1991)

74 50 India Infrastructure Report 2007 Table 3.4 Existing and Potential Irrigation Capacity in India, Major Minor Minor Total and (Surface (Ground Medium Water) Water) Ultimate Potential (million ha) Irrigation Potential Created (per cent) Created Irrigation Capacity (ha) Utilized Potential (per cent) Irrigation Potential Utilized (million ha) Maximum Irrigation Potential that can be created (million ha) Source: Central Water Commission (P&P Directorate) and Planning Commission (2002). As of , the 83 million hectares of irrigated area served only about 46.5 per cent of the landholdings, which means that at the current rate, further irrigation potential of around 95.5 million hectares will have to be created to provide for the remainder 53.5 per cent of landholdings. Given assessments of ultimate potential, only around half of this requirement (46.7 million hectares) can be addressed through creation of new potential. Further, to the extent that there is underutilized potential, the figures will diminish further (Table 3.4). Major and medium projects require an average investment of Rs 1 lakh per hectare of irrigated area, and the sum required will therefore be around Rs 246,000 crore, just to exploit full potential of major and medium projects. At around Rs 10,000 per hectare, for minor irrigation, the additional funds required are Rs 22,200 crore (Planning Commission, 2002). Electricity Rural electrification is defined broadly to cover for creation of the physical infrastructure for electricity. However, the access of individual households to electricity is questionable even if these targets are met. The Rajiv Gandhi Gram Vidyutikaran Yojana (RGGVY) aims to electrify 125,000 villages, connect all the estimated 2.34 crore unelectrified households below the poverty line (BPL), offer 90 per cent subsidy for providing connections and augmenting the network in all the already electrified 0.46 million households by The approximately 54.6 million households that are currently not electrified but are above the poverty line, will not receive any subsidy to provide an electricity connection. Tariffs have been set too low to justify investments. This factor has also increased the risk of investment in power generation. The policies and regulations have also been largely reactive to private response and this has slowed the process. While the attention of private investments is largely urban and industrial in nature, higher levels of investment are likely to benefit rural India, both directly and indirectly. Transmission and distribution losses, largely attributed to technical challenges, illegal use, heavy subsidies around power used for irrigation, and challenges in appropriate fee collection have pulled the State Electricity Boards into losses. Telecommunication Rural teledensity increased from 0.02 per cent to 1.92 per cent in the last 50 years ( ). Village-level telephone connectivity, carried out through Village Public telephones (VPT) for rural India is missing in 58,648 (roughly 10 per cent) villages. Compared to this government plans to raise the teledensity in rural areas from the current 1.9 per cent to 15 per cent by 2007 and has proposed Rs 8000 crore subsidy for creating necessary infrastructure. With this kind of subsidy support, it will be possible to install 20,000 base stations in rural areas to cover about per cent of the villages, according to TRAI. According to the TRAI, if the present USO Policy continues then India would achieve rural teledensity of only 3 per cent by Agro-Processing and Marketing Infrastructure Agricultural Markets As of March 2003, there were 7323 regulated wholesale agricultural produce markets in India, up from 57 in In addition, there were 27,046 rural periodic markets. On an average 21 villages are served by one rural market with the state-wise figure ranging between one rural market for one village in Kerala to 667 villages in Himachal Pradesh. The need to develop haats or weekly bazaars has been emphasized upon by the Expert Committee on Strengthening and Developing of Agricultural Marketing (GoI, 2001). The report recognizes that since these markets constitute the first contact point with commercial circuits for the producers and 80 per cent of the household incomes of the rural masses is estimated to be spent at these markets, their development, therefore, with proper operational, pricing and technical efficiency constitute the foundation of 4

75 Financing of Rural Infrastructure 51 integrated market system for distribution of agricultural and allied produce. Storage The three main agencies in the public sector, which are engaged in building large scale storage capacity: the State Warehousing Corporation (SWC), Central Warehousing Corporation (CWC) and Food Corporation of India (FCI). The CWC and SWC have enhanced capacity from 8 warehouses handling 7000 tonnes in to over 1800 warehouses handling over 23 million tonnes in The FCI has created storage capacity of over 35 million tonnes. The storage capacity, at its present level is sufficient only for 10 per cent of the total production of fruits and vegetables. The capacity requirement for post-harvest management of perishables is estimated to be over five times that of the current capacity. The Expert Committee on Strengthening and Developing of Agricultural Marketing (GoI, 2001) assesses the need for creation of 15,000 additional cold storages with a capacity of 45 million tonnes. This would require an investment of the order of Rs 27,000 crore. Processing Infrastructure This enables local value addition and supports self-employment. The fruit and vegetable processing industry in India has increased capacity three-fold from 0.7 million tonnes to 2.1 million tonnes between 1990 and This processing infrastructure for fruit and vegetable is highly decentralized, and most units operate in cottage/homes and the small scale sector. Dairy related micro infrastructure, for example, entails not just the processing units such as bulk coolers, chilling plants, pasteurising facilities, and packaging facilities, but also milk collection cans, fat testing machines, milk vans operating on milk routes, and marketing facilities. The financing of such infrastructure is likely to be different from other larger infrastructure in that there is scope for significant private finance. An integrated approach to creating such infrastructure and attracting private finance is needed to add significant value for different sectors such as dairy, horticulture, and agriculture of different types of commodities. RURAL INFRASTRUCTURE FINANCING Funding from Governmental Sources Around 70 per cent of the population of India lives in rural areas, and therefore, Indian planning has a history of intervening in and focussing on the problems of the rural sector. It was around the mid-1970s that the concept of basic minimum needs came into the policy frame, with an explicit acknowledgement of the worsening rural poverty situation and large scale unemployment (Das, 2002). During the Sixth Plan, issues relating to basic infrastructure were sought to be addressed in a rather more cohesive and direct manner than before under the Minimum Needs Programme. The infrastructure investments in rural areas are mired in hidden and explicit subsidies and heavy losses. The approach to investment in rural infrastructure was traditionally that of complete state support as such investment was viewed as economically unattractive and also too complicated for the private sector to consider. While on the one hand, public investment was the only source of finance for rural infrastructure; on the other even these have been declining as a proportion of both total government expenditures and as a proportion of GDP. During the post-reform period, between and , not only has the share of budgetary expenditure on all social services and poverty alleviation programmes declined from 2.08 to 1.87 per cent, but also the share of rural development in all social services and poverty alleviation programmes has fallen from about 32 to 25 per cent (Das, 2002). The expansion and improvement of irrigation infrastructure occupies a central place in India s agricultural strategy. Investment in the major and medium irrigation programmes comes almost entirely from public sources, whereas for minor irrigation programmes a significant share comes from institutional and private sources as well. Between and , capital investments in major and medium irrigation schemes went up 7.5 times at current prices and 4 times at constant prices, whereas the irrigation potential increased only by 30 per cent (Vaidyanathan, 2003). Investment in irrigation constitutes 55 per cent of total agricultural investment the single largest component of the investment by the public sector. The government has spent over Rs 120,000 crore towards developing irrigation potential up to the Ninth Plan. The plan outlay under the Accelerated Irrigation Benefit Programme for was Rs 4500 crore. The outlay of the State and Central Governments for rural roads was Rs 3070 crore in the Eighth Plan period. It was Rs 1980 crore and Rs 2140 crore in the next two years, and For water and sanitation, the total investment envisaged in the Tenth Plan period is Rs 3010 crore, which the State and Centre are expected to share in the ratio of 47:53. Public resources are thinly spread over a large number of competing alternative uses. Even though state funding is the only significant source of infrastructure finance, it is not adequate. As a case in point, at prices, the Planning Commission estimates that an investment of Rs 107,800 crore will be required to provide electricity to all villages in

76 52 India Infrastructure Report 2007 India. Compared with this, the average annual investment over the last few years has been merely Rs 8.8 thousand crore. Central Government Sponsored Schemes Most poverty alleviation schemes of the government have asset creation and infrastructure creation components. In February 2006, the Finance Minister, in his budget speech, announced an allocation of Rs 186,960 crore for rural infrastructure, under the Bharat Nirman Programme. This is the single largest allocation for any sector and is 54 per cent higher than the previous year. Schemes directed at creation of infrastructure include the Million Wells Scheme (MWS) for surface water bodies, Indira Awas Yojana (IAY) for housing, Jawahar Gram Samridhi Yojana for school buildings, rural roads and other infrastructure, Swarna Jayanti Swarozgar Yojana to support micro-enterprises. The Employment Assurance Scheme (EAS), Food for Work programmes, as also the new National Rural Employment Guarantee Scheme (NREGS) provide employment to villagers in the construction of minor local infrastructure such as small roads, school buildings, and pond digging. SUBSIDY DESIGN The design of the subsidy disbursed is crucial to how the infrastructure is built, financed, and managed. The thrust on community participation has been increasing, yet the financing mechanisms have not efficiently built in the crucial aspects of co-financing either from the community or other sources. To the extent that co-financing is required in government schemes, experience shows that the design has failed to preempt misuse of this clause. The manner in which subsidies are designed continues to be an issue with public funds. Outright and upfront grants have often failed to motivate the beneficiaries to use the funds judiciously. Smart subsidies or those which ensure community contribution and where the grant is targetted appropriately at an institutional structure ensure more efficient and sustainable use of the funds. Beyond sunk capital costs, such funds often remain with the community as revolving funds. If subsidies are made contingent to performance, or are structured as output-based aid, their effectiveness is likely to be much higher (Box 3.1). MULTIPLICITY OF ROLES One of the issues with public funds, for creation and maintenance of infrastructure, stems from the multiplicity of roles that the government plays. These roles range across regulatory, promotional, financial, and implementational. Notwithstanding the near pure public good attributes of some types of infrastructure, the government has been seen to underperform when it is playing all these roles simultaneously. Most often, the implementation role of the government is played by the DRDAs and increasingly by Gram Panchayats. The DRDAs largely have low capability for micro-planning and implementation. PRIs vary in capabilities across states, and Box 3.1 Misdirected Subsidies which Benefit Non-poor more than the Poor Electricity subsidies to agricultural consumers in India A key government policy in India has been the subsidization of electricity to agricultural consumers as a way of providing support to poor farmers. However, research in two states has shown that the subsidy is often made to the target population by charging the farmer only a flat tariff for each water pump he has rather than billing for the kwh of electricity consumed. This technique provides greatest support to farmers operating larger farms. Expenditure on electricity for large farmers represents 6 per cent of gross farm income; it rises to 13 per cent for small or marginal farmers. Under-priced electricity services to households in Bangladesh Bangladesh, like many countries, charges electricity prices to households that are cross-subsidized by other consumer groups and also subsidized by the government. This support mostly reaches the better-off owing to low connection rates. Consider the following data from the Household Income and Expenditure Survey: Connected Households (per cent) Quintile income group Urban Rural Combined 1 (poorest) (richest) Source: Monari (2002), BBS (2003), WSP (2002).

77 Financing of Rural Infrastructure 53 are also not quite ready to take over efficient management of programmes yet. CENTRE-STATE COST SHARING Most of these schemes require 25 per cent contribution from states. Experience has shown that state governments are often slow in offering their share. In Kerala, the state government has taken a policy decision to transfer all small single village water supply schemes to gram panchayats. However, even with such a decision, the process has been slow and only a limited number of about 1000 such schemes have really been transferred. The state governments often give the alibi of inadequate capacities of the local authorities to execute these programmes. There is a case for reform-linked incentives and assistance from the Centre to the states. Enactment of the 73rd Amendment developing a framework of user charges, to create space for private finance could form the basis for setting up these criteria (Mehta et al. 2003). PRICING OF INFRASTRUCTURE The required reforms in infrastructure sectors include restructuring of pricing as an essential part of effective management. In irrigation a chasm exists between the cost and pricing of irrigation, which doesn t augur well for the development of irrigation infrastructure. The water rates collected by several states served by public works are neither revised regularly to keep pace with the escalating costs, nor are sufficient to meet the working expenses, let alone cover fixed investment or earn a rate of return over the investment. Tamil Nadu revised water rates thirty years ago, Punjab, Haryana, Kerala did so in the mid-1970s, while Andhra Pradesh, Bihar, Rajasthan, Orissa, and a few others did so in Andhra, Gujarat, and Karnataka tried to implement a new regime which got held up due to various reasons. The Committee on Infrastructure Pricing stressed the need to view the strategy for reform of water pricing as part of a larger programme of modernization of irrigation systems, and restructuring of their management. Fund utilization of government schemes has historically been seen as patchy and inefficient. Experiences such as Rogi Kalyan Samiti 5 in Madhya Pradesh show that as soon as market mechanisms such as pricing of services are allowed to function, in synergy with the government intervention, all parties begin to play a more efficient role. The increased accountability and transparency of such systems due to the presence of other players, including the community, is likely to ensure better utilization of funds (Box 3.2). 5 The Rogi Kalyan Samiti is a patients welfare association comprising local politicians, government officials, doctors, donors, and community leaders. Rural Infrastructure Development Fund The Rural Infrastructure Development Fund (RIDF) was launched in to address the inadequacy of public investment in agriculture and rural development, and was housed with National Bank of Agriculture and Rural Development (NABARD). The initial corpus of Rs 2000 crore was raised through contributions both from public and private sector banks with shortfalls in agricultural lending. In each successive year, the RIDF received additional corpus, and as of September 2006, a total corpus of Rs 60,000 crore reposes with the RIDF (Box 3.3). NABARD describes the success of the RIDF using two criteria the high social return and employment generation and the near perfect repayment experience. Both these however, are not direct pointers to the success of the RIDF. Irrigation projects per se have a high social rate of return in waterconstrained or water-uncertain situations. The RIDF only funded completion of such projects, after the larger proportion of cost had already been undertaken. So, ignoring the sunk costs, the RIDF IRR would obviously show high returns. Similarly for the latter, all loans given were against state government guarantees and the governments had an additional incentive to repay because the disbursement growth rates were higher than the debt servicing needed. The RIDF did relatively little to check quality of infrastructure created or completed with these funds by state governments. Taking the case of Rajasthan, Morris (2003) shows that of the 179 schemes sanctioned between RIDF I to VI, 76 were reportedly completed, yet on a physical inspection, several of these were found to be actually unfinished. Also, from an advance of Rs 9.5 crore in , the State Finance Department had disbursed only Rs 35 lakh till These funds were actually used to improve the ways and means situation of the state. Often the states did not make adequate budget provisions for infrastructure spending, despite higher loans sanctioned by the RIDF. Inadequate provisions have led to delays in completion of many projects. Cost overruns are only around 7.8 per cent but time overruns are rampant across RIDF funded projects. The cost and time overruns do not account for benefits lost on account of delayed completion, and are underestimations to that extent. While the RIDF was conceived with the right ends in mind and was funded appropriately from shortfalls in priority sector lending, it has in effect been reduced to just another pool of funds available to state governments. Data does show that the fund sanctions were weakly linked with the state fiscal situation, which can be called an improvement over direct allocations by the central government. Given that NABARD is a specialized funding agency with appraisal and monitoring capabilities, RIDF should have enhanced the governmental system s understanding of rural

78 54 India Infrastructure Report 2007 Box 3.2 Rogi Kalyan Samiti Rogi Kalyan Samitis (RKS) are registered societies constituted in the government health delivery system in Madhya Pradesh, as an innovative mechanism to involve the people s representatives in the management of the hospital with a view to improve its functioning through levying user charges. The first RKS was constituted in 1997 in Indore. RKS have been set up at four levels of hospitals including district hospital, civil hospital, community health centre and primary health centres. It is a community-focused initiative with an executive and a general body, which have membership from the local elected representatives, bureaucrats, doctors, donors, and community representatives. Clear role-definition, transparency and accountability for the management, in addition to the budgetary allocation to the hospital, have transformed these into vibrant institutions, which cater to the needs of the poor effectively. The Samiti is allowed to levy fees for hospital services in government hospitals, and this revenue accrues to the Samiti, not the government. The revenue can be applied to a defined set of activities as decided by individual samiti. Among the various uses are purchasing of consumables such as medicines, reagents, X-Ray plates, ensuring of regular maintenance, repairs, cleaning, security, and hospital waste management. The government budgetary allocation to the hospital is used to meet the wage bill. This has led to substantial improvements in service delivery, in the sanitation and work environment of the hospital, and a reduction of cost of health care to the poor, who were earlier compelled to purchase consumables from private shops. Box 3.3 Rural Infrastructure Development Fund K.G. Karmakar The GOI established a fund to be operationalized by NABARD in the Union Budget called the RIDF which was set up within NABARD by way of deposits, from Scheduled Commercial Banks operating in India, to the extent of shortfall in their agricultural lending subject to a maximum of 1.5 per cent of the Net Bank Credit. The scheme has been continued with substantial allocations in the successive Union Budgets and NABARD has partnered various State Governments in the creation of rural infrastructure. Initially, the mandate under the Fund was to support projects in the irrigation sector where substantial investments had been made but which could not be completed owing to resource constraints of the State Governments. Over the years, the coverage under RIDF has been made more broad based in each tranche and at present, a wide range of 31 sectors under RIDF XII are being financed (Table B3.3.1). Table B3.3.1 Eligible Activities under RIDF XII 1. Rural Roads; 2. Rural Bridges; 3. Minor Irrigation Projects/Micro Irrigation; 4. Soil Conservation; 5. Flood Protection; 6. Watershed Development/Reclamation of waterlogged areas; 7. Drainage; 8. Forest Development; 9. Market Yard/Godown, Apna Mandi, rural haats and other marketing infrastructure; 10. Cold storage, Public or Joint sector cold storage at various exit points; 11. Seed/Agriculture/Horticulture Farms; 12. Plantation and Horticulture; 13. Grading and certifying mechanisms such as testing and certifying laboratories, etc.; 14. Community irrigation wells of irrigation purposes for the village as a whole; 15. Fishing harbour/jetties; 16. Riverine Fisheries; 17. Animal Husbandry; 18. Modern Abattoir; 19. Medium Irrigation Projects; 20. Mini Hydel Projects; 21. Drinking Water;

79 Financing of Rural Infrastructure Infrastructure for Rural Education Institutions; 23. Public Health Institutions including mobile health clinics; 24. Construction of toilet blocks in existing schools, where necessary, specially for girl students, so as to improve the amenities available in schools; 25. Pay & use toilets in rural areas; 26. Major Irrigation Project (only those projects already sanctioned and under execution); 27. Village Knowledge Centres; 28. Desalination plants in coastal areas; 29. Small Hydel Projects (up to 10 MW); 30. Infrastructure for Information Technology in rural areas; and 31. Construction of Anganwadi Centres. The annual allocation of funds announced in the Union Budget has gradually increased every year from Rs 2000 crore in (RIDF I) to Rs 10,000 crore for (RIDF XII). The aggregate allocations have reached the level of Rs 60,000 crore. Further, a separate window under RIDF has been created with a corpus of Rs 4000 crore for partly funding the rural road and bridges components of the Bharat Nirman Programme in NABARD, as the manager of the Fund ensures even and equitable distribution of the RIDF corpus to all states. The allocation of funds among the states is made on the basis of the geographical area of the state concerned, the percentage of rural population, the stage of infrastructure development index, and trends in sanction/disbursement under earlier tranches of RIDF. Deviation from this norm becomes inevitable when sufficient number of projects are not received from some of the states in time. The GOI approves the list of eligible activities for project formulation by the state government to be financed under each tranche. Projects received from various departments through the Finance Department of the state governments, are sanctioned by the Project Sanctioning Committee of the Board of NABARD after detailed technical, financial, and economic appraisal of the projects. The size and spread of the projects being large, implementation period of 3 years is provided and need-based extension is also given. The rate of interest applicable on lending to the state government and payable to Commercial Banks on their deposits are also decided by the GOI/RBI. The loan repayment period presently is extended over 7 years, including a grace period of 2 years. Loans are released by the respective Regional Offices of NABARD on a reimbursement basis after satisfactory completion of the prescribed formalities and progress in implementation of the individual projects. A start-up advance may also be granted to State Governments to facilitate expeditious commencement of the works. Table B3.3.2 Tranche-wise Sanction, Disbursement, and Completion of Projects (Rs crore) Project Number of Number of Number of Completion Number of Amount Sanctioned Ongoing Completed Reports Non-starter Tranche Sanctioned Disbursements Projects Projects* Projects Received Projects RIDF I 1, , , ,131 4,117 0 RIDF II 2, , , ,576 7,498 0 RIDF III 2, , , ,013 13,399 0 RIDF IV 2, ,482 6, ,433 4,621 0 RIDF V 3, , ,254 1,478 10,776 9, RIDF VI 4, , ,354 2,063 41,291 39, RIDF VII 4, , ,987 12,118 12,869 11,355 1,261 RIDF VIII 6, , ,012 10,492 10,520 7,643 1,783 RIDF IX 5, , ,605 5,772 13,833 7, RIDF X 8, , ,979 58,870 1, ,934 RIDF XI 8, ,440 30, Total 51, , , , ,677 76,975 6,501 Note: * Includes non-starter projects separately indicated in the last column of the table. Source: Computed by author.

80 56 India Infrastructure Report 2007 With the close of RIDF XI in , the cumulative number of projects sanctioned during the last eleven years ( to ) stood at 244,651, entailing RIDF assistance of Rs 51,283 crore. Of the total assistance sanctioned 53 per cent has been accessed by six states (Andhra Pradesh ranking first (14 per cent), followed by Gujarat and Uttar Pradesh (9 per cent each) and Tamil Nadu, West Bengal, and Madhya Pradesh (7 per cent each). The balance was availed by the remaining twenty-two states. Tranche-wise details of projects sanctioned, amount disbursed, projects completed and so on as on 31 March 2006 are given in Table B The aggregate disbursements under all the projects sanctioned under RIDF stood at Rs 31, crore as on 31 March All the projects sanctioned in one tranche do not get completed during the tranche period and the operative period for disbursement under the tranche is extended based on the requests of the state governments. Out of the total 2.45 lakh projects sanctioned so far, 121,677 projects were completed by the end of 31 March Once completed, the projects sanctioned are expected to provide irrigation to lakh ha, 2.02 lakh km of roads, 3.69 lakh metres of rural bridges, 70.5 MW of power, 6337 Primary Health Centres, 61,956 schools, and drinking water to 6229 villages and save 22,334 lakh units of power. There are non-starter projects 6 which account for 2.6 per cent of the total projects sanctioned (2.45 lakh). Prior to RIDF, infrastructure projects were funded out of the budget resources by the State Governments in a sporadic manner and many projects were even abandoned midway, thereby locking in scarce public funds. RIDF helped to introduce a project mode in the infrastructure funding by the state governments. Financing of rural infrastructure under RIDF became project-oriented, based on compliance with technical feasibility and economic viability in conformity with the policies and priorities of the State Governments. The Governments started viewing RIDF projects as investment activities to create productive assets which were expected to realize benefits over an extended period of time. RIDF postulates adequate annual budgetary provisions to meet various project expenses and repayment obligations by the project implementing departments of the state governments. Further, loans are released under the sanctioned projects after ensuring the quantity of the work completed, on a reimbursement basis. This arrangement creates a sense of accountability and involvement by the implementing departments. The project approach enables governments to ensure punctual completion of projects, thereby saving on time and cost overruns. Through the RIDF mechanism, the endeavour of NABARD has been to inculcate a sense of discipline in project management by the implementing agencies, by focusing on scientific project appraisal and quality monitoring of works execution. Apart from the monitoring at the state government level, implementation of the sanctioned projects are subjected to close on-site and off-site monitoring by NABARD including select major projects monitored independently by reputed institutions like ORG-MARG, TCS, L&T, CES Ltd., and so on. CHALLENGES AHEAD Despite reasonable success, the RIDF also had its fair share of constraints as is to be expected in rural infrastructure projects, mostly at the level of the state governments, with difficulties in land acquisition, obtaining statutory clearances, awarding technical and administrative approvals and inadequate budgetary provisions which had, at times, slowed down the pace of project implementation. Inadequate capacity of the smaller states in project formulation, execution, and monitoring, has also resulted in skewed distribution of RIDF sanctions, across geographical boundaries. NABARD has been constantly interacting with the state governments to provide adequate and timely budgetary support, expedite administrative and technical approval as also environmental/forest clearances, ensure necessary legislation for formation of user groups, such as Water Users Associations and for collection of user charges for reducing their financial burden and to enhance RIDF effectiveness. In the Union Budget , it was announced that specified projects under Public Private Partnership (PPP) Model have now been made eligible to access RIDF Funds. State governments have been requested to provide feedback on the scope available for operationalizing projects under the PPP framework. NABARD is in the process of exploring prototypes in select areas on a pilot basis. Note: Views expressed here are those of the author of the box. infrastructure financing issues. But the manner, in which state governments have treated the RIDF, merely as another source of funds, does not indicate that much learning has been acquired. If the RIDF had led to a better understanding of risks in financing rural infrastructure, it could have shared such analysis with other financial institutions and there could have been greater private sector interest in rural infrastructure investments. The risk taking abilities of actors in the system 6 A project is classified as non-starter if its implementation does not commence within six months from the date of release of start-up advance from NABARD. have not changed substantially and the RIDF has not quite taken rural infrastructure financing to the next logical level. In some ways, therefore, the RIDF despite having filled a crucial gap, has not fundamentally influenced the paradigm for financing rural infrastructure. Other Public Financial Institutions SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI) SIDBI has schemes designated for developing Industrial Infrastructure for Small Scale Industries (SSI) and Integrated

81 Financing of Rural Infrastructure 57 Infrastructure. The former caters to small industrial parks, common facilities, warehousing and market facilities of up to Rs 10 crore and the latter caters to cluster development by creating or upgrading infrastructure facilities including water, power, telecom, industrial effluent plants, and others of up to Rs 5 crore in rural and backward areas. These schemes had provisions of grant funding from the Central and State governments and lending by SIDBI, but do not seem to have made a dent in infrastructure financing in India. SIDBI could have played a role complementary to NABARD RIDF in the interests of creating an enabling environment for rural non-farm sector enterprises but has mainly confined its work to urban clusters. HOUSING AND URBAN DEVELOPMENT CORPORATION (HUDCO) HUDCO is a national financing agency with a dedicated focus on housing for economically challenged sections of society. The non-housing portfolio of HUDCO includes sanitation and water supply, sewerage, drainage, solid waste management, roads, and bridges. While the infrastructure financing is increasing as a proportion of HUDCO s portfolio, the concentration is entirely urban. While HUDCO has lent over Rs 260,000 crore for infrastructure projects in urban areas, it currently provides finance only for shelters in rural areas. The expertise and resources of an apex institution can be better utilized by enhancing its scope to include rural infrastructure as well. NATIONAL COOPERATIVE DEVELOPMENT CORPORATION (NCDC) NCDC was established in 1963 under the Ministry of Agriculture. It extends term loans to cooperatives for creation of infrastructural facilities like godowns, cold storages, equipment financing, transport vehicles, boats, and other tangible assets and also for establishment/modernization/ expansion/rehabilitation/diversification of agro-processing industries. The scope of the NCDC s activities has been extended by an amendment to its Act, to include assistance for certain notified services in rural areas like water conservation, irrigation and micro irrigation, agri-insurance, agro-credit, rural sanitation, animal health, and so on. Construction of Cold Storages and Ice Plants The NCDC provided assistance to build 313 cold storages (including capacity expansion) with a total capacity of 0.9 million tonnes as on March Of these, 285 cold storages, with a total capacity of 8.46 lakh tonnes, have been completed. The Corporation has, so far, provided about Rs crore for establishment of cold storages. The assisted cold storages are mainly for storage of potatoes, though items like fruits, tamarind, spices, and milk products are also being stored. Packing and Grading Sheds and Godowns The NCDC provided assistance to cooperatives at the primary level as well as at the mandi level and for the establishment of fruit and vegetable processing units. As on March 2004, 48 cooperative fruit and vegetable processing units were sanctioned out of which 39 have been installed. The NCDC has sanctioned Rs 41.3 crore for establishing such units. Marketing Infrastructure including Retailing The NCDC provided a total investment of Rs crore to assist 1431 cooperatives towards infrastructure and business development. The projects have helped in creating necessary infrastructure in the rural areas. Under the projects, 28 million tonnes of godown capacity has been created at the primary society level, besides which 212 strong room/lockers and 352 deposit counters have also been established for mobilising the deposits in the rural areas and starting mini banking activities through village cooperatives. While the financing efforts of NCDC are welcome, particularly as they go to financing user groups (exactly what cooperatives are supposed to ensure) the overall financing by NCDC in comparison to the unmet demand is rather small. Private Funding With public sector resources under pressure due to prior commitments of the government on salaries, pensions and interest payments of past borrowings, there is need to raise funds from private sources for infrastructure creation. The economic reform process has not quite extended to rural India yet. Not surprisingly therefore, private funding for rural infrastructure has neither been systematically invited nor has it come forth save some experimental money, largely at the behest of development organisations. Public financial resources and the government s administrative capacity are overburdened, and private sector participation will help ease the situation in rural infrastructure. The private sector stayed away from rural infrastructure daunted by long gestation periods, lack of information on risk profiles, perception of inadequate financial returns, regulatory restrictions, and ambiguity. Other hurdles include relatively low income density (income per square kilometre, which is depressed both by lower income per household in rural areas as compared to urban areas as well as lower number of households per square kilometre) and high incidence of subsidised (though poorly performing) services leading to unchecked pilferage, as in the case of electricity. While the Government admits to limitations of budgetary support as the sole source of funding, and is taking steps to invite private funds for infrastructure, these steps are mainly for large industrial infrastructure. Attracting private capital for rural infrastructure requires the

82 58 India Infrastructure Report 2007 policy-makers to rethink their approach and strategy and play a proactive promotional role. Minor irrigation infrastructure has been significantly funded by private money, supplied through institutional sources and accessed by individuals. Groundwater, which forms the source of a large proportion of minor irrigation supply, is largely accessed through dug wells and tube wells, much of which is privately financed. Factors which contribute to rapid development of groundwater structures include new agricultural technology, better access to credit, and expansion of rural electrification. The down-side of these supportive factors and their largely unregulated expansion is that states such as Punjab, Haryana, Rajasthan, and Uttar Pradesh have already over-exploited their groundwater. There have been private sector initiatives for construction of household toilets. Overall, however, the private sector s involvement in O&M in the water and sanitation sector is still very limited. One of the reasons is that maintenance is usually considered a state responsibility. There are no cases of organized large-scale private involvement in water supply. In health and education, the involvement of the private sector is widespread at all levels, be it the village medical practitioner, the entrepreneur who runs a one-room Englishmedium school or the large super-speciality hospitals and deemed universities for professional education. One sector where private investment overtakes that from public sources is storage infrastructure for perishable and semi-perishable commodities. Eighty per cent of the cold storages, accounting for around 94 per cent of the total capacity countrywide, are from the private sector. Apart from easing the fiscal position, there is a belief that with private sector participation, investments will be better managed with likely efficiency and productivity gains. The reform process for the electricity sector in India has shown that creating incentives for state-owned enterprises is difficult and the outcomes are far from certain. Overall, both unfulfilled demand of infrastructure services and constrained supply of finance, management and governance are factors which discourage private capital from rural infrastructure financing. Existing specialized public institutions such as the RIDF need to play a pioneering role in catalysing these investments. We need to take cues from private investments in urban infrastructure for the poor in devising innovative solutions to suit specific local requirements. These institutions can play a larger role in formulating risk profiles and addressing other issues related to investment in rural infrastructure. Multilateral Agencies Multilateral aid agencies such as the Asian Development Bank (ADB) have schemes designed to lend to specialized institutions at the apex level, which on-lend to retail institutions to enable delivery of market-based housing finance to low income households. ADB offers a combination of long-term loans and technical assistance grants to financial institutions such as HUDCO, IDFC, ICICI, and NHB who are further entrusted with on-lending of these funds to institutions which work more closely with poor communities. The World Bank has also extended several loans to state governments for establishing irrigation projects and command area development endeavours, rural roads networks and agricultural produce market yards, apart from large power sector projects which also benefited rural areas to some extent. The World Bank has also funded the Karnataka Rural Water Supply Project in the mid-1990s, while experimenting with several models related to community participation and user fees. Insurance Companies Insurance companies potentially have large pools of funds, and their long-term maturity matches the investment needs in infrastructure. Currently, except for the gigantic governmentowned Life Insurance Corporation (LIC), the total amount of investible funds is still small with private life insurance companies. As per the regulations of the Insurance Regulatory and Development Authority, 15 per cent of the investments of any insurance company should be in infrastructure. The LIC alone had plans to invest Rs 10,000 crore in infrastructure in Commercial Banks Commercial bank deficit in sectoral lending to agriculture is called forth by the GOI into the RIDF. This, in some ways, is their contribution to rural infrastructure lending, and a convenient one at that because the risks and transaction costs are very low. The direct lending by commercial banks to infrastructure in rural areas receives purpose-wise refinance from NABARD. In the year , the rural infrastructure loans disbursed by NABARD to Commercial Banks, RRBs, Cooperative Banks included minor irrigation of around Rs 679 crore, land development of Rs crore, storage/market yards of Rs 32.3 crore across all these banks, and forestry development of Rs 7.1 crore. That this is largely all that commercial banks have to offer to rural infrastructure is at one level understandable, because infrastructure financing requires a completely different set of skills from other types of credit. The existence of an extensive rural banking network, however, makes a worthy case for these banks to engage in infrastructure financing in rural areas. These banks need to be incentivized to finance infrastructure with innovative delivery mechanisms closely linked with the

83 Financing of Rural Infrastructure 59 Box 3.4 Revival of Lift Irrigation Schemes After the enactment of the Andhra Pradesh Farmer Management Irrigation Systems Act, 1997, the AP Irrigation Development Corporation (APIDC) handed over nearly 200 defunct lift irrigation schemes (LISs), typically with a command of acres, to newly elected water users associations (WUAs) of farmers. BASIX, a livelihood promotion organization which pioneered the microfinance movement in India, jointly with PRERNA, an NGO, worked to revive one of these, in Gudebellur village along the banks of the Krishna river in Mahabubnagar district of AP. BASIX gave a loan to the WUA for repairs of the electric pumps and channels and reconnection of electricity. The result, with an investment of Rs 2 lakh, was the revival of the LIS worth Rs 2 crore! In the first year, 1998, the farmers could irrigate about 650 acres out of the potential 1200 acres. The work was taken by PRERNA to six other LISs. In 2003, the APIDC set up a programme for the revival of all the 200 plus defunct schemes. community and to extend finance with working arrangements with other agencies such as microfinance institutions. Micro-finance Institutions Within infrastructure, micro-finance institutions (MFIs) in India have experimented with financing largely household level facilities including water and sanitation systems, shelter, and shelter improvement. Some MFIs have successfully lent for common facilities and revival of community level infrastructure such as lift irrigation infrastructure, in combination with some grant funds to undertake capital repairs. Association of Sarva Seva Farms (ASSEFA), an NGO in Tamil Nadu, has established several types of community infrastructure in rural areas of the state. BASIX gave loans to farmers to revive lift irrigation structures in Andhra Pradesh (Box 3.4). BASIX has also designed a water and sanitation loan product which enables poor households to access piped water supply and build toilets. In infrastructure finance the role of MFIs is primarily to finance the household level demand, rather than to finance complete infrastructural facilities at the village level. The strength of MFIs is close community contact, as a result of which they are in a position to be more demandresponsive than other agencies. Also their understanding of the risk profile of customers and appropriate delivery mechanisms is inevitably sharper enabling them to provide innovative financing schemes for purposes of housing, water and sanitation, energy, market yards, cold storages, milk chilling plants, and so on. In India, most MFIs have an NGO background, and to that extent are well equipped in carrying out the grassroot developmental work to ensure effective solutions for financing rural infrastructure. Moreover, MFIs can act as useful conduits for soft funds for infrastructure financing, without contaminating the user community with effect of subsidies. Infrastructure creation is complex and often beyond the technical capacity of the target community, which necessitates the involvement of other stakeholders such as energy companies, water and sanitation experts, local governments, and so on. Simple products such as house construction and house repair loans have been given successfully by NGO/MFIs such as ASSEFA and IASC. More complicated products however, require combination financing and management, for which MFIs need to partner with other agencies. Developmental organizations such as ASSEFA have designed multiple infrastructure products, each financed by a combination of relevant actors. It is important to recognize the limitations of microfinance in infrastructure financing, as MFIs typically offer credit which is small in size and has a short tenure. The average term of a microfinance loan is one year and the total lending by all MFIs in India by the end of March 2006 is around Rs 4000 crore covering around 4 million households. Given the unmet demand for infrastructure finance in India, the current outreach and resources of MFIs are miniscule. The creation of infrastructure on a substantial scale, which often requires lumpy investments, is essentially beyond the purview of microfinance. For financing community infrastructure projects beyond the household level facilities, funds with medium to long term tenures are needed. In most cases, the MFI does not have access to such funds and external funds of such tenure would be necessary to avoid the term mismatch. The value that MFIs can add is to develop small success cases and demonstrate these innovations in rural infrastructure financing to the mainstream players. Community Financing The common assumption that the poor cannot or will not pay for infrastructure services is increasingly being proven incorrect. There are studies which show that rural customers dedicate a larger proportion of their disposable incomes to infrastructure services compared with their urban counterparts (Waughray and Moran, 2002). Thus it is possible to convince the community to contribute, provided there is a locally

84 60 India Infrastructure Report 2007 Box 3.5 Community Financing in Building Infrastructure COMMUNITY MANAGED RURAL MARKET PLACES, TAMIL NADU ASSEFA has been engaged in development of rural markets to serve about ten to fifty villages. The communities participate in donating the land for setting up the market, provide free labour and locally available materials. A separate market management committee is established with the elected members from the local community to manage the operation and the fees collected from the retail sellers to meet the recurring expenditure. ASSEFA s assessment suggests that given the high demand and willingness to pay by the farmers and retailers a financially viable model is possible. LOCAL MULTI-PURPOSE COMMUNITY HALL, TAMIL NADU The hall has been built in Manithotam, Tamil Nadu. It is owned by the local community and is used for multiple purposes such as weddings, family celebration, and community functions. It is engaged for about 100 to 120 days in a year and a commercial charge is levied for its use. This is also initiated by ASSEFA in different locations as revenue generation for the local community. A COOPERATIVE DAIRY COMPANY, TAMIL NADU ASSEFA has facilitated the establishment of dairy infrastructure such as chilling plant and milk processing plants in Kanchipuram, Vellupuram, Chinnasalem districts in Tamil Nadu. The surplus milk is collected daily by 3000 to 5000 women and is processed, packaged, and sold in the semi/urban areas on a profitable basis. A Section 25 Company has been established with locally elected representatives on the Board of Directors. Qualified persons have been employed to manage the operation with a professional approach. Such initiatives have been established in 5 areas, each benefiting about 3000 to 5000 rural women. The local community has raised external loans for upgrading/expansion of the company to benefit more women under this venture. SCHOOL INFRASTRUCTURE, TAMIL NADU ASSEFA has established over 400 rural schools in different parts of Tamil Nadu. The parents of children from the local community formed a School Committee to manage the school. The school committee ensures quality education to the children by appointing qualified teachers and providing pucca infrastructure. To meet the expenditure they have developed a revenue model based on fees collected from the children, extra fees collected from community functions, donations raised, as well as resources tapped from the government. This income also helps to improve or expand the school infrastructure. trusted organization such as an NGO or a good panchayat. Community contribution is a meaningful strategy, not only from the perspective of generating additional funds but also for better management and governance of community projects. Community contribution brings a sense of ownership and leads to better management of commonly owned infrastructure. The user community could play a significant catalysing role in inviting investor confidence by contributing funds. The community stake ensures that if systems are built appropriately the community can hold the other stakeholders accountable and demand proper service. Community cost sharing needs to be done based on sustainable financial rules. While several government programmes do have community cost sharing modules in their design, often low levels of community contribution are arbitrarily fixed leading to failure in generating adequate stakes for the community. The concept of community cost sharing has to be translated into actual strategies, including building participatory structures at the local levels. Mandatory contribution by the community without adequate education and mobilization can lead to a situation where they use borrowed funds to meet their contribution and participation becomes a burden rather than a step to empowerment. On the question of cost recovery through user charges, it is interesting to note the following data from a World Bank study in India. The World Bank has made assessments of costs associated with poor rural water supply services for six states. 7 The opportunity cost of time spent in collecting water is Rs 12 per household per day while that for time spent due to open defecation practices stands at Rs 9 per household per day. In addition, the health costs due to diarrhoea and gastroenteritis diseases are likely to be around Rs 300 per household per year. This opportunity cost totals up to Rs 21.8 per household per day, close to half the daily income of a BPL household with one income earner. These estimates point towards the ease with which the community is likely to opt for 7 Figures based on household surveys of World Bank Project appraisal documents. States covered are Uttaranchal, UP, Karnataka, Kerala, Maharashtra, Tamil Nadu (World Bank, 2006b).

85 Financing of Rural Infrastructure 61 payment of user fees in a scenario where the provision of the water supply service can eliminate the costs associated with existing practices. The study shows that the O&M cost recovery from beneficiary communities is generally in the range of 10 to 50 per cent for water services. The O&M cost recovery for piped water schemes is much higher than for handpump and standpost schemes (World Bank, 2006b). ASSEFA s experience in Tamil Nadu in creating rural infrastructure with community contributions and stake is encouraging and shows high demand and willingness to pay for such infrastructure (Box 3.5). WORKABLE INFRASTRUCTURE FINANCING MODELS FOR RURAL INDIA With the liberalization of the Indian economy in the early 1990s, the regulatory environment is increasingly supporting experiments in private financing of infrastructure. The 73rd CAA has cleared the path for empowering local bodies in decision-making and choice. As a result we also see examples of community participation in infrastructure service provision and financing. The progress of private sector and community involvement is halting, as the political and economic changes needed to accommodate and encourage their participation are slow. In this context, we take a closer look at partnership models in infrastructure (mostly urban), along with examples of similar attempts in India or abroad to explore possible options for financing rural infrastructure. Kinds of Partnerships/Contractual Arrangements Contractual arrangements between the public and private sector take many forms, and these infrastructure partnerships can largely be classified based on the levels of risk, regulations, and the nature of the infrastructure. 1. Service contracts, as short-term engagements, usually outsource specific operations or maintenance of existing infrastructure. This inherently limits the scope of private involvement but also limits the risk associated with providing the service. 2. Management contracts are better suited for privatization of stable infrastructure. While retaining ownership, this arrangement outsources the entire operations and maintenance to the private sector. Management contracts are also used to gradually move infrastructure towards privatization. 3. Leases, while similar to management contracts in most respects, also transfer the assets and their streams of income. This effectively increases the private partner s exposure to the risks of commercial operation. Leases generally provide gains in operational efficiency and service but provide little incentive or framework for expansion of infrastructure. 4. Concessions place the responsibility of investments for expansion on the private partner while the public partner retains ownership of the assets. As private partners take on more and more responsibility, appropriate regulations are needed, and the terms of agreement need to be clearly defined. 5. Build-Operate-Transfer (BOT) model and its many varieties differ from concessions in terms of asset ownership. The private partner generally builds and operates the infrastructure for a significant period of time before transferring the asset to the government. There is flexibility in BOT financial arrangements to mitigate the demand risk for both parties. Depending on the type of infrastructure and regulatory framework, the public partner agrees to cover a certain level of demand or a per unit charge for consumption and related expenses, thus varying the exposure to demand generation for both the private and public partner. 6. Finally, there is divestiture in which the assets are completely owned by the private partner. While the government is not exposed to any financial risks thereafter, it must have a mature regulatory framework to manage and monitor privatized infrastructure. Especially in the context of rural infrastructure, systems must be in place to encourage expansion of the infrastructure to remote areas (Table 3.5). In the rural context, due to uncertainty of demand and high risk perception, it is difficult to see the private sector stepping in, in any of these forms yet. It is therefore, essential for most models to have a strong community involvement component. Active participation brings a better understanding of the end users consumption habits, the local context of fee collection, and involvement of the community in the design and maintenance of infrastructure which are essential components for the success of any rural project. Franchising may also be explored as a way for private investments to empower entrepreneurs in the local communities to provide operations and maintenance for infrastructure. This effectively places the responsibility of ongoing service quality and cost within the local community under the broad supervision of the infrastructure developer. PPP Options and their Applicability in Rural Context Public-private partnerships (PPP) in the rural context are still in their nascent stages. Therefore, it is too early to label specific models that will work and those that will not. Given the complexity of the rural context, creating space for private financing and the challenges of sustaining collaborations have led to mixed results so far. However, it is a worthy exercise to

86 62 India Infrastructure Report 2007 Table 3.5 Allocation of key responsibilities under the PPP options Option Asset Operations Capital Commerical Duration ownership and maintenance investment risk Service Public Public and Public Public 1 2 years contract private Management Public Private Public Public 3 5 years contract Lease Public Private Public Shared 8 15 years Concession Public Private Private Private years BOT/BOO Private and Private Private Private years public Divestiture Private or Private Private Private Indefinite private and public Source: Toolkits for private participation, (may be limited by licence) explore partnerships that might work or have worked for various types of infrastructure taking into account the economic, social, and political aspects. Water For areas that receive low rainfall, large structures such as dams and their associated distribution networks (which tend to be more expansive than rain-fed areas) provide water for the rural population, thus requiring more financing. Generally, in the local context, water related infrastructure naturally takes the form of a local monopoly. In the case of extensions from existing networks, it can be part of a larger monopoly. In India, most water related infrastructure is financed and managed by the government. There are political implications around collecting cost covering tariffs for providing water related services (Vaidyanathan, 2003). The case of the Pani Panchayats in Orissa serves as a good example of decentralization of operations and management in water infrastructure. Pani Panchayat was born out of need for community involvement, maintenance, and collections for water usage. The programme is a local community framework conceptualized by the state of Orissa to serve the end user through operations and management and tariff collections. Funds are raised directly from the end-user community in the form of share capital and membership fees, to sustain operations. Though the Pani Panchayats initially only supervise the operations and management of the tertiary system (portion of infrastructure directly interfacing with the end user), as the programme progresses, they will take on larger portions of the infrastructure and also participate in collections. It is worth noting that local NGOs played a critical role in creating awareness on this government initiative in the communities and assisted them in the registration and formation of the Pani Panchayats. The partnership between the state government, community end users and NGOs essentially took the form of a management contract. Despite the teething problems in decentralization and capacity building and organization of community based bodies, the productivity gains and corrections in wastage have been significant in the early years of this scheme (Rath, 2003). Build Operate Train Transfer (BOTT) is a tri-sector approach that consciously includes civil society organizations in public-private partnerships. To cite an international example, the South African government formulated the BoTT model that incorporated the strengths of all three protagonists. The government provided the funding for infrastructure, the private sector brought technical expertise, and the civil society organizations provided the community inputs into demand and design, as well as operation and maintenance costs from the community. Each BOTT functions as a for-profit organization. The consortium of the various partners bids for contracts to take on these projects from the government (Wadell, 2000). While it has faced its share of challenges in capacity development and fee collection, this approach has taken a much more holistic approach by inclusion of civil society organizations. Sanitation Sanitation, unlike water, demonstrates a greater social benefit to the larger community than the direct visible economic impact to each family. In this sector, therefore, awareness campaigns

87 Financing of Rural Infrastructure 63 Box 3.6 Rural Health and Environment Programme in Orissa Gram Vikas operates the RHEP in 12 districts of Orissa covering 105 villages, working with the marginalized groups to improve access to basic sanitation, health, and livelihoods. The RHEP s main offering is a covered toilet and bathing platform in each house, and piped water supply. Gram Vikas works through an approach in which each household is persuaded to make a contribution of Rs 1000 in a village corpus fund, which is put in a bank fixed deposit and the interest from that is used for meeting the maintenance costs. Only after 100 per cent of households make a contribution to the corpus, does the work begin. In this, the villagers contribute labour and local material such as sand and gravel. The costs of purchased items like cement and pipes and pumps, are met by Gram Vikas through donor funds. The villagers then take over the management of the system with occasional help from Gram Vikas. Additional work such as setting up a fish tank or planting trees to add to and protect the village forest is done around this work. The RHEP won the Global Development Network Award for are required to highlight the importance of sanitation for the general well-being of the community. Gram Vikas, an NGO in Orissa, initiated the Rural Health and Environment Programme (RHEP) where it serves villages with 80 per cent of the families below the poverty line. In the experience of Gram Vikas, in order to generate participation from the villagers in sanitation infrastructure creation, it was essential to build drinking water provisioning into the project. Gram Vikas operates by establishing a corpus fund for each village that requires each family to contribute around Rs 1000 and this money is kept in a bank for future expansions of the infrastructure in the village. 8 The villagers cover per cent of the cost, while the remaining funds come from external grants. The government has considered participating in this initiative through discretionary funds. The community is involved in the design and decision-making process, as well as capacity building for operations and maintenance (Box 3.6). Electricity Power sector infrastructure requires huge investments in production and transmission. Besides the economic constraints in rural India, transmission and distribution losses (both technical and due to theft), political interference, and the current financial disarray in the SEBs have deterred private investments in rural areas. In order to fulfil demand, alternative stand-alone forms of energy production have been introduced despite higher per unit expenses. Though there is little scope for this stand-alone infrastructure to be integrated into the eventual extension of traditional grids, that often seems to be the only viable alternative. To gain some learning from international experience in this regard, one may look at the case of Chile which, in its 8 This amount may seem a large sum for a village family, but it has been done in several villages in Orissa by Gram Vikas. For details please refer to the Gram Vikas website or contact Joe Madaith, the Director of Gram Vikas. attempt to expand electrification outreach, took on an ambitious and creative concessions-based engagement. This and simultaneous industry wide privatization helped increase the electrification of rural areas from 53 per cent in 1993 to 76 per cent in While privatizing the state-owned companies, Chile chose to separate generation and transmission from the distribution utilities. This helped build-in competition into the distribution of electricity. The distribution utilities were divided based on their region of operation and concession rights, but these concessions were not guaranteed, and instead were open to competition. The National Energy Commission was formed at the central level to act as the main policy and regulatory body which did tariff setting. The government pushed the decision-making down to the regional level while focusing more on funding, monitoring, design implications, and national policy. At the outset, a special fund was appropriated to encourage entry into rural areas that were most difficult to operate. Roads The transportation sector and roads have widely been viewed as an integral component for social and economic growth. Construction of highways, bridges, and routes to urban centres attract private investments in the form of BOT, BOO (Build Own and Operate) and BOOT (Build Own Operate and Transfer). The rural context requires significant, if not complete subsidization for roads due to difficulties in recovering cost from the community. Availability of resources has been the main constraint in maintenance of roads. Some states are adopting a levy of market fee on agriculture produce to generate additional resources for road maintenance. In this context, private sector maintenance of a 143 km state highway stretch between Bhopal and Dewas has seen encouraging results. There has also been some success in Latin America for rehabilitation and maintenance of roads through service contracts by forming localized community based microenterprises, which require some capacity building.

88 64 India Infrastructure Report 2007 Prerequisites for Attracting Private Sector Finance While the past few decades have demonstrated mixed results in public private partnerships in financing urban infrastructure, the rural context of India presents a set of additional challenges. The dispersed but vast population, a government induced culture of artificially low tariffs, culture of non-payment for services, and therefore, relatively high risk perception, have kept private financing at bay. Attracting private investments requires a competitive rate of return for the risks associated with the investment. Smart Use of Subsidies Subsidies can be used as financial instruments to attract private investments into rural infrastructure by effectively de-risking the investment. Governments generally face conflicting objectives and have to balance the tension between using subsidies to reduce tariffs charged to customers and attracting private investments (Mehta et al. 2003). Historically subsidies for new infrastructure projects relent to budgetary pressure during financial crisis. Chile s electrification scheme demonstrates the effective use of subsidies to create an environment of competition, incentives for entering areas of higher risk, and accountability for previous efforts. Special purpose vehicles (like the BOTTs in South Africa), allow stakeholders to assume genuine responsibility in projects. This also allows private investors to isolate the risk of infrastructure projects from other engagements. The necessary policies should support SPVs when attracting private partners to rural infrastructure projects. Move towards Cost Recovery The government must show a track record of maintaining cost-recovering tariffs to attract private investment. It must also demonstrate its commitment to realistic tariff setting and enforcement for payment for services. Often, due to improper design of subsidies, the tariffs collected for infrastructure services do not properly represent the customer s ability or willingness to pay for service. Demand Estimation The demand of rural communities is often underestimated. There are several reasons for such underestimation, including, lack of data, lack of efforts at understanding demand, confusing the government s hesitation to charge with inadequate ability to pay, history of bad service, and so on. Efforts are required to highlight the actual demand of rural communities. Underestimation of demand can be seen as a significant deterrent to private investment. For the challenges associated with underestimation in demand, community involvement and exposure are essential, and it is expected that demand itself will increase with greater exposure to the service. Regulatory framework Policy and regulation should help clarify roles of different actors between financing, building, and operating infrastructure, and regulation itself should be separate from all these. The appropriate government body should help manage policy changes and their impacts on infrastructure projects and ensure transparency in bidding and other government related activities. The state of Andhra Pradesh has created the Infrastructure Development Enabling Act (IDEA) specifically to expedite development of infrastructure and to facilitate issues between the public and private partners. Chile created the National Energy Commission (Comisión Nacional de Energía, CNE) for technical and project monitoring in the privatization of state-owned electricity companies. Chile also allowed the private sector the autonomy to handle the project details and operations. While some oversight and regulatory mechanisms are required, excessive involvement can be seen as a red flag to private investors. Therefore, clarity in the roles of each partner is essential for attracting private financing. Commissions like CNE and policies like the AP IDEA Act, in the context of rural infrastructure, can provide sector oversight and policy inputs that encourage public-private partnerships and development of rural infrastructure. Competition Competition encourages efficiency, transparency, and accountability. The non-exclusive concession system for electrification in Chile, awarded distribution to utilities, provided appropriate incentives to existing companies to protect their market share and expand even though rural electrification is costly. Prerequisites for Attracting Community Finance Infrastructure is likely to have some element of nonexcludability, some social and political attributes attached, and some history of supply and user behaviour. Participation and finance from the community will always require setting the stage for collective action. To enable collective action from the community for financing infrastructure, direct economic benefit has to be demonstrated. This demonstration is likely to remain abstract till the infrastructure is created and to that extent the community is being asked to experiment.

89 Financing of Rural Infrastructure 65 Community Involvement Community mobilization is the key to community engagement in infrastructure services. It is a critical component in the design, operation, and management of rural infrastructure. Demand driven infrastructure services are likely to be adopted by large numbers, and are, therefore, more likely to attract community finance. The various sustainable PPP infrastructure projects that have been successful often have strong representation from the community in terms of the design as well as the operation and maintenance of the infrastructure. As demonstrated in the RHEP, water and sanitation programme being run by Gram Vikas, Orissa, community based organizations play a critical role in looking out for the interests of the community and in mobilizing them. NGO/ CBO intervention is, therefore, crucial for engaging the community, with financial and physical contributions. Norms for user behaviour Collective action will always be a function of how well the norms for usership and user behaviour are defined. The community has to be held jointly responsible (along with the service provider) for efficient management and judicious use of the infrastructure services. Once the other institutional arrangements are in place, community finance will flow and will ensure not only community participation but also accountability from all parties involved. Access to Microfinance Access to microfinance can provide funding options to households to meet last-mile infrastructure needs. If the pipeline is provided by a subsidy, but the household water connections and taps need to be paid for individually by the community, microfinance is the ideal solution. In addition, microfinance can also help stabilize fluctuations in income, enabling the customer to pay for services on time. Many government programmes provide reimbursement, but communities have to mobilize funds up front. In such cases, access to bridge finance for community groups is needed. Contributions from the community can be sensitive to the overall pattern of fund flows into a system. Lack of predictability in fund flow, makes it difficult for the project to finalize their work programmes, and therefore, inhibits upfront contributions. Microfinance can help deal with such uncertainty. Stepping-up from O&M cost recovery to capital contribution At the first level, the community needs to pay operations and maintenance charges, and this itself requires significant awareness building and community mobilization. Any capital contribution from the community will follow a stage where O&M costs are fully recovered. Sound Institutional Arrangements Once the user community is playing the role of a shareholder or and is an active participant in the system, the system needs to ensure that their rights as users and responsibilities as owners are well defined. Their interface with the other actors in the arrangement, such as the government or private sector agencies, needs to be carefully designed. Contracting procedures need to be simplified for greater community involvement, as has been done in the Surat Municipal Corporation or for the community toilets in Pune. In the rural context, this has been tried in Andhra Pradesh, where several of women s self-help group federations have been awarded contracts for local road and culvert construction. Some Lessons from Successful Infrastructure Financing Ownership and Management Infrastructure should be managed like a business and should be responsive to consumer demands. Poorly performing infrastructure services are often marked by low levels of financial autonomy and consequently, discipline. Private sector participation in management, financing or ownership will, in most cases, be needed to ensure a commercial orientation in infrastructure (Raghuram et al. 1999). Technology The use of appropriate technologies rather than the best technology can attract consumers and reduce commercial costs. In Chile, the electrification programme addressed the challenges around rural electrification by encouraging both traditional distribution as well as stand-alone technologies. The small scale non-network service providers were given subsidies to create space for private investment to extend electrification to areas that could not be viably serviced by traditional distribution. Involving Community and Other Stakeholders To optimize outreach of infrastructure services, as also to ensure long-term maintenance of the asset, it is imperative to have representation from diverse stakeholders in the financing pattern of such infrastructure. The pattern of management and governance are to a large extent derived from the manner in which the asset is funded. Accountability and transparency in the systems can be enhanced with a wider ownership base.

90 66 India Infrastructure Report 2007 Experiences from Ghana and Cambodia show that sustainability of services requires financial allocations to be firmly linked with empowerment and participation of beneficiaries. Need to Develop an Institutional Base The more we penetrate the interiors of rural India, the more crucial the management aspect becomes, due to the near absence of institutions to support infrastructure in these areas. In this respect, NGOs play an important role in facilitating local finance mechanisms or acting as intermediaries between microfinance organizations and the poorest clients. Policy and Regulatory Framework Failure to develop a clear separation of roles between the policy maker and the provider may end up compromising both of these routes of accountability. Holding the provider accountable financially through consumer choice may be compromised if the provider is propped up by non-transparent subsidies. Similarly, the failure to clearly separate the roles of the policymaker from the provider tends to draw local politicians into the delivery of services rather than the establishment of guidelines for service delivery (WDR, 2004). Increasingly, the governments need to be responsible more for creation of policy, regulatory frameworks, and encouraging private involvement in the provision of infrastructure services. The stance of the policy-makers needs to reflect the changing reality which necessitates passing on the responsibilities to the user community and private investors and have them manage, maintain, and pay for it. Enhancing the involvement of private sector and the community, while appropriately manipulating the forces of competition and tools of decentralization, can lead to more effective and efficient implementation of the projects. THE WAY FORWARD Institutional Reforms to Attract More Financing Funds will flow only to those investments where it earns a risk-adjusted market rate of return. This axiom has to be observed in any institutional arrangement that we design. This means that first, all possible projects should be sorted in the sequence of viability or rate of return. This necessarily means investments will flow into those ventures which cater to a sufficient number of customers with the purchasing power and willingness to pay. Thus it is not a coincidence that enormous amount of private capital has flowed into cellular telephone network, because it meets these twin criteria. For activities such as rural electric supply, where there is a sufficient number of customers, but willingness to pay has been distorted by decades of subsidized provision, institutional changes would have to be made to rebuild willingness to pay. In the long-run scenario, if revenue improvement could be demonstrated on a steady basis, then it would be possible to attract private investment. This was attempted in Orissa after the unbundling of the OSEB into generation, transmission, distribution corporations and privatizing of the distribution companies (discoms). Unfortunately, the Orissa electricity sector, post privatization, has run into great difficulties and as a result the private sector is cautious about discoms. Such a failure is not a conceptual refutation and this strategy should be tried again with the learning gained from the Orissa experience as a resource. Power distribution gained in the Hoshangabad district of Madhya Pradesh demonstrates how institutional structures can evolve to make a success story of a rural power supply project (Box 3.7). To attract finance (investment and working capital) all actors, including the service providers, and the users need to work jointly towards diminishing the risk profile of the investment. This will often require them to be co-financers as well. Robust institutional arrangements between the various stakeholders are the essential underlying requirement for finance to flow smoothly. Institutional arrangements that the government endorses in each sector will determine user and private sector finance, as is evident from changing institutional arrangements in irrigation (Box 3.8). Continued and Supporting Role of Public Financing Public funding cannot be dissociated from infrastructure creation. It has to be recognized however, that neither does the state have a bottomless treasure-chest, nor has the current set of approaches worked well for infrastructure creation. This calls for both reduction in and reorganizing of the role that public funds play in infrastructure financing. Public funds are increasingly seeking innovative methods of addressing infrastructure needs. The implication of this for rural infrastructure financing is a more creative use of government funds earmarked for such work. Instead of the government funds being used as the sole or main source of funds, they should be used as equity or quasiequity, or even as a guarantee, and most of the financing should be done using other institutional funds, such as, RIDF funds or loans from commercial banks. This would significantly enhance the extent to which scarce government funds could attract infrastructure investments. For example, a minor irrigation project of say, Rs 50 crore can be either entirely funded by the government, (in which case it may take up to

91 Financing of Rural Infrastructure 67 Box 3.7 Sustainable Rural Power Distribution Project The Sustainable Rural Power Distribution Project in the Babai block of Hoshangabad district was implemented by BASIX in , with support from the Canadian International Development Agency (CIDA). Under this project, BASIX organized over 80 transformer user associations, each comprising 5 to 15 farmers owning agriculture pump sets, served by the same distribution transformer. All the transformers under a single feeder emanating from a 33KV sub-station were organized into such groups. Since the total number of hours electric supply could not be increased beyond the 6 hour per day that was available to the other feeders, the only thing that BASIX could promise, in consultation with Madhya Pradesh State Electricity Board (MPSEB), was a better service in terms of quicker attention to fuse calls and replacement of transformers in case of burn outs. Even this limited promise led to improved bill collection ratio and after a few months enhanced billing because many undeclared connections were registered. Eventually, the MPSEB was so pleased with this pilot effort, that it placed a whole sub-station in place of a feeder, which dramatically improved the voltage delivery to the farmers. This is a small example of the virtuous cycle that can be a trigger between an infrastructure provider and the users, provided the right institutional arrangements are made. Due to change of government in MP in 2004, this project could not be taken to the next planned step, which was to organize all the farmers along the four feeders emanating from the Babai sub-station and then establishing a power users mutually aided cooperative society, federating all the transformers users associations. This federation was registered but the sub station could never be handed over to them for management. Had this process gone through, the sub-station would have become a user group managed facility, whose ownership and technical support would have continued from the MPSEB. This would have significantly improved the billing to supply ratio and the collection to billing ratio, since these functions would have been in the hands of the users associations. In return the farmers would have got steady voltage, preventing frequent motor burn outs, as well as quick response to fuse calls and any infrequent transformer burnouts. Eventually the MPSEB could have increased the number of hours of supply to this sub station because of increased remuneration. Indeed in Madhya Pradesh, the Electricity Regulatory Commission gave an order to ration electricity in ascending order of over dues. Thus those circles which had the highest overdues would have their power cut first. Over time consumers could learn to start paying for their usage. Box 3.8 Changing Institutional Arrangements in Irrigation People s participation in renovation and maintenance of field channels was an established practice during the pre-independence era. The Command Area Development Programme (CADP) introduced in was an improvement on the existing system with emphasis on field channels, land levelling and on-farm development and the use of warabandi as a water management system. The 10th Five Year Plan document lays emphasis on restructuring the Command Area Development Programme by involving stakeholders with renewed emphasis on structures like field channels, focus on intermediate and main drains, and revised terms of warabandi, based on usage instead of hours and formation of water users associations. A fresh approach to Participatory Irrigation Management (PIM), and creation of robust grassroots institutional structures thereby was underlined as essential to any reform in the sector. The issue of financing of infrastructure is a function of the overall reform in the sector in question. The reform in irrigation, for example, needs to tackle water efficiency, water rates, O&M, dilapidation of systems and PIM as a package of measures to improve the overall system. Although there is some progress in the development of water resources, a lot remains to be achieved in terms of improving utilisation, operational efficiency, management, and promotion of a regionally equitable irrigation infrastructure. ten years to complete) or its financial structure could be such that the government puts Rs 5 crore as straight subsidy to reduce the viability gap, another Rs 5 crore as equity to reduce risk perception, and yet another Rs 5 crore as a guarantee against shortfalls in collections of user fees in the initial years (till users display their willingness to pay). With this offer the government can seek Rs 40 crore (guarantee not counted) from the RIDF or commercial banks, and finish the project in a few years. Thus the role of public financing both from central and state governments, till such time that panchayats build stronger finances, will remain significant. It is our attempt to highlight that the more governments learn to play this role differently

92 68 India Infrastructure Report 2007 and leverage their strengths as the policy-maker, the more likely we are to attract other forms of finance and enable sustainable solutions for financing of rural infrastructure. Need to Experiment with Private Financing The case of electrification in Chile shows how private finance can be used creatively for rural contexts, if the supportive finance from government is structured well. In the case under discussion, the user communities covered 10 per cent of cost, which was paid upfront by a private company and recovered subsequently through tariffs. The distribution utilities were divided across regions, and each region used subsidies (paid for by the region and the central fund) to encourage electrification of areas that provided a greater social impact. Regions were encouraged by a special central fund that rewarded the region based on achievements in rural electrification and the remaining infrastructure needs. Panchayat Financing v/s Users Association Financing Some form of local institution is required for on-site infrastructure construction, operation, and maintenance. Proximity to the site is an advantage that panchayats and user bodies have. There are two types of local institutions in rural India panchayats and user groups, which could be incorporated as cooperatives or even companies. Panchayats generate revenues through taxes which could provide funding, and users associations have the ability to generate revenues through user charges. The overall taxation base of the local bodies is so poor that they derive over 90 per cent of their revenue from grants-in-aid. Thus, unless their tax base and tax collection are significantly enhanced, the general tax revenues of panchayats cannot be a significant source for infrastructure financing. Even as the tax base improves, panchayats should only provide the equity for raising infrastructure loans from specialized sources (see Box 2.2). We hope that panchayats would be able to finance rural infrastructure in due course of time but it may take several decades before we can get there and meanwhile user group financing is a more reliable alternative for local financing. A more promising route for financing rural infrastructure seems to be through specific user charges levied by a direct service providing entity such as the water users association. The twin issues of ability to pay and willingness to pay constantly come in the way of using this route for rural infrastructure finance. But it is being increasingly recognized that the unwillingness to charge, rather than the willingness to pay, is the main constraint. Decades of patronage-based service provision has led to a situation where such bodies are unwilling to charge for the services at a reasonable rate which covers all the cost. By linking their viability with user charges, specific infrastructure users associations can be incentivised to recover their operating and maintenance costs and, hopefully over a period of time, their capital cost (Box 3.9). Financial Orchestration Innovative orchestration of financial resources can be done by combining various sources of funds public and private. Public funds can be from the centre, state, district, or the panchayat level. Private funds can be from investors, commercial banks, or from the people, who are users of the infrastructure (Box 3.10). Government of India programmes have been used innovatively by some state governments enabling convergence of resources from different programmes and schemes as well as greater community participation through own contributions and creation of financing space for other stakeholders. A privately managed community infrastructure financing initiative, namely the Community Led Infrastructure Finance Facility (CLIFF) provides an interesting model of financing infrastructure. CLIFF uses finance as a tool to bring poor communities (and the organizations which support them) right into the heart of urban development planning and action. While the initial trigger is financed by CLIFF in one of the many forms mentioned, it ensures the provision of the missing link in catalysing other sources of funds efficiently. CLIFF provides venture capital and other financial products directly to organizations of the urban poor, rather than to government, to support community-led slum upgrading schemes conceived of in partnership with city authorities. This scheme can only therefore, work where poor communities have built the capacity to manage slum-upgrading initiatives (Box 3.11). An example of financial orchestration including private investment in Tajikistan is relevant because of the unique poverty and risks profile in the country. If the public-private partnership approach outlined here could work in one of the more challenging countries in the world, it should be applicable to rural contexts elsewhere (Box 3.12). Some of the institutional innovations brought in included: creation of a full-function regional utility, which meant the monolithic national utility was unbundled in a geographic sense (as opposed to the functional sense of separating generation, transmission, and distribution which was the conventional wisdom at the time); creation of a fully funded social protection mechanism, monitored and administered by a credible third party (in this case the World Bank); and participation of IDA, the World Bank s concessional lending window, in the financing of a project company, with IFC

93 Financing of Rural Infrastructure 69 Box 3.9 Shift in Financing Pattern in Rural Water Supply The Government of India initiated water services first through the Minimum Needs Programme, and then through the Accelerated Rural Water Supply Programme (ARWSP). Initially, rural water supply in India followed a supply-led approach where water access was a deemed social good. Financial and operational failures in the ARWSP led to a fundamental shift in the sector towards demand-driven approaches, which the GOI brought about through decentralization of responsibilities and pilots in the Sector Reform Project (SRP) in The SRP focused on increasing community participation to bring about a significant shift by integrating the concept of beneficiary cost-sharing, at 10 per cent of the capital cost and the entire O&M cost. The Tenth Five Year Plan document refers to the experience that while the panchayats are unwilling to shoulder the responsibility for operating and maintaining these projects, state governments do not have effective village level mechanisms to maintain these assets. This Plan therefore, laid emphasis on participation of stakeholders at all levels, from planning, design, and location to implementation and management. It also said that while the central and state budgets will continue to be the major source of funds, the project costs should be progressively borne by the beneficiary community. However, it is imperative to change the management system to make it more demand-driven to engage the community in O&M. Box 3.10 Innovative Programmes with Financing Orchestrated by Government of Andhra Pradesh The Government of Andhra Pradesh introduced a programme called Janmabhoomi and also used the GOI programmes innovatively to cater to local priorities. Janmabhoomi launched in 1996 is a statewide programme designed to address civic needs of communities in a participatory manner. Allocations from central programmes such as Swarna Jayanti Shahri Rozgar Yojana (SJSRY) and National Slum Development Programme (NSDP), partial grants from the State government for community infrastructure in both rural and urban areas with a 30 to 50 per cent contribution by the communities themselves formed the core funding. Innovative use of this scheme was made in a slum settlement in Tirupati, with participation from a thrift and credit group developed with support from the Development of Humane Action (DHAN) Foundation. This group mobilized the required resources by accessing loans available from the federation of self-help groups, Sri Padmavathy Abyudaya Sangam (SPMS), to meet its contribution and was able to get the local authorities to improve roads, install utility connections by laying connecting sewers, storm drains and drinking water network. The community in each street mobilized the necessary resources through this approach. In general, repayment for such loans has been good. Box 3.11 CLIFF Financial Products, Pune, India Meeting the challenge of slums, particularly in large cities, generally requires collective housing and infrastructure solutions, as opposed to separate individual/household solutions. Consequently, CLIFF has been designed as a venture capital facility supporting flagship community-led slum development projects rather than providing credit to individual households. CLIFF therefore, offers the following forms of financial support: Technical assistance grants so that professional help can be brought in to help communities to package projects in a way that banks and state authorities can deal with. Loan financing to projects to kick-start community-led flagship initiatives while conducting further negotiations with formal finance institutions and public officials to unlock local financial resources. Provided schemes at least break even, CLIFF finance gets fully repaid to Nirman from income streams, which can then be recycled to pre-finance further projects. Nirman is a not-forprofit company, promoted by the SPARC (Society for Promotion of Area Resource Centers), and acts as the financial and construction arm of this initiative. Knowledge grants for exchanges, visits and workshops so that as many people as possible are able to learn from the projects as they are developed and implemented.

94 70 India Infrastructure Report 2007 Grants for core operational and administration costs of the agencies managing CLIFF. Guarantees: Homeless International s Guarantee Fund can also be used to complement CLIFF, by providing financial guarantees to underwrite some of the risk taken by banks when lending to projects. Loan financing will be recycled as projects are completed and revenues received, thereby establishing Nirman as a sustainable, long-term financing facility in India. Box 3.12 Pamir Private Power Project in Tajikistan This project is restoring reliable electricity supply to a poor and isolated population in eastern Tajikistan that was almost completely cut off from power supplies after the country s independence from the former Soviet Union in This restoration has been achieved through an innovative combination of private investors and multilateral financial institutions. It has been backed by a donor-funded social protection programme to ensure that the electricity remains affordable. At the same time, the government of Tajikistan has undertaken reforms necessary for the new framework to work. The total cost of $26 million was financed through a mix of 45 per cent equity and 55 per cent debt provided by the International Finance Corporation (IFC) and International Development Association (IDA). IFC provided $3.5 million in equity financing; the remainder, $8.2 million, came from the Aga Khan Fund for Economic Development (AKFED), the principal private sector partner in the venture. bringing a 30 per cent equity stake, to introduce a capital market orientation and links with the private sector. The essence of orchestrating finances for infrastructure creation is to understand the value that different actors bring to different contexts. The type of financial instruments used by different actors is a function of their relative strengths and risk taking abilities. Evolution of Institutional and Financing Arrangements in Rural Infrastructure We all know that there exist limitations in institutions and financial arrangements which make operation and maintenance of infrastructure projects fraught with many deficiencies. Lack of institutional mechanisms also gives rise to lack of ownership of these projects. The infrastructure sector is filled with contract and contractor relationships which are temporary. Here we have suggested an evolutionary development of community arrangement along with financial institutions which can make communities tackle with ownership issue. Financing arrangements are inextricably linked to the underlying institutional arrangements in rural areas. As the supply-side institutional arrangements evolve towards greater participation from a larger number of stakeholders, and towards a reduced and largely facilitating role of the government, the involvement of users also increases. The arrangements amongst the service providers and their interface with the users constitute the institutional mechanism for infrastructure creation and provision. This mechanism determines the financing pattern that can be configured. The sources which can be accessed to finance at each stage (Figure 3.1) move from complete state subsidy to increasing levels of mainstream commercial capital and community finance. Increasing levels of user community contribution, and facilitating finance from the government will help derisk rural infrastructure projects to attract private sector finance. Infrastructure financing solutions for rural areas will have to be designed creatively, with each set of actors providing the right space to others. The institutional and financing arrangements for rural infrastructure have been captured in Figure 3.1. The view is evolutionary, starting from stage one, where the state is the financier, builder, operator, regulator, and patron of a group of unorganized powerless users, to stage four, where the government is only the regulator and provider of viability gap financing, whereas users are well-organized into a body which is representative and which finances and operates the infrastructure facility. Bihar Hill Area Lift Irrigation Corporation, Central Power Distribution Company of Andhra Pradesh Ltd., Village Electricity Committees, and Anakapalle Rural Electricity Supply Co-operative, A.P. are good examples of stages I, II, III, and IV of financing respectively. Bihar Hill Area Lift Irrigation Corporation (BHALCO) This entity was established in the 1970s in the Chhota Nagpur tribal areas of Bihar (now Jharkhand state), to lift water from the numerous rivulets in the area, each lift irrigating acres. Intake wells were built in the middle of the river

95 Financing of Rural Infrastructure 71 PARTNERSHIP GOVERMENT REGULATOR VIABILITY GAP/CATALYTIC FINANCING + PRIVATE ENTITY COMMERCIAL LONG-TERM DEBT FINANCING BUILDER/OPERATOR + USERS OPERATION MANAGED BY USER ASSOCIATION FEE COLLECTION COVER O & M & POSSIBLY PARTIAL CAPITAL COSTS EVOLVED Stage IV INSTITUTIONAL ARRANGEMENT GOVERNMENT REGULATOR LIMITED FINANCIER + PUBLIC/PRIVATE ENTITY DEBT FINANCING OPERATOR GOVERNMENT REGULATOR FINANCIER + PUBLIC ENTITY (e.g. SEB) OPERATOR Stage III Stage II USERS HAVE A VOICE & GRIEVANCE REDRESSAL FOR SERVICE QUALITY & SUPPLY USERS PAY O&M COSTS USERS HAVE SOME VOICE NO CONTRIBUTORS TO FINANCING USERS BEING BILLED FOR O & M COSTS LIMITED REPAYMENT USER INVOLVEMENT SERVICE PROVIDER USERS PATRON-CLIENT GOVERNMENT: FINANCIER BUILDER OPERATOR PATRON Stage I UNORGANIZED & UNINVOLVED USERS NO REPAYMENT CULTURE NONEXISTENT SERVICE PROVIDER ROLES GOVERNMENT PARTERSHIPS COMMUNITY USER ROLES INDIVIDUAL Figure 3.1 Evolution of Institutions and Financial Arrangements for Rural Infrastructure and 6 cast iron pipes carried water from there to a high point, using an electric pump, and thereafter it was released in the command area through gravity flow. These schemes were fully financed and constructed by the government, and were operated by government employees. Due to frequent power failures, despite having separate dedicated feeders and transformers, the schemes were not reliable. Operator absenteeism coupled with favouritism in supply of water to those who paid off informally, led the remaining farmers to break the pipes and pumps in many places. By the middle of the 1980s, all the few hundred of these schemes were defunct. Central Power Distribution Company of A.P. Ltd. The infrastructure of the Central Power Distribution Company of A.P. Ltd. (APCPDCL) has been financed by the

96 72 India Infrastructure Report 2007 government and the distribution company (Rao, 2004). The recent efforts of the distribution company, APCPDCL, towards customer service and billing programmes have begun to realize efficiency gains in distribution, better collections, and increases in revenue. Some steps taken by the APCPDCL in this direction are: 1. Shift to a customer centric/responsive approach: the establishment of Customer Service Centres, with satellite Call Centres in remote rural areas, Vidyut Adalats for dissemination of Citizen Charters (clear service metrics set a standard for customer service and ensured timely resolution of billing conflicts) in rural areas and issue resolution, Farmer Meetings for irrigation related issues and demand side management. 2. Leveraging technology for billing efficiency: the use of spot billing eliminates many complications around billing involving issues like transparency, up to date billing, cash flow due to collections, and simplification of billing process (Table 3.6). 3. Access to convenient payment methods: eseva, payment collection at banks, and online payments. Conscious efforts towards providing decentralized services also enabled: 1. User Participation, transparency, and accountability. 2. Possible billing and collections by community institutions. 3. Financial viability of decentralized systems (with some startup support if transmission tariff is set by the government while the user charge is set by the distribution company). 4. Release of the potential of community institutions in depoliticizing collections. Table 3.6 Progress of Central Power Distribution Company of AP Ltd Government Subsidy + Additional Support (in Rs Billion) T&D Losses (per cent) Revenue (in Rs Billion) Metered Sales (per cent) Source: Rao (2004). Village Electricity Committees, Gram Vidyuth Prathinidhi Village Electricity Committees (VECs) of Orissa and Gram Vidyuth Prathinidhi of the Karnataka State Electricity Board are good examples of Stage III of institutional evolution. These are examples of mobilizing community to handle billing, collections, and basic maintenance of distribution. In case of the VECs in Orissa, these were organized by the Xavier Institute of Management, as a pilot project with the regional distribution companies. The VECs were given responsibilities of billing, collection, routine maintenance, and identifying and regularizing illegal connections. The model worked well initially but has not been sustained since private discoms have wound up. The project in Karnataka used Gram Panchayats to handle meter reading, billing, and collections with the flexibility to subcontract these tasks. The experience of this transition has brought some important learning to light. Shifting O&M to the Gram Panchayat requires significant attention for capacity building and active involvement from distribution entities. Collection issues around irrigation for smaller consumers of energy still persist. The use of technology enables simplification in billing, improves transparency, accountability, and reduction in long-run costs (The SARI/Energy Programme Resource Centre, 2004). Anakapalle Rural Electric Supply Cooperative, A.P. The Anakapalle Rural Electric Cooperative Society Ltd. (ARECS) in the Vishakapatnam District of Andhra Pradesh was formed in 1974 with a mission to make electrical energy available to its members to promote the economic development in the area. In 1976, the cooperative took over distribution operations and maintenance from the State Electricity Board. Thirty years later, with over 96,000 members, the cooperative has achieved 100 per cent village electrification, increased the number of service connections by 2400 per cent, and is debt free and profitable. The government played a critical role in providing the necessary start-up equity to transfer the distribution infrastructure to the cooperative. As this equity came in the form of a twenty-five-year loan from the Rural Electrification Corporation that was eventually repaid by the cooperative, it can be seen as largely catalytic in nature. The community investment, in the form of shares in the cooperative, combined with the start-up contributions from the state government provided sufficient equity to take on these loans (Rao, 2006). ARECS was able to establish a culture of payment for service and responsive customer support. A 50 per cent decrease in line loss from inception till today and a substantial increase in user demand, with the change in management from state government to an institution of the people, strongly suggest that the rural customer base responded favourably to customer service and was more willing to pay user fees. This institution also used loans to fund the successful expansion of distribution infrastructure. The expansion and outreach that the ARECS achieved in a span of twenty years resulted

97 Financing of Rural Infrastructure 73 from an amalgamation of community ownership, a supportive government framework, and debt financing (see Box 6.1.5). CONCLUSION There is basic agreement on the fact that public resources are scarce, and also that they have not been used with a high degree of effectiveness till now. On the other hand, both due to the semi-public good nature of infrastructure and also the lack of precedence of complete private sector financing, it is unlikely that private funds will flow to rural infrastructure financing substantially. Also, while NGOs and MFIs are a good medium for devising and delivering rural infrastructure solutions to the community, they are not geared for largescale financing given their limited resource base and organizational constraints. Private capital has barely started flowing to the urban infrastructure sector in India, and it will take a long time before it finds its way to rural infrastructure. The constraints to flow of private capital are largely institutional, a term by which we mean the rules of the game or norms, codified under laws, regulations, and specific contracts, by which all the stakeholders related to an infrastructure project, transact, and interact with each other. This can be something as simple as a norm that services used must be paid for to something as complex as a contract that the return on equity exceeds the weighted annual average of LIBOR over 10 years, plus 500 basis points. Establishing and enforcing such norms is the area of institutional reforms. This is happening, albeit slowly, with many ups and downs. Once satisfactory institutional arrangements are devised for urban projects, these will slowly diffuse to rural projects as well, though we should not underestimate the more difficult political economy of rural India. The complexity of demand and supply gap, willingness to pay, and ability to pay for infrastructure services require financial orchestration which implies blending different sources of funds, such as government capital subsidy, community contribution, and private equity. Greater provision of rural infrastructure will require a paradigm shift towards recognizing the value that other players bring apart from the government panchayats, private sector, and the user community. It will be necessary to define their roles and responsibilities and bring them proactively on board for creation and maintenance of rural infrastructure. The government needs to create the space for financial orchestration and enable development of a collaborative framework to build and operate infrastructure in rural areas. Given the relative strengths and weaknesses of each set of institutions in delivering finance for rural infrastructure, it is imperative that we look for solutions in the middle-ground. Even conceptually, the state and the market mechanisms are two extreme modes of functioning, and either of these, by themselves, cannot ensure development with equity. Solutions with the strengths of each side, which are balanced by civil society, are likely to be efficient, equitable, and sustainable. We have also suggested a progressive model which can be gainfully applied to various infrastructure projects (Figure 3.1). This kind of evolution of institutional and financing arrangements requires several years of practice before it can be mastered and thus the initial projects need to be structured to offer a soft landing to the institutions which agree to pioneer this. Once a number of pilots are successfully implemented, the lessons can be built into a supportive regulatory policy, and institutional strategic framework. Several examples abound right here in India and the task is to build on their successes.

98 74 India Infrastructure Report 2007 REFERENCES BBS (2003). Household Income and Expenditure Survey , Government of Bangladesh. Bery, Suman, D. B. Gupta, Reeta Krishna, and Siddhartha Mitra (2004). The Nature of Rural Infrastructure: Problems and Prospects, Working Paper 94, National Council of Applied Economic Research, New Delhi. Das, Keshab (2002). Rural Infrastructure, 3iNetwork, India Infrastructure Report Desai (1991). India Irrigation Review, The World Bank, Washington. Econ One research, Inc. (2006). Emerging Lessons in the Private Provision of Rural Infrastructure Services, Retreived July 8, 2006 from A L-MS-BP-IW-Final per cent20report per cent pdf. GOI (2001). The Expert Committee on Strengthening and Developing of Agricultural Marketing, Ministry of Agriculture, Government of India, New Delhi. Tripy/APCPDCL Servicesd Practices.pdf Mehta, M., Mukundan, K., Kesavan R. and S. Mukerjee (2003). Sustainable Private Financing of Community Infrastructure in India, mimeo, World Bank. Monari (2002). Power Subsidies: A Reality Check on Subsidizing Power for Irrigation in India, Viewpoint no. 224, The World Bank. Morris, Sebastian (2003). Expenditure Accountability and The Society, India Infrastructure Report 2003, 3iNetwork. NSSO (1999). Drinking Water, Sanitation and Hygiene in India, 54th Round National Sample Survey Organization Report No. 449, Department of Statistics, GOI, New Delhi, (2003). Housing Condition in India: Household Amenities and other Characteristics, 58th Round National Sample Survey Organization, Report No. 489, Department and Statistics, GOI, New Delhi. Planning Commission (2002). Tenth Five-year Plan, Planning Commission, New Delhi. Raghuram G., Rekha Jain, Sidharth Sinha, Pangotra Prem, and Sebastian Morris (1999). Infrastructure Development and Financing: Towards a Public Private Partnership, MacMillan India Limited. Rao, C.M.R. (2004). Customer Service & Billing Programs in APCPDCL, Retrieved on July 29, 2006 from Publications/REP/ExecutiveTrip7/APCPDCLServices& Practices.pdf (July 29th 2006) Rao, V.R. (2006). Brief Presentation of Sri Raghava Rao, Managing Director. The Anakapalli Rural Electric Co-op Society Ltd; KasimKota: Visakhapatnam District: Andhra Pradesh: India, mimeo, Anand, The Anakapalle Rural Electric Coop Society Ltd. Rath, B. (2003). People s Participation for Efficient and Accountable Management of Irrigation Systems, India Infrastructure Report: Ensuring Value for Money, 3iNetwork and Oxford University Press, New Delhi. The SARI/Energy Program Resource center (2004). Retreived July 29,2006 from RESPRESKTA_Complete.zip. Toolkits for private participation (1997). Retrieved July 10, 2006, from frame.html.. Vaidyanathan, A. (2003). Rural Infrastructure, India Infrastructure Report: Ensuring Value for Money, 3iNetwork and Oxford University Press, New Delhi. Venkatachalam, Pritha (2005). Innovative Approaches to Municipal Infrastructure Financing A Case Study on Tamil Nadu in India, Working Paper Series, LSE, ISSN Wadell, S. (2000). Emerging Models for Developing Water Systems for the Rural Poor: From Contracts to Co-production. Waughray, Dominic and Dominic Moran (2002). Cost Recovery in Water and Sanitation Projects. DFID Knowledge and Research Project, London. WDR (2004). Making Services Work for Poor People, World Development Report 2004, The World Bank, Washington, World Bank (2006a). World Bank Rural Development Strategy: Reaching the Rural Poor, Annex 5, Physical and Social Infrastructure, (2006b). Bridging the Gap between Infrastructure and Services, Background Paper, Rural Water Supply and Sanitation, The World Bank, New Delhi. WSP (2002). New Designs for Water and Sanitation Transactions: Making Private Sector participation work for the Poor, Water and Sanitation Program, Washington.

99 4 RURAL TELECOM PART I RURAL TELECOM AND IT Pradip Baijal and Rekha Jain INTRODUCTION Economic reforms in the post-1991 era have radically changed the Indian economy with maximum impact on the telecom sector. Telecom regulations and the explosion of competition in the telecom market raised teledensity in India dramatically to 12.7 per cent in 2006 from 1.94 per cent in However, not much has changed for the more than 70 per cent of the Indian population living in rural areas and this is a major cause for concern. In 2006, we find that the rural teledensity is still hovering around 2 per cent (from 0.4 per cent in 1998), whereas urban teledensity is above 35 per cent. In metros like Delhi, Mumbai, Bangalore, and Chennai, the tele-density is around 50 per cent (TRAI 2005b). Since teledensity has a positive relationship with the level of development, the large differential between rural and urban tele-densities is a symptom of serious developmental differentials as well and should receive adequate policy attention both in terms of analysing the causes as well as for devising strategies for bridging the gap viably. 1 TRAI s observation that, A time has come that our policies of reaching telecom to villages are looked at as Universal Service Opportunity rather than Universal Service Obligation, is appropriate (TRAI 2005b). Access to telecom services including internet and broadband services, provides new and exciting opportunities for the 1 See Part II on Accelerating Rural Telecom Penetration: An Empirical Analysis. users. Rural populations suffer the double jeopardy of not having proper road and public transport facilities and other infrastructure of urban areas in addition to being deprived of telecommunication services as well. This intensifies economic imbalances and inequalities which are already in staggering proportions. Communication technologies help in poverty reduction in three ways: (i) increasing the efficiency of the individual and thereby, of the entire economy, (ii) ensuring better delivery of public services, such as health and education, and (iii) creating new sources of employment, income, and training particularly for the poor population. Low cost wireless solutions are now available for rural areas at affordable prices. Business innovations such as pre-pay options have reduced the entry price at the lower end of the market and enabled easy access for multiple services in areas where fixed telephone infrastructure is poor. Rural India will ultimately define the core strength of the industry, since the sheer volume of potential connections is immense. Inclusion of rural users in the customer base will strengthen the network and enable it to deliver multiple services in communication-starved rural areas. Since the prices of wireless telephony and communications both at the entry level as well as the recurring expenses have come down drastically due to overall growth, there is a huge demand for such services in rural areas also. However, dispersed and low density rural markets make it less profitable for private operators to enter such areas and compete with cheaper fixed line telecom rates in rural areas.

100 76 India Infrastructure Report 2007 An important trend is the emergence of community access to both basic and value added services. While individuals in many poor locations may not be able to afford the upfront costs of owning telephones and internet-enabled PCs, a community as a whole may be able to afford the facility. As entry costs of mobile telephones and PCs and their recurrent costs are plummeting, particularly when viewed from the cost benefit perspective, the scenario is changing rapidly. Rather than the present model where only one (or a few) connection is given in a village at prohibitively high prices with consequently high capital and yearly subsidy implications, a one time subsidy to the service providers would go a long way in creating a rural telecom market where services can be delivered efficiently in a competitive environment. STATUS OF RURAL TELEPHONY India s tele-density in 1948 was 0.02 per cent. The telecom industry was for the exclusive preserve of the public sector. All Five Year Plans, and successive governments placed strong emphasis on telecom development. Yet in 1998, the tele-density was only 1.94 per cent, displaying an incremental growth of 1.92 per cent in the fifty year period post-independence, indicating an average yearly growth of 0.04 per cent. After the introduction of telecom regulation in 1997 and liberalization of the sector, growth accelerated 12.5 times over the nonliberalized monopoly years. Competition regulation was introduced in 2003 and it led to a growth of 2 per cent in and again in With stabilization of competition regime, tele-density increased by about 3 per cent in and at the present monthly rate of growth, it would increase by more than 5 per cent during , 125 times the growth in (Figure 4.1.1). Tele-density Stage I II III IV Year Ending Fig Telecom Growth: The Changing Scenario Source: TRAI (2005b) and TRAI (2006) Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 *Population taken as 1088 million Fig Rural and Urban Tele-densities ( ) Source: TRAI (2005b and 2006). Despite governmental concern for rural tele-connectivity and allocation of huge USO funds for rural telecom, there has been no substantial growth in rural areas and the rural growth curve pre- and post-liberalization looks remarkably flat (Figure 4.1.2). This is perhaps on account of the fact that mobile technology, the vehicle for growth in urban areas has not been introduced in rural areas. Competition in rural telecom is virtually non-existent and the government is the monopoly provider not unlike the scenario countrywide. EVOLUTION OF THE TELECOM SECTOR: LESSONS FOR RURAL TELECOM Though manufacturing of telecom equipment by the private sector was permitted in 1984 and some services like radio paging were also opened for the private sector in 1992, the reform process only started after the issuance of the National Telecom Policy, 1994 (NTP 94), which called for bidding for private licenses and setting up of an independent regulator. However, the mere entry of private operators in the network did not help. The competition really started after a regulator was appointed in 1997 following the promulgation of the TRAI Act 1997 and it made effective interventions to create a level playing field for new entrants. The Regulator issued the first tariff order in 1999 and thus the reform process really started during the late 1990s. Some problems were identified in NTP 94 and in the implementation of TRAI Act, High Court also quashed the powers of TRAI to enforce interconnections. This led to the issuance of NTP 99 and amendments in the TRAI Act in Interconnection problems started again in 2004 by the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) questioning these powers. These issues are now being debated before the TDSAT and the Supreme Court Urban Rural Total 26.2

101 Rural Telecom 77 Prior to liberalization in the mid-1990s local calls, national long distance calls, and international calls were either managed by the government or by government companies and this network constituted a vertically integrated natural monopoly. Post-liberalization the network elements were effectively broken up and private players started building network elements leading to many competing public and private players. The growth in the sector came in after the Government of India/TRAI made major changes in the policies, structure, and the regulation in the telecommunication sector. All stakeholders also responded positively. As can be seen from Figure 4.1.3, the Universal Service Objectives are affected by a number of policies and it would be necessary to analyse the implications of the same before implementing a plan to increase rural tele-density. Even after the implementation of reforms, tele-density picked up slowly and increased from 1.94 per cent in 1998 to 5.11 per cent in 2003, that is, an average incremental growth of 0.6 per cent per year. The growth substantially picked up after 2003, when the regulator ceased to micromanage tariffs by replacing the cost-plus tariff regulation by competition regulation in urban areas. The regulator also substantially reduced interconnection charges and Access Deficit Charges (ADC). During this period, the government also substantially and continuously decreased revenue share. The changes led to drastic reductions in tariff to levels among the lowest in the world, despite higher taxation in India. Based on current monthly growth rates, over 5 per cent increase during can be expected. It would be worthwhile to look at the tele-density growth graph again and examine the growth engines during various phases and then examine the rural tele-density graphs for reasons of increasing divergence. During , 88 million mobile and 12 million fixed line telephones were added, and this addition too was basically wireless technology driven (Figures and 4.1.5). USO Funding Policy Tariff Policy Roll out obligation Competition Universal Service Objectives Rural Service Providers /Niche Operators (under consultation) Termination charges Access Deficit Charge Government funding Fig Factors affecting Universal Service Objectives Subscriber Base (in millions) May-06 Source: TRAI (2005b and 2006). Fig Mobile Phone Growth Source: TRAI (2005b and 2006). Subscriber Base (in millions) Fig Growth of Fixed line Telephone Private operators contributed prominently to post-1998 growth. Where public sector operators expanded their subscriber base in by 32 million, the same for the private sector was 80 million subscribers. It is remarkable that public sector undertakings whose growth was very slow during the monopoly period of 1948 to 1998, that is, about 0.3 million subscribers every year, increased to about 5 million subscribers every year during the period 1998 to The public private cooperation and competition led to immense improvement in the performance of both the public and private sectors (Figure 4.1.6). We can only infer from this that companies behave very differently in monopoly and competitive environments and consumers gain only when competition is introduced in markets. The measures taken by TRAI to reduce tariffs-encouraging competition, introduction of Unified Access Licensing Regime, introduction of calling party pays regime, lowering of ADC from 30 per cent to 10 per cent of the sectoral revenue and later to 5 per cent, allowing cheaper handsets being sold at the time of delivery (with rest of the money charged in installments), allowing cheaper intra-network calls and fixation of very low termination charges, thereby increasing

102 78 India Infrastructure Report 2007 Subscriber Base (in million) Year Ending Private Sector Fig Subscriber Base of PSU and Private Sector Operators Source: TRAI (2005b & 2006). PSUs Effective charge (in Rs per min.) Launch of Lifetime Scheme Reduction NTP Lowering of ADC Telecom from 30% to Tariff CPP introduce Wll rd & 4th introduce Cellular Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Sep- Dec- May Fig Mobile Growth and Effective Charge per Minute Source: TRAI (2005b and 2006). Mobile sbuscribers (in million) Fixed Mobile (Rs/min) Mobile Subscriber base (Million) competition at origination, a place where tariffs are fixed-led to the phenomenal growth (Figure 4.1.7). The government encouraged the process by changing high entry fee to revenue share and reducing the revenue share further in 2001, 2003, and Despite a severe drop in tariffs, the income of telephone operators went up sharply due to the increase in the number of subscribers (Figure 4.1.8). It was thought initially that reduction in revenue share would lead to severe contraction in government revenues. The introduction of service tax on telecom services in , however, led to a substantial increase in government revenues from mobile telephone despite severe reduction in tariffs (TRAI 2004). If we look at the total revenues from all telecom services they also increased exponentially after (Table 4.1.1). There could be no better example of growth in revenue from lower taxation/tariff. But even today, the taxes and duties on telecom services are very high and need further reduction, particularly to universalize these services in real terms, which is now possible, and especially in rural areas. Despite very heavy taxation vis-à-vis other neighbouring countries, tariffs in India are the lowest in the world, a tribute to the competition in the sector and our operators (Table 4.1.2). Fixation of very low termination rates in India has led to aggressive competition in origination, leading to the lowest call rates in the world (Table 4.1.3). The analysis above clearly reveals that the factors leading to high telecom growth have been: 1. Introduction of mobile technology which allows telecom services to be offered at lower costs, 2. Healthy competition among large number of public/private operators, Subscriber Base (million) Subscriber Base Fig Growth of Mobile Subscriber Base with Reducing Average Revenue per User (ARPU) Source: TRAI (2005b and 2006). 3. The government and the regulator facilitating fall in tariffs by various measures including reduction in taxation and interconnection rates on the sector. Internet and Broadband ARPU The growth of internet and broadband in India has been tardy both in comparison to the growth of telephony as well as in comparison to some of our neighbours. The reasons are not far to seek. Mobile technology has kickstarted telephony growth. Internet/broadband in its traditional sense cannot be delivered through these networks. The entry price for these services is very high (because of the cost of a computer terminal), and like mobile telephony, internet, broadband tariffs were also very high in the initial years. Consequent to the Broadband ARPU (Rs/month)

103 Table Estimate of Government Levies from Licence Fee, Spectrum Fee and Service Tax on Telecom Services Rural Telecom 79 (Rs Crores) Year Gross Pass Adjusted Licence Service Spectrum Total Govt. Revenue through Gross Revenue Fee * Tax # Charge ** Levies , , , , ,000 15,549 56, , ,000 17,935 69, , ,969 36,821 90, , ,500 29, ,000 10,703 11, ,500 Notes:* For telephone, cellular mobile, NLD, ILD, Internet service, varies from 0 to 15 per cent up to Dec 2005 and 0 to 10 per cent Jan 06 onwards. # Actual service tax collected has been taken from to and Service tax applied to Adjusted Gross Revenue for the other years as it is not charged on Interconnection Usage Charges, and so on. Service Tax rate for is per cent. ** Spectrum charge varies from 2 per cent to 4 per cent depending on amount of allocated spectrum. Weighted Average Spectrum Fee for years to is estimated as 3 per cent, 3.4 per cent and 4 per cent respectively. Adjusted Gross Revenue from wireless service. Source: Service providers data and TRAI (unpublished information). Table Telecom Sector Levies in Pakistan, Sri Lanka, China, and India Pakistan Sri Lanka China India Sector Charges Percentage of revenue Service Tax, GST GST VAT 3% 10% + GST Licence Fee 0.5% + 0.5% R&D 0.3% of turnover (T.O.) + Nil 5 10% 1% of capital invested Spectrum Charges Cost recovery ~ 1.1% of T.O. ~0.5%** 2 6%* (China Mobile) USO 1.5% Nil (only on ISD calls) Nil Included in license fees Total Sector Charges 2.5% + GST + cost reovery ~1.3% T.O. + 1% inv + VAT ~0.5% + 3% (Tax) 17%~26% + GST Notes:* Backbone spectrum charges extra. ** Estimated from spectrum fees & revenue of China Mobile. Source: Information from Regulators website & TRAI. Table Call Charges per Minute of Use, ARPU and Termination Rates Per Minute for Mobile Service in Different Countries (June 2004) Name of the Call charge Use/subscriber ARPU (Average Termination rates per minute country per minute per month Revenue Per User) Fixed Mobile US$ Minutes US$ US$ US$ Australia Brazil China Switzerland Japan India 0.04* Note: *Has come down to 0.03 in 2005 lowest in the world and going down further. Source: TRAI 2004 & (2005b).

104 80 India Infrastructure Report 2007 Table Growth of Internet & Broadband and Tariffs ( ) Mar- Mar- Mar- Mar Internet Subscribers per hundred persons Monthly charges for average usage of internet (in $) Broadband Subscribers per hundred persons Monthly charges for average usage of broadband (in $) Source: TRAI (2006a). Policy issued by the Government in 2004, and reduction in DLCC and IPLC tariffs enforced by the regulator, internet and broadband tariffs have declined and the services are now picking up (Table 4.1.4). However, since fixed line is almost a monopoly of the incumbent and last mile not unbundled, the absence of competitive multi-operator environment continues to retard the growth. Private operators mostly deliver broadband on cable TV circuits only and the monopoly last mile holder only provides broadband on 0.5 million lines in comparison to a resource of about 25 million lines with the incumbent, even assuming only 50 per cent lines to be broadband compatible. This is despite the fact that the government has been laying emphasis on broadband connectivity for several years now. The immense unfulfilled demand for broadband is made apparent by the fact that a much inferior service of dial up internet has acquired a large number of subscribers despite high tariffs. Unless broadband delivery is made competitive by last mile unbundling, take off will be slow as demonstrated by our experience with monopoly provisioning of voice services. The presence of both public and private players in all these sectors and a framework allowing for maximum competition will open up the next phase of telecom revolution, including broadband and TV services. TRAI s recommendations in this regard were sent to the government on 13 January 2005 wherein it was recommended that a unified licensing regime should be introduced for all telecom services to encourage free growth of new applications and services. REVIEW OF RURAL TELECOM POLICIES Before liberalization, universal service objectives were met by the government through a series of programmes like Long Distance Public Telephone Programme (progressively increasing the scope to the provision of a public telephone within five kms of any habitation that is, one telephone in a hexagon of size five sq km), Gram Panchayat Phone (one phone in each gram panchayat), and Village Public Telephone Programme (one phone in each revenue village). In liberalizing the access segment, post-ntp (National Telecom Policy) 1994, specific VPT (village public telephone) roll out obligations were specified in the licenses. However, these commitments remained largely unmet. Most of the VPTs till date have been provided by BSNL. As on 31 March 2004, 5.22 lakh villages out of a total of 6.07 lakh had telephone access and of these 5.09 were provided by BSNL. New Telecom Policy 1999 and the Universal Service Objectives In 1999, the Government announced the New Telecom Policy that is, NTP Universal Service was one of the main objectives of NTP The policy outlined the following specific Universal Service targets: 1. Provide voice and low speed data service to the balance 2.9 lakh uncovered villages in the country by the year Achieve Internet access to all district headquarters by the year Achieve telephone on demand in urban and rural areas by In addition NTP 1999 also set the following targets: 1. Make available telephone on demand by the year 2002 and sustain it thereafter so as to achieve an all India teledensity of 7 per cent by the year 2005 and 15 per cent by the year Encourage development of telecom in rural areas through suitable tariff structure and by making rural communication mandatory for all fixed service providers. 3. Increase rural tele-density from the current level of 0.4 to 4 by the year 2010 and provide reliable transmission media in all rural areas. 4. Achieve telecom coverage of all villages in the country and provide reliable media to all exchanges by the year The NTP 99 and the consequent creation of the Universal Service Obligations Fund led to the development of a policy and regulatory framework for managing Rural Telecom Services (RTS). The targets set by NTP 1999 and the achievements till March 2004 show that there is an excellent progress in all areas except rural connectivity (Table 4.1.5). The targets for overall voice connectivity by 2010 would be overachieved by a wide margin. In 2002, USO Fund was established to fund specific USO targets set by NTP 99. In addition, open competition was introduced to create pressure on service providers to expand coverage and to reduce subsidies. This resulted in steep reduction in mobile and long distance tariffs and increased

105 Rural Telecom 81 Table NTP 1999 Targets, Achievements, and Shortfalls NTP 1999 Targets Eligibility for USO Achievement (March 2004) Funding (NTP 1999) Provide voice and low speed data service to the balance 2.9 Yes 5.22 out of 6.07 lakh lakh uncovered villages in the country by the year 2002 Achieve Internet access to all district headquarters by the Yes Achieved year 2000 Achieve telephone on demand in urban and rural areas by 2002 Yes Urban demand largely met, Rural unmet Teledensity of 7 by the year 2005 and 15 by the year 2010 No Tele-density 7 achieved in March 2004, and 15 likely by Dec 2006 Rural teledensity from the current level of 0.4 to 4 by the Partly Rural Tele-density 1.7 in March 2004 year 2010 Reliable media to all exchanges by the year 2002 No out of exchanges on fibre and several on microwave and satellite High-speed data and multimedia capability using technologies No NA including ISDN to all towns with a population greater than 2 lakh by the year Note: NA: not available. Source: Compiled by author. choices for consumers. However, concerns regarding slowing down of VPT/Rural Direct Exchange Lines (DELs) roll out have arisen. The yearly increments in VPTs/Rural DELs indicated below confirm the deceleration despite adequate availability of funds (Figures and ). The prime reason is apparently the increased focus on cellular mobile infrastructure deployment after by all operators at the cost of fixed line and rural investments due to very high per capita costs of providing fixed line connectivity. Also, a large number of rural DELs installed by BSNL, based on Multi Access Radio Relay (MARR) technology did not work and had to be replaced at government cost. Since the present dispensation only adds one or two telephones in a village, the maintenance arrangements are inefficient, putting the entire roll out programme in jeopardy. The bustle of the cellular market has almost completely by-passed the rural client because the government does not support mobile telephony through USO fund for rural areas in a focused and targetted fashion. USO Fund and Amendment in the Indian Telegraph Act 1885 On 9 January 2004, the Indian Telegraph Act 1885 was amended to provide the USO Fund (USOF) a statutory nonlapsable status. The Act states, Universal Service Obligation means the obligation to provide access to basic 2 telegraph 2 This was interpreted to mean service provision through fixed and fixed wireless technologies. The government has amended the Act to include mobile services in rural areas (see Chapter 1 of this report). Number of VPTs (in lakhs) Fig Yearly VPT Additions Source: TRAI (2004). Number of Rural DEL addition (in million) Fig Yearly Rural DELs Additions (in millions) Source: TRAI (2004).

106 82 India Infrastructure Report 2007 services to people in rural and remote areas at affordable and reasonable prices. The USO levy is presently 5 per cent of AGR and comes out of the license fees paid to the government. The implementation of USO is through a multi-layered bidding process. The Fund is being administered by the Department of Telecom through Universal Service Fund Administrator, an establishment set up by the government in Though the fund is non-lapsable, the proceeds are credited to the Consolidated Fund of India and can only be withdrawn through the budgetary process, that is, after the expenditure every year is approved as a part of the budget. Thus control of the fund lies with the Ministry of Finance and the details of the scheme are controlled by the USOF Administrator. Until recently as per prevailing policy, USOF did not subsidize mobile services making it difficult for service providers to take such networks to rural areas on their own. Consequently, prohibitively expensive fixed lines were laid in rural areas. These were then heavily subsidized through USOF to enable service providers to offer low rates to customers. This practice has been replaced by a policy which encourages low cost mobile technology to enter rural areas through a subsidization plan for service providers that is much more viable than what is presently incurred in terms of subsidy costs. TRAI had recommended strategies that clearly demonstrated that minor tweaking of the policy provisions could prevent subsidies from flowing into unviable phones. One or two phones subsidized in an entire village in the absence of a developed telecom market in a village would not change anything. We would also lose the opportunity to create a much more viable telecom market where the villager would no longer complain: why should I buy a telephone? I cannot talk to anyone in a village. All other phones are only public call offices. Present Status of USO Fund Receipts and Disbursements Around Rs 500 crore have been disbursed to telecom service providers during the two financial years, and , and Rs 1315 crore in to provide telecom services in rural/remote areas. These services mainly include maintenance of existing VPTs, replacement of VPTs working earlier with MARR technology (which did not work and had to be replaced at government cost) and subsidy to existing rural DELs. Telecom operators contributed 5 per cent of their adjusted gross revenue to the USOF. Minimizing the Cost of Increasing Penetration of Telecom Services in Rural Areas The government had finalized the guidelines which provide that the following activities will be supported by the USOF, namely: Table Collection and Disbursement of USOF (Rs crore) Financial Year Collection Disbursement Balance Total (est.) Source: Information received from office of USOF, DoT. 1. Operation and maintenance of village public telephones (VPTs). 2. Provision of additional village community telephones in villages with a population above 2000, after achieving the target of one VPT in every village. 3. Replacement of MARR based VPTs installed before 2002 which did not work. 4. Upgradation of a public telephone to Public Telecom and Information Centres (PTICs) in villages with a population of more than 2,000, for providing data application including FAX, , internet besides voice telephony. 5. Installation of high speed PTICs for providing additional facilities including tele-education and tele-medicine at block headquarters and in villages with a population exceeding The amount of support from USOF for the above mentioned activities excluding rural DELs will be around Rs 3300 crore for the commitment period ranging from five to seven years for Rural Community Phones and VPTs in uncovered villages and for existing VPTs including MARR replacements. The balances in USO fund can allow the Government to take up more activities and if the USO is extended to mobile infrastructure, as recommended by TRAI, mobile telephony in villages can yield dramatic results. Even with the current collections and disbursals from the USOF, the targets of NTP 99 can be barely met. Therefore, an alternative is to examine the provision of USOF support for network infrastructure providers as well as mobile infrastructure providers (Jain, 2006). The USOF provides support for rural DELs in 1685 net high cost SDCAs. It is estimated that 6.6 million additional rural DELs will be installed in these 1685 SDCAs by the year 2007, which will be eligible for support from the USOF. The amount of support from USOF for the new rural DELs beyond was around Rs 11,000 crore for the period of commitment (Tables A4.1.1 and A4.1.2). An additional amount of around Rs 2600 crore is likely to be required for upgrading the DELs which were installed in these SDCAs from April 2002 to March Besides these 6.6 million DELs in 1685 SDCAs, some additional rural DELs

107 Rural Telecom 83 will also get installed in the remaining SDCAs by the year Thus, including the existing 13.6 million rural DELs, the rural tele-density may still not reach the 4 per cent target by the year 2010, after providing a subsidy (including VPTs) of around Rs 17,000 crore. In fact, if all rural DELs installed after are provided USOF support so as to reach a target of 4 per cent rural tele-density by 2010, then the total support amount including support for VPTs and so on would be around Rs 25,000 crore (Table A4.1.3). It needs to be pointed out that rural DELs have been receiving support from ADC since 2003 which will conclude and merge with USOF in The rural DELs will get a further subsidy of around Rs 5000 crore from USOF beyond 2008, if the present approach of USOF subsidy to fixed line DELs continues. Rural areas cannot be expected to live with such low tele-densities and that too, at such high subsidy cost particularly, when it is possible to substantially increase tele-densities in rural areas with the help of new technologies and regulatory regimes in line with urban areas. BARRIERS TO PENETRATION OF TELECOM IN RURAL AREAS Network Coverage We can now examine the reasons why the telecom revolution failed in rural areas. Mobile technology, the primary factor in the rapid increase in urban tele-density, is not supported in rural areas by adequate Base Transceiver Station (BTS) infrastructure (towers, power supply, and so on). In , mobile networks covered mere 1700 of the 5200 towns in India and hardly any villages. The total population of subscribers catered to by these networks came to 200 million, all urban. The number of rural subscribers was negligible (TRAI 2004). Since the mobile tariffs have decreased considerably, there is a huge demand for mobile telephones in rural areas but unless mast heads cover rural areas this demand will remain unmet. TRAI (2005a) discussed the coverage aspect with mobile operators and the operators agreed to launch a telecom expansion plan as given in Table However, the implementation of the plan has thus far been adequate only in the densely populated and hence, more profitable urban areas. If government policies are implemented through USOF subsidies to ensure competitive rural coverage of mobile network, rural tele-densities can start approaching urban levels. Also if these networks can deliver multiple services, their economy would further improve. Doubts have often been raised regarding the existence of a commercial market for mobile phones in rural areas. However, international case studies on comparative mobile tower coverage in similar countries suggest that the market does exist and such coverage is eminently practicable. In consultation with the Table Proposed Network Coverage by End 2006; Operators Plan By area Population Coverage (~75 per cent) Towns ~4900 out of 5200 ~300 Million Rural areas ~350,000 out of 607,000 ~450 Million villages Source: TRAI s IUC Regulation dated Table Mobile Coverage in Selected Countries, by region, 2002 Region Country Pop. Covered by mobile signal Africa Cape Verde 90% South Africa 93% Togo 90% Zambia 50% Americas El Salvador 85% Ecuador 86% Guatemala 68% Mexico 90% Arab States Jordan 90% Morocco 95% Asia-Pacific Korea Rep. 99% Malaysia 95% Philippines 70% India 20% Europe Azerbaijan 94% Belarus 72% Czech Republic 99% Slovak Rep. 98% Source: ITU World Telecommunication Indicators Database. operators TRAI suggested a population coverage target of 75 per cent by the end of Later experience showed that this figure is not easy to reach and requires incentives to be given by the Government and policy change viz. making mobile infrastructure subsidy eligible for USO, encouraging the sharing of towers and so on. It is probable that the present average revenue per user (ARPU) of Rs 322 per month (approximately $7) in the telecom sector will go down further if the operators enter rural areas. Research tells us that Indian cellular operators can remain profitable even at an ARPU of $4 per month (Morgan Stanley, 2005). Hence, operators can profitably expand into non-covered and rural areas. In any case, operators are already offering some tariff packages that assure ARPU of over $4 per month. The recent policy initiative regarding subsidizing mobile phone operators networks needs to be aggressively implemented.

108 84 India Infrastructure Report 2007 Backbone Infrastructure Currently around 670,000 route kilometers of optical fibre is laid across India. Of the 35,000 exchanges in the country, 30,000 exchanges of the incumbent have OFC (optical fibre cable) connectivity (these include OFC connectivity of about 27,000 exchanges in rural areas). In addition, satellite systems offer high bandwidth connectivity all across India through VSAT. In spite of the existence of this nationwide fibre network adequate connectivity to villages is not available to an entrepreneur other than the facility owners (which is the BSNL). The cost of installing backbone infrastructure in semi-urban and rural areas for a new entrepreneur can be substantial, and it is in the interests of economic efficiency that the existing infrastructure be fully utilized. The problem is that the facility owners are not willing to share their infrastructure commercially with the private operators. The only additional capacity available is that with infrastructure service providers (IP-1 & IP-2). The World Bank study in this regard has identified that the capacities available in the country are quite substantial (TRAI 2005a). In actual practice, last mile connectivity sometimes seems to be the limitation. In addition, there are no uniform, clear, applicable, and enforceable guidelines for various procedures such as right of way, municipal and civic clearances and so on. As a result, different state governments adopt different rules, criteria, costs and time frames, which have significant time and cost implications for the operators in obtaining requisite clearances. Infrastructure Sharing According to industry estimate, setting up a cellular tower (BTS) costs around Rs 50 lakh inclusive of equipment, power plant and so on (TRAI 2004). A significant number of existing cell sites is already being shared by competing operators across the country mainly in urban areas. In rural areas, too, sharing infrastructure will reduce costs and the advantages may be substantial, depending on how win-win deals are struck by operators. The incumbent and the owner of majority of the rural infrastructure does not wish to give up its first mover advantage by sharing infrastructure. However, other operators who have experienced the advantages of sharing of infrastructure in urban areas are quite keen on the arrangement. The choices range from voluntary sharing to government/trai mandated sharing of infrastructure. If it is mandatory sharing, it follows that TRAI must fix rates on forward looking long run increment cost principles, universally adopted by network regulators to ensure growth. It is a matter of deep embarrassment for the government that in Andhra Pradesh, the incumbent is charging such usurious rents that the laid fibre remains dark and operators are forced to lay alternate fibre or try alternate modes of delivery. The huge rural demand for knowledge based networks remains unfulfilled. The incumbent has nothing to lose from poor capacity utilization of its network, because it is subsidized by USO funds or ADC or license fee waiver. Consequently, a network laid at the expense of the taxpayers money in the name of rural connectivity remains unutilized. It must be ensured through policy or regulatory intervention that these networks are effectively utilized. Tapping Effective Demand for Rural Telecom Services: Purchasing Power is not a Barrier A demand side analysis will help to differentiate the areas where services may be provided in a commercially viable way from those where support will be required to enable provision. The increasing purchasing power of rural Indians (Tables and ) and a similarity in the purchase basket with those of urban areas increasingly indicates an ability to purchase telecom services and the low rural tele-density in some areas may indicate supply side constraints. (For statewise analysis, please see Part II of Chapter 4.) Subscribers buy telephones when they can afford it. If we look at tele-density in India and in other countries with similar Gross National Income (GNI) per capita on purchasing power parity (PPP) basis, it appears that India can also increase its tele-density very fast based only on income indicators (Table 4.1.9). It is interesting to note that while in percentage terms, the middle to high income households in rural areas are nearly onethird of those of urban areas, in absolute terms these numbers are almost the same. Further, in the lower middle-income group also, while the percentage of rural households is just a shade higher than urban households, in absolute terms, these constitute nearly two and a half times the number in urban areas. The cost-effectiveness of a given solution in providing communication service in rural areas because of the spread out characteristic of the subscriber base is a different consideration and may require subsidization of the network Table Urban/Rural Income-wise Distribution of Households in (in millions) Income Group Rural Households Urban Households Lower (47.94%) 9.31 (18.96%) Lower Middle (34.83%) (33.76%) Middle to High (17.23%) (47.28%) Total (100%) (100%) Source: NCAER IMDR 2002.

109 Rural Telecom 85 in rural areas. Any subsidization of individual telephones may not be an appropriate policy, in view of the huge rural demand and inevitable problems in implementing micro-managed subsidization policies. India s rural market has been growing steadily over the years and is now bigger than the urban market for FMCG (53 per cent share of the total market). Rural India also accounts for a large pie of consumer durables/white goods, automobile/ two-wheeler/tractor sales among a host of other industry sectors in our country. Table presents the ownership pattern of key durables. According to the World Bank, wherever they are given the choice, poor communities often spend on communications as much as urban communities, in terms of percentage of available income (World Bank, 2002). With wide network coverage and affordable communication services, rural growth can pick up substantially in a short time frame and this opens the Universal Service Opportunity window, both for the operators as well as subscribers. The demand for mobile telephones is increasing very fast even in small towns. Category C states have, on average, 85 per cent rural population, while Category A and B consist of 67 per cent and 75 per cent rural population respectively. Further, Category C states, which include Himachal Pradesh, Bihar and Jharkhand, Orissa, Assam, Sikkim, Tripura, Meghalaya, Manipur, Mizoram, Nagaland, Arunachal Pradesh, and Jammu & Kashmir, have on average lower per capita income than states in other categories approximately Rs 8000 as compared to Rs 10,000 and Rs 13,000 for B and A category states respectively. Yet, Category C circles have outperformed the national and other Category averages in percentage growth Table Urban-Rural Markets Total numbers in millions All India Urban + Rural Urban + Rural Semi- Semiurban Urban Total Households (millions) Bicycle Radios Television Motor Cycles & Scooters Source: TRAI s study paper on Indicators for Telecom Growth dated c (TRAI, 2005b). over multiple quarters, in terms of both GSM and CDMA subscribers (albeit on smaller base). Consequently, we can contest the claim that areas with higher rural populations or lower economic status are not attractive for investment in telecommunications infrastructure. Since the demand for goods in rural areas has grown several folds in recent years, our policies should now concentrate on expanding the supply of telecommunication services to rural areas. The government should substantially compensate such infrastructure from USO funds to facilitate explosive rural growth in telecom. Schemes should be simple and free from bureaucratic intervention if one is serious about replicating the urban growth model in a time bound manner. There is another feature of the Indian telecom market that characterizes the consumer profile very distinctly. Unlike other countries, where fixed line telephones far outstrip cable TV connections, the growth of cable TV services in India has been remarkable (Table ). The remarkable growth in cable TV which has connected more houses by wire without any government support, allocation or subsidy, vis-à-vis fixed line telephony where far fewer houses have been connected despite huge demand as indicated by long waiting lists, clearly shows: 1. Whenever the Indian government has allowed entrepreneurs free choices with non-draconian regulation, providing an environment for the expansion of business, they have flourished (Jain, 2001). 2. Indian consumers value multi-sourced information (here, cable channels in addition to Doordarshan) and entertainment (Star plus, Sony, Zee TV, and so on) much Table Number of Cable Subscribers and Number of Fixed Line Telephone Subscribers (2003) (In millions) Name of the No. of cable TV + No. of fixed country DTH subscribers line connections Australia China United Kingdom Japan Korea Taiwan Thailand United States India 61* 47* Note: *Data for India is for Source: TRAI study paper on Indicators for Telecom Growth dated (TRAI, 2005b).

110 86 India Infrastructure Report 2007 more than fixed line telephone services. This trend is not the same anywhere else in the world, as shown in the table above. The popularity of cable TV should be leveraged to increase the penetration of communication services, particularly in remote and rural areas. This can be incentivised by encouraging rural triple (or more) play networks. Such IP based next generation networks in place of present switch based networks are already being implemented in many countries. The operators can be allowed this choice if a converged network is introduced into the Indian telecom sector. Such an environment can be enabled either through Convergence Bill (if it is passed by the Parliament) or Unified Licensing (Unified Access Licensing introduced already). Once the rural areas get adequately connected, their untapped energies may be released to produce results we cannot even anticipate today. This has been convincingly demonstrated by the efforts of pioneers such as ITC, N-Logue, and Akshaya, and the experiences of the Indian IT industry, and the experiences in urban voice networks. The isolated cases of successful rural centres in Kerala, AP, Tamil Nadu, and Karnataka need to be replicated in a time bound manner to make a serious difference to the rural economy. IT APPLICATION IN RURAL AREAS: SOME INITIATIVES Indian corporate, state governments, and NGOs have launched several rural initiatives of different scales based on the latest ICTs. The results throw new light on the rural telecommunications scenario in terms of demand for services, possible modes of supply, and financial viability of initiatives. The types of services provided by the pilot projects through private initiative in rural areas of India can be classified as follows: 1. Profit Driven Projects: (a) ITC e-chaupal (b) N-Logue (c) Drishtee (using existing telecom infrastructure) 2. Grant/aid Supported Projects: (a) MS Swaminathan Center (in Pondicherry, focused on agriculture and fishing applications). (b) Tara-haat (focus on rural enterprises). (c) Akshaya (in Kerala with Government support). (d) Gyandoot (in M.P. with focus on e-governance) operated by N-Logue. (e) Rural e-seva (in East Godavari District of AP with focus on e-governance). (f) Warana Village (in Maharashtra by NIC) operated by N-Logue. 3. Application Development initiatives: (a) Bhoomi (b) Lokvani 4. Infrastructure Enhancing State Government Projects: (a) Andhra Pradesh Broadband Network: Broadband connectivity available across the state for offices, institutions, and homes at affordable costs (Jain, 2004). The list of such projects is expanding and all may not have been captured above. But there is a lesson in these projects for all of us that, recognizing the benefits of rural connectivity, corporate, educational institutions, NGOs, and State governments have launched major projects which cover thousands of villages and if these efforts could be integrated into an appropriate policy framework, there would be an explosive increase in rural connectivity/communications, the kind of which has never been witnessed in India before. We enumerate here four projects, namely, Lokvani, e- Chaupal, N-Logue and Andhra Pradesh Broadband Network which have used different communication platforms. Policies to promote commercialization can draw from the experiences with all the platforms. Lokvani Lokvani is an e-governance programme based on PCO network, to improve governance in districts. There are four important features of the programme. First, it uses PPP model to improve governance at the district level. Second, it uses existing PCO network. Third, the network uses software provided by NIC which can be scaled up in other districts. Fourth, deepening of services through Lokvani has been demonstrated (Box 4.1.1). ITC e-chaupal Based on V-SAT technology, ITC has covered over 25,000 villages with e-chaupal at 4300 places in six states where information about ITC s agricultural products, market, weather, fertilizer requirements and their variety is provided (Box 4.1.2). These e-chaupals, besides providing connectivity and information, also serve as ITC ground level outlets for agricultural products. Products such as seeds and fertilizers of guaranteed quality are made available at reasonable rates. These chaupals also carry out other commercial transactions with farmers such as purchase of agricultural produce, thereby, eliminating the village middle men. The scheme has received very positive response from villages since the villager is now able to get better price for his crops in a transparent manner and is assured of the quality and quantity of inputs that he may purchase. 3 He has the option of choosing the time of sale based on market information. These services have led to a communication revolution at the village level. By careful planning, these networks can be used for other applications including e-governance, e-health, e-education and so on. 3 This is assured by ITC employed area managers.

111 Rural Telecom 87 Box LOKVANI People s Voice Amod Kumar, Markanday Shahi, and A.P.Singh Lokvani is an e-governance programme launched in public private partnership with the combined efforts of both, the district administration as well as the National Informatics Centre in the district of Sitapur (UP) which is home to 3.6 million citizens of whom 88 per cent are rural inhabitants with a per cent literacy rate. Lokvani is an outstanding example of a highly cost-efficient, economically self-reliant, user financed community network. It has been projected as a commitment to the people in providing them with transparent, credible, and accountable systems of governance. This system is grounded in the rule of law, encompassing civil, political, as well as economic and social rights underpinned by accountable and efficient public administration for multiphase development of the rural people. The primary objective of the IT solution is to bridge the digital divide and connect the common man to the strategy makers in a seamless fashion. The Lokvani model has been formulated keeping in mind the three key stakeholders: (a) government; (b) the IT entrepreneurs/ Kiosk operators; and (c) the citizens. Since the IT literacy (and also any form of literacy) is very low in Sitapur, the Kiosks form an interface between the IT enabled government and the IT illiterate citizens. GOVERNMENT A society by the name of Lokvani was constituted at the district level to implement the project autonomously and reduce some of the bureaucratic pressures. All the financial decisions were taken under the purview of the society itself. The rationale for such a framework is that the budgets of small districts have a limited scope for extra expenditure and the process of getting finance is a long drawn out and complicated one. The Lokvani society meets its recurring expenses from the money received from the registration of Kiosks and short term and lifetime membership fees. The initial costs for setting up the society were also negligible as the hosting services was provided free of cost by the National Informatics Centre. IT ENTREPRENEURS/KIOSK OWNERS In the Lokvani system, Kiosk centres are set up in the existing cyber cafes and computer training institutes. This has ensured the financial viability and long-term sustainability of the Kiosks due to an alternate source of stable income. This step ensured that supplementary capital was not vital to the solution. The society signed contracts with existing Kiosk owners for the purpose of registering them as Lokvani franchisees with only a nominal annual fee of Rs IT entrepreneurs run the Kiosks. A typical Kiosk has an internet enabled PC, a printer and a webcam. It also has a CD ROM drive. Some Kiosks also have a power backup (typically, power is available five hours a day). Kiosks earn profits from various services of Lokvani provided to the citizens. In addition, the Kiosks can also generate some extra revenue by providing disparate facilities like computer education, computer typing, digital photography, internet access resulting in cross sales. CITIZENS The citizens form the customer base for which the model has been designed. The citizens save tremendous cost and effort in obtaining government services, registering grievances and petitions, accessing land records, seeking employment opportunities or learning about governmental schemes and services through the Lokvani facilities. In an economy riddled with poverty, it is an enormous burden Citizens on the citizens to forego daily wages to obtain regular government services. Therefore, with the Lokvani system, the citizens are the key beneficiaries and the media is putting pressure on the government to ensure the continuation of the system (Figure B4.1.1). Kiosk Kiosk GEOGRAPHICAL SPREAD There are forty-two uniformly distributed kiosk centres at the block and tehsil level of Sitapur. Each black dot in that figure represents the location of a Kiosk centre in Sitapur. More than one Kiosk may be situated in the same place. Government Figure B4.1.1: Operational Model of Lokvani SERVICES OFFERED BY LOKVANI The Lokvani system has empowered the public by generating awareness about citizens rights through a seamless flow of information. It is an outstanding manifestation of the right to information. The services offered by Lokvani encompass a wide

112 88 India Infrastructure Report 2007 range of government departments (Department of Public Grievances, District Administration, Development Department, and Department of Land and Revenue). The services offered by Lokvani are (a) Grievance and Petitions, (b) land records, (c) tender service, (d) employment services, (e) information related to government schemes, and (f) information about government services. LOKVANI GRIEVANCE AND PETITIONS SERVICE This is the most popularly used service of the Lokvani system as of now. This service allows citizens to register and then track the status of their petition via a local kiosk. The complaint is then transferred to designated officials, who can read but cannot modify it. It has many unique features including one which enables the citizens to follow up on their complaint while on the move with the help of a mobile phone. Another salient feature is the colour coding of complaints to ensure a prompt and satisfactory reply. It begins with the complaints being coded white which automatically transforms into yellow 4 days before the set deadline for the disposal of the complaint. Lastly, in the event of the expiration of the deadline, they are coded red otherwise the complaints are coded green and disposed of. Various functionalities provided are Status of Complaint, Officerwise Summary of all Complaints, Summary of all Complaints, Datewise Received Complaints, Centrewise Sent Complaints, Datewise Marked Complaints, Datewise Modified Complaints, and Datewise Disposed Complaints. LAND RECORD SYSTEM Information about the type of land, list of villages and details regarding the allotment of land in villages are available online in the local language. Individuals can view the land records for a nominal payment. In case the information regarding a particular land record is not available online at the kiosk centre, the applicant gets to receive it within a stipulated period of five days by speed post. TENDER SERVICES Notices regarding the tenders and their terms and conditions are published under the Lokvani Tender Service. The forms are also available for download. Interested contractors can send the completed tender forms through speed post to the concerned offices. Results and comparative charts of all bids are displayed on Internet within 24 hours of allotment. EMPLOYMENT SERVICES The Lokvani system provides information on all vacancies in the district as well as downloadable application forms for job seekers. Detailed information regarding the financial help provided by the government under various self-employment schemes is also available. INFORMATION RELATING TO GOVERNMENT SCHEMES The data of various schemes funded by the Central and State Governments through various Developments and Social Welfare Departments is accessible via Lokvani. Application forms for social schemes like Old Age Pension Scheme, National Family Benefit SITAPUR (Uttar Pradesh) To Maigalganj Neri Pisawan HARDOI Baragaon Mohali SITAPUR Qutbnagar Ramkot Ranigarh National Highway District Boundary River To Beniganj State Highway Road Railway Track District Headquarter Taluk Headquarter Town Tourist Place Map not to scale Copyright 2006 Compare infobase Pvt. Ltd KHERI Jharerkhapur Khairabad To Oyal Hargaon Parsendi Misriksh Machhrehta Kamalpur Nairnisharanya Sidhauli Bari LUCKNOW Tambaur Nabinagar Laharpur Mallanpur Akbarpur Khanpur Maharajganj Biswan Mahmudabad Nilgaon To Lucknow To Fatehpur Bansura Thanagaon BARA BANKI BAHRAICHI Fig. B4.1.2 Lokvani Kiosks with Black Dots representing the Kiosk location 24 N Scheme, Professional and Vocational Education, Loan for the Physically Handicapped, Loan for the Development of Small Scale/Handicraft/Cottage industry are made available for download. Citizens can download these forms and submit them through traditional methods. INFORMATION ABOUT DEVELOPMENT WORKS Lokvani provides a list of developmental programmes which are running under various departments like Educational Department, Jal Nigam, Electricity Department, Food and Civil Supply Department, Social Welfare Department, Public Works Department, Revenue Department, and other development departments. It also provides information about the people who have received employment under the National Food for Work Scheme and allotees of homes under the Indira Awas Yojana. Information on the development work under various schemes like National Food for Work Scheme, Member

113 Rural Telecom 89 of Parliament Development Scheme, and Member of Legislative Assembly Development Scheme is also available online. Detailed information about the food allocated to Kotedars and other agencies is also freely available. SINGLE WINDOW SYSTEM Lokvani Single window system deals with the filing of application for Birth, Death, Income, and Domicile Certificates at the kiosk centers. These certificates are received after due completion of the verification process. The system has been introduced on a trial run basis. BENEFITS OF THE LOKVANI SYSTEM Citizens can easily obtain pertinent information from the kiosks that are conveniently located in every block and even in a few villages. Unlike the traditional method, people are not required to visit the district/tehsil headquarters and as a result save on precious time, money, and effort. Computerization of land records has precluded the dependence on the Lekhpal for furnishing the official documents. Citizens can access information about various government schemes and their preconditions through kiosks. They can also obtain the list of persons who are benefiting under various schemes. A complaint can be filed against the concerned officer in the case of any discrepancy. For example, if a person benefiting from the Food for Work, Indira Awas Yojana, Mid Day Meal or Prime Minister Gram Sadak Yojana does not fulfil the prescribed criteria specified by the government, anyone can file a complaint against him. Online tender services have significantly reduced the preexisting monopoly of some influential contractors. Results and comparative charts of all bids are displayed on Lokvani within 24 hours of the allotment. This has drastically reduced the likelihood of illegal negotiations after the allocation of a tender. Before the implementation of Lokvani, there existed no easy method of checking the time taken by an officer to resolve cases assigned to him, thus promoting a culture of lackadaisical approach and dereliction in solving problems. However, in the new system, the officer is assigned a reasonable time period within which he has to redress the issue. This strict schedule has dramatically increased the efficiency and accountability of officers. Moreover, the District Magistrate and the citizens can access the progress report of the work by any officer. Transparency brought about by the easy availability of information on land records has reduced the possibility of land scams. Kiosk operators are earning extra money besides their regular income, without any extra investment. This has caused the number of registrations to climb up drastically. Apart from this their earnings from their mainstream business has also gone up. Recently, Court Information System has been added to the portal. There is a plan to include: Online Electoral Rolls, Vehicle Registration, Driving Licence, Payment of electricity bills, phone bills, Ration cards and allotment to Kotedar, Police thana computerization/networking connectivity, Tourist Related information, Daily rates of Fruits/Vegetables/Grains, Online pensioners information/installation of IVRS SMS, Parivar register Database (Rural and Urban), All Employees Database, University/College information (seat availability, admission), Health information (All Hospitals/Nursing Homes/Laboratories), Recovery Certificates (R.Cs), Industries information (Durry exporters and so on), Registry of properties, Banking Services, Drinking Water facilities Database, Development from MP/MLA funds, Khasra and Jamabandi records, and SC/ST tracker to Lokvani services. In short, with the deployment of Information and Communication Technology, the task of managing the services becomes effortless. Prior to the Lokvani system the infrastructure was abysmally inadequate due to a very limited number of computer systems and nonexistential computer networks. Another factor contributing to the efficiencies in governance has been the ability of the administration to effectively monitor the government officers. Note: The views expressed here are those of the authors of the box.

114 90 India Infrastructure Report 2007 Box Building Rural Market Infrastructure Rajasekhar ITC s e-chaupal was designed to achieve convergence between enhancing shareholder value, social good, and stimulating sustainable rural development based on community-centric and market driven principles. It addresses issues contextualized within the Indian farming and village systems by bringing to bear specialized expertise and insights required for scalable solutions. The geographical dispersion of farmers increases the complexity of their market linkages. Weakness in physical infrastructure, in combination with weakness in institutional infrastructure, leads to multiplication of intermediaries in the value chain. One of the objectives of e-chaupal is to re-engineer physical and information chains in such a way that they become efficient, locally responsive, and enhance overall value for all the participants. E-Chaupal has de-linked information from transaction through real-time multicasting ability of ICTs, to offer the freedom of choice to the farmer and to the rural consumer. It makes it possible to bundle information, knowledge, and transaction from independent participants in a collaborative business model to deliver unique value to the farmer/consumer and businesses simultaneously. The seamless workflow capability of ICT enables smooth coordination across borders of individual enterprises all this, without exclusively depending on traditional institutional infrastructure. One of the advantages of e-chaupal is virtual aggregation of demand for farm inputs or marketing of farm produce which gives the power of scale to the smallest of farmers. Community based e-commerce models whether within a contiguous cluster of villages or across geographic dispersion give the much needed volume linked economies to business enterprises and overcome the lack of physical infrastructure and in the process create viable markets for the poor. The e-chaupal is in the process of expanding into a universal business platform and goes beyond basic information provisioning to orchestrating knowledge extension services (farm management, risk management), availability of farm inputs and consumption goods/services (screened for quality, price, local pick-up), and choice of output channel (market access assurance, convenience, lower transaction costs) at the villager s doorstep through interlocking partnerships of specialized agencies. In six years, more than 6200 e-chaupals and 10 Chaupal Sagars were created by ITC across eight states reaching out to 35 lakh farmers engaged in nine agri-commodities in 35,000 villages with a vision to reach 100,000 villages by 2010 while delivering extraordinary value to all the stakeholders. Note: Views expressed here are of the author of the box. The cost of providing connectivity is, however, high and the scheme can be cost effective only when other services are combined with the agricultural products business of ITC. However, it is evident from this pilot project that there is an enormous demand for value added information although cost effectiveness of the provisioning arrangement in view of its limited usage is a concern. N-Logue projects in Tamil Nadu and Andhra Pradesh The project is based on the cordect product developed by IIT Madras. It provides information kiosks, in over 2000 villages in the state of Tamil Nadu and to a lesser extent in Andhra Pradesh and Madhya Pradesh. The kiosk is connected to the terminal of an ISP through a 70 kbps wireless connection using cordect technology which in turn provides internet based services including e-education, e-medicine, video conferencing, cyber chatting as on-line products and computer training, photography (still photography) as off-line products. These kiosks are owned by villagers, part financed by N-Logue and partly by the villager himself. The reported income per month varies between Rs 3000 to 5000, indicative of the quantum of demand of these services in rural areas. The cost of product provisioning is not very high but can be made more attractive through further expansion and certain regulatory interventions. Availability of power is a major concern in all such projects. There are various evaluations of these projects. About per cent kiosks do well. Andhra Pradesh Broadband Network This is the most comprehensive and integrated effort so far in any of the states and aims at broadband connectivity across AP at an affordable cost within a viable tariff structure. The Network plans to provide ten Gbps up to each district H.Q., one Gbps up to each Mandal H.Q., and 100/50 Mbps up to each village using fibre/wireless. From the analysis of the pilot projects, it is evident that a market exists in rural areas for not just voice telephony but also a variety of other value added services including Internet Protocol TV (IPTV) which can be provided through data circuits. A number of additional value added services can be designed and implemented by service providers, once these

115 Rural Telecom 91 Table Capex/Opex of Broadband connectivity projects A.P. model N-logue E-chaupal Per village For Per village For Per village For villages villages villages Capital Cost 0.93 lakh 701 crore 0.5 lakh 375 crore 1.2 lakh 900 crore Operational cost 0.25 lakh 188 crore 0.25 lakh 188 crore 0.53 lakh 398 crore (Annual) Delivered bandwidth 100 Mbps 70 kbps 64 kbps at village level Revenue Income/ year from year 2 nd Breakeven happens after 4th 5th year of Kiosks: Operations Rs 20,000 to Rs 1 lakh/ year Revenue HQ: Profitability Project HQ: 14.1 Crore approx. (With 30% Projects in Rs 30 lakh/ year (To be shared their 1st year of operation and the rest in their by project HQ/ company). 2nd year of operation) Revenue Franchisee: Total revenue = 1% of total transactions Approximately 4.5 crore, assuming 450 crore transactions made in one year. Approx. Rs per year per Franchisee Revenue Agent: Approx crore, assuming 450 crore transactions made in one year. Approx. Rs per year per agent Source: World Resource Institute and TRAI. networks are converted into IP based converged or unified networks. The cost effectiveness of some of these projects for scaling up to a large number of villages or all the rural areas in the country is, however, not entirely proven at this stage (Table ). But these projects are being expanded at a very fast pace. Success of these projects will depend on: 1. unified licensing or convergence framework, 2. USO Funds for infrastructure efforts on a technology neutral basis, 3. assurance of government business to these networks. The market will automatically choose the best mode of delivery for different areas and locations depending on their requirements. The main reason for better performance of these projects appears to be the greater stake of the entrepreneur in the schemes, involvement of the NGO, facilitation of funds, and training of the entrepreneur. The cost of implementing these schemes is also not much and a major proportion of the costs is recoverable in business once the network stabilizes, particularly in high-density villages. If voice telephony is added to such networks, they may be more viable and it is suggested that the Unified Licence Policy, when implemented across the country could unlock this potential (Jain, 2006). It is quite possible that in spite of the best efforts of the cellular/uasl operators, they may not be able to increase the penetration of telecom services in very backward areas from the telecommunication point of view. In such situations, a bottom up approach by promoting small operators in partnership with local population may help. Keeping this aspect in mind, a concept of niche operators in Short Distance Charging Areas (SDCAs) where tele-density is less than 1 per cent may be considered for early approval (TRAI, 2005a). To sum up, (i) the rural market for communications is not entirely based on voice telephony nor is voice telephony service by itself remunerative enough due to high infrastructure cost, (ii) there is a substantial demand for value added services provided on data circuits but such data circuits by themselves are not sufficiently remunerative to be scalable to all parts of the country, (iii) innovative projects of a small entrepreneur working as franchisee of a large service provider, have produced interesting results. Such entrepreneurs, utilizing their own infrastructure of a specific nature, are often more successful than very large operators, and (iv) if these projects can give the entire range of triple play services (including TV), facilitated by IP networks, the demand in rural areas for such networks

116 92 India Infrastructure Report 2007 would be large, and they would be more viable than single play networks. RURAL BPOS The BPO business has four main inputs: communications systems, hardware, infrastructure, and people. The cost of communications and hardware is not in the direct control of the industry, but BPO operators can directly control costs related to infrastructure and people. Simply put, the rural BPO shifts the location of outsourced work from urban to rural areas. Lason Inc. (a US based outsourcing firm), GramIT (associated with Satyam), and Datamation (a Delhi-based group), are three of the key players in the Indian rural BPO scene. Their approaches to the business also frame the different execution possibilities. A variety of business models have been adopted by the various players, including franchising (see Boxes and for more details). Rural BPO Operators Lason does not own the specific centres that do the processing, but designates them as franchisees, providing the hardware and training, and monitoring the quality of output. The local owner provides the physical location. Lason estimates that about 30 per cent of the revenues it earned in 2004 came from smaller city and rural sites. Datamation, on the other hand, owns and operates all the BPO centres it runs. NGOs assist Datamation in hiring and training the workforce for the BPOs. Their operation is based on a not-for-profit philosophy. They also run Hewlett- Packard s rural BPO initiative (begun in February 2000), which is part of a bigger project called HP i-community. The Byrraju Foundation, which is associated with Satyam, has launched GramIT, a rural BPO in village Jallikakinada (AP) that employs 200 rural youth, drawn locally as well as from surrounding villages, using the last mile connectivity provided by Project Ashwini, which connects thirty-two village centres with broadband wireless. The GramIT centres are set up as cooperative societies, acting as franchisees of Byrraju foundation. What Drives Rural BPOs One of the central advantages for the BPO is that costs associated with infrastructure and people are much lower in rural areas than in urban areas. This allows firms to reduce up to 90 per cent of their expenditures in providing the physical location given cheaper land prices and construction costs. In addition, one of the observations of rural BPO managers has been that employee attrition is lower because jobs are taken to where the people live. In rural South India a substantially large pool of English language literate youth exists making it easy for BPOs to establish operations and hire workers, implying lower turnaround and hence, lower rehiring and training costs. Another major driver behind the rural BPO model is that it feeds the large demand for low cost outsourcing solutions for services such as digitization of hospital records (proposed by GramIT) and legal documents (the work processed by Lason). Box New Wave of BPOs Pradeep Nevatia, MD & CEO of Lason India passionately believes that rural BPO is the next wave in BPO because this model makes tremendous business sense and has significant social connotations. In March 2005, Lason started operations in Kizhanur, a small village in Thiruvallur District of Tamil Nadu where it processed documents for clients in the US. Recently, they were approached by Jindal South West Foundation s Corporate Social Responsibility (CSR) wing, which is a part of the OP Jindal Group, to launch a BPO facility in Bellary District, Karnataka. This facility has generated numerous employment opportunities and is helping to bridge the technology divide in the region. In future, the Jindal Group may outsource its business processes to this BPO site. This joint venture is an indication of how even non-it companies can be a part of the rural BPO revolution and benefit from the same. According to Mr Nevatia, Village BPOs mean lesser attrition (because jobs are being taken to where the masses live as opposed to making people migrate from rural to urban areas for employment), which implies lower employee training costs. Therefore, there is better cost efficiency. He believes that village BPOs will help address domestic BPO needs, such as in the case of e-governance, that requires huge digitization which is currently hindered by the absence of cost-effective solutions. Village BPOs ensure rural empowerment and self-sufficiency, which translate into an improved economy in the long run. However, initially, sponsor companies need to invest time and money in intensive training and put in place Poka Yoke processes. (The phrase Poka-Yoke is explained on as the first step in truly error-proofing a system.) Importantly, the concept of village BPOs is in sync with the government s philosophy of providing employment opportunities in villages. Source: The Hindu (September 12, 2005).

117 Rural Telecom 93 Box GramIT, a Rural BPO: An initiative of the Byrraju Foundation Sagarika Bose Byrraju Foundation is a non-profit organization set up in July 2001 in the memory of the Late Byrraju Satyanarayana Raju, Founder, Satyam group of companies. The Foundation seeks to build progressive self-reliant rural communities by providing services in the areas of healthcare, environment, sanitation, primary education, adult literacy, and skills development. The Foundation currently works in 150 villages in 5 districts of Andhra Pradesh East Godavari, West Godavari, Krishna, Guntur, and Ranga Reddy. With the objective of moving rural India from the periphery to the centre of the new economy, the Foundation launched GramIT as an initiative that seeks to engage educated rural youth in the new economy by providing BPO services from the village. The first centre was launched at Jelli Kakinada, about 25 km from Bheemvaram in West Godavari district in August 2005, employing 200 youth from the village who would have otherwise moved to cities in search of job opportunities. The BPO centre does not belong to a national or multinational corporation but is owned, managed, and led by the community. The GramIT centres follow a BOOF (Build, Own, Operate and Franchise) model. The centre at Bheemavaram will be operated by the Foundation until it attains financial stability (say over six months). The associates of the GramIT centre will then be organized into a Mutually Aided Cooperative Society and the Centre will be franchised out to them. The workforce will have ownership of the centre and be driven by entrepreneurial motivation for greater efficiency and thereby, profit generation. They will assume full responsibility for operations and adherence to delivery schedules. Quality, Processes, Training, Customer Interface, and Business development and Brand will continue to be owned and managed by the Foundation which will ensure that a uniform high quality customer experience is built and maintained. The BOOF model, thus, effectively de-risks all stakeholders the employees, the investors, and the customers. GramIT Centre is envisioned as village level productive enterprise (VLPE) that will serve more than one purpose. As each GramIT center will be an independent enterprise that caters to predefined and exacting service standards, it will foster the spirit of enterprise in the village. Not only will they employ villagers, they will also empower villages, by contributing a part of the profits to chalk out and implement strategies for village development, to either supplement governmental programmes or as independent initiatives. They will also give voice to the increasing demand for quality infrastructure and services such as better roads, retailing, education and health in the village. The GramIT being a profit-oriented enterprise will plough back a part of its surplus into the village for providing support in implementing initiatives in health, education, water, sanitation and so on. The innovation is thus an amalgamation of a social cause and a business case. Selection for training is based on a simple aptitude cum skill test. This is followed by personal interview. The selected candidates undergo intensive training for 8 10 weeks in the village by trainers who are experienced professionals. Post selection, training is rigorous, focussing on honing English language skills, computer and keyboard skills and other soft skills making them fit to be deployable in the ITeS industry. No salary or stipend is paid during the training period. On completion of the training, the youth are engaged in transaction processing at the GramIT centres that provide back office support to Indian companies, Indian Government bodies and other institutions, offering transaction processing in a variety of areas such as, accounting, HR, bulk mailing, records digitization and archival services, reminder and follow up services, logistics and travel support. As the first customer, Satyam Computer has outsourced some of its internal processes in human resources, bookkeeping and administration. Several other leading corporates and institutions have also offered to support the initiative. The aim is to reach another 250 villages and 2 million people in the future. GramIT has already seen a number of reverse migrations. Currently over 5 per cent of GramIT associates have migrated back from the cities and this number will grow further. Several educated housewives accounting for nearly 20 per cent of the GramIT workforce, have come to work either for the first time or are returning to work. Unmarried girls, comprising 20 per cent of GramIT associates are seeking employment and earning an income which can be expected to have a positive impact on gender discrimination issues in the villages. Significantly, the youth, who would perhaps be under employed for another five years while they search for Government employment, pursue higher education or settle down in a vocation that does not use their education, are now economically useful contributors to the village economy. Apprehensions about poor connectivity, lack of trained manpower, inadequate orientation towards organized sector working are disappearing. There are positive indicators from the users about the economic potential of GramIT centres, affirming the Foundation s belief in the potential of GramIT as a catalyst of rural transformation. Note: Views expressed here are of the author of the box.

118 94 India Infrastructure Report 2007 AGENDA FOR ACTION USO and TRAI Act The TRAI Act has laid down clearly that notwithstanding the tenets of the Indian Telegraph Act, 1885 (13 of 1885), the Authority would ensure effective compliance of USO. Despite this clear provision in the Act, the Regulator has not played a significant role in the enforcement of universal service obligations. The regulator has, however, held periodic review meetings with the USOF and made recommendations on the structure of the USO schemes. In October 2005, it made detailed recommendations on rural telephony and the government has taken decision on these far reaching recommendations in November Also, as stated above, the fund has been created by the government it is a part of the Consolidated Fund and disbursements are sanctioned by the Ministry of Finance. USO Fund Administrator who presently prepares schemes and disburses funds, has also been created at the governmental level. It is, thus, very clear that the government presently controls rural telephony, and the regulator plays no substantial role in enforcing its recommendations. There is a need for an organizational restructuring for the USOF. Last Mile Connectivity Since many remote regions of India have little or no telecom infrastructure, it might be possible for local service providers (like niche operators suggested in TRAI (2005a)) to provide telecom connectivity by drawing backbone support either from satellite systems or fibre, or even combinations of last mile technologies and high capacity backbones (for example, fibre backbone, WiMax backhaul, Wi-Fi local distribution). Local operators will spur entrepreneurship and allow local knowledge to dictate the design of networks. For example, the FCC in the US has been very supportive of wireless LAN technologies like Wi-Fi, especially in underserved communities like the Appalachian region, the Mississippi Delta, and American Native Villages (which tend to be remote and difficult to access). The FCC has also sought the help of local leaders and has pursued aggressive outreach programmes in these areas (FCC 2004). Last mile connectivity to sparsely distributed households is costlier than in densely populated areas. Wireless technologies offer a promising alternative for the provision of multi-service broadband and voice connectivity. Making spectrum available for rural wireless deployments at reasonable costs either through special low rates or through financial support from USO Fund will help bring costs down and encourage innovation and deployment of advanced wireless technologies, providing support for last mile connectivity. Power Supply Unavailability of reliable power supply in semi-urban, rural and remote areas increases operational costs because operators have to maintain sufficient backup systems. Alternate energy sources could mitigate this problem, but might be costly to install and maintain. Hence, availability of a reliable power supply is necessary for achieving higher tele-density in rural areas. Operation and Maintenance Cost Maintenance costs of the network in rural areas are higher as compared to urban areas because of poor transportation, difficulty in obtaining spare parts, non-availability of skilled manpower and so on. Operational cost of satellite technologies such as VSAT in rural areas is also higher given the additional cost of the bandwidth incurred by the operator and taxes. Unless the number of rural subscribers grows this problem cannot be easily tackled. The present arrangement of one or two telephones in rural areas is obviously not a viable arrangement. Duties, Levies, and Taxes Prevailing duties, levies, and taxes are very high. The net result is that the service cost becomes high and unattractive to rural population and enough resources are not left with the operator for major rollout. Instead of levying huge duties and then reimbursing them with the help of USO, a far superior arrangement would be to drastically reduce taxes and duties on identifiable rural inputs. Licensing Framework We have seen that technological developments, especially those built around IP networks have resulted in convergent networks in which one single network offers a variety of services. As has been pointed out in the TRAI recommendations on Unified Licensing, service specific licensing is losing its meaning owing to the fact that service providers of one type step into the services of another type of licence using the same network. The increasing capability of wireless technology and its use in the modern cellular mobile technologies, irrespective of whether they are based on the so called 3G technologies or beyond 3G technologies, has created a totally new situation. It is, therefore, anticipated that for the rural areas, where the demand is clearly identified to be substantially inclined towards multimedia, a change in the licensing or legal framework will be extremely useful. Cost of Handsets and Access Devices Lower income rural households may perceive mobile handsets or access devices as expensive. The cost of handsets constitutes

119 Rural Telecom 95 an entry cost and is, therefore, an important barrier for growth of mobile services. Recently, single chip cell phone solution was launched in India that will bring down the cost of handsets, making the Rs 1000 mobile a reality. Such single chip solutions are expected to reduce power consumption by 50 per cent. This has been possible due to the huge increase in the size of the market, particularly of low priced handsets and a realization among suppliers that India is a highly price-sensitive market and its huge numbers can only be brought into the network if the entry costs are low. Availability of Locally Relevant Applications It is also important to increase content access that is, create applications and services which are useful to the local population. These could include e-governance, e-health, e-education, and commercial applications in local languages. With proper communication infrastructure it may be possible to move business processes to rural regions. This should open up the growth potential of rural Indian economy. The creation of necessary infrastructure will bring the market forces into play to create the needed applications at an acceptable cost. However, such a process is often slow and will vary from area to area and will depend upon the state of economic development of the given area as also the extent of awareness generated about ICT in these areas. Thus, a government policy and regulatory support would have to be in the form of the initial seed application and towards this, e-governance and e-health would play a major role. Affordability of Services There is evidence to suggest that people will spend up to 2 per cent of their income on phone calls if a phone is available to them, even in rural communities. The number of cable TV homes in India is more than those with fixed line phones. This indicates that even lower income population has a demand for entertainment and information services. Cellular service providers have already begun to introduce innovative schemes in urban markets to increase affordability of services. For example, operators like Reliance, Bharti, and Hutch have introduced micro prepaid cards that accelerate growth and increase operator margins. Similar schemes in rural areas will only serve to increase their market share and service penetration. Competition The urban telecom growth was driven by aggressive competition among a large number of operators. The present rural telecom policy is dependent on the public sector and governmentsupported USO schemes on individual telephones, VPTs and so on. The present rural telecom policy, thus, replicates the overall telecom policy during the period Hence, there is a remarkable similarity in the overall telecom growth graph of and the present day rural telecom graph Dovetailing State and Central Efforts One of the most impressive facts about telecommunications in India is that the fibre optic cable runs through every block in the country. Different providers like the railways, Power Grid, oil companies, BSNL, and GAIL have extensive deployments of fibre in many remote areas. One of the possible ways to overcome the problem of remote area communication in India is to employ this latent capacity in the national interest. The present governmental efforts in e-governance have led to captive government networks up to block level. We need to see whether these networks can be converted into commercial networks, say by handing over NIC (National Informatics Centre) networks to BSNL or by giving NIC an Internet Service Provider (ISP) licence, and then allowing competition by encouraging private networks in these areas and also by giving these networks government business. There is no logic in setting up separate data networks for government business or governance. The Andhra government is trying to encourage a private fibre to village network and is helping its viability by ensuring government e-governance business to this network. The only solution, therefore, lies in creating sharable infrastructure in rural areas to enable many operators to enter in a viable and competitive manner and create an environment which has led to the urban telecom revolution in India. Regulatory interventions for sharing fibre already laid by the incumbent from public or USO funds, especially in rural areas are required. From the backbone onwards wireless services may be provided. Reducing levies is essential to drop cost to customer and hence, increase in penetration in new markets particularly rural areas with lesser purchasing power and low density of population. USO to Fund Infrastructure and not Just Services A key consideration in evolving these policy and regulatory interventions is that market forces must be allowed to ultimately determine the conditions for rural area telecom services. An appropriate form of subsidy in the short run would be necessary to incentivize the creation of infrastructure. This subsidy would have to be in the form where the emphasis shifts from the present VPT and individual DEL-based subsidy to growth in network using subsidy. Further, these steps would lower the

120 96 India Infrastructure Report 2007 input cost resulting in the expansion of the market and enhancement of revenues to the government from taxes on the output. The proposed network infrastructure expansion approach in rural areas will be simpler to implement and monitor. The operators will have to operate their services in a more efficient manner. This will also encourage development of local entrepreneurship in rural areas and ultimately, this will lead to growth of telecom services in rural areas (Box 4.1.5). Access service providers, who provide telecom services in rural areas, using any technology, should also be given incentives depending upon rollout of infrastructure in rural areas. Due to cost reduction in optic fibre technology and its capability of providing very high bandwidth in last mile connectivity the operator may use this technology in rural/remote areas. It would encourage the rollout of network by using any wireline or wireless technology with support from USOF for shared media. Currently, the amount of support has been quantified for usage of wireless technology depending upon the number of BTSs. Other technologies may also be given incentive of the order of around 50 per cent of the total infrastructure costs. Spectrum Management In rural and remote areas with low requirement of spectrum, services should not be taxed heavily. Thus, depending upon the number of BTSs located in rural areas, the service providers should be given a discount in Annual Licence Fee and Spectrum Charges, which are charged in terms of percentage of AGR. The discount on Annual Licence fee and Spectrum Charges could be linked to the rolling out of infrastructure in rural/remote areas. For instance if 5000 BTSs are installed in rural/remote areas, then say, 10 per cent discount may be given in the Licence Fee and Spectrum Charges payable by the operator and percentage of discount may increase further with increasing BTSs. One may argue that service providers who provide voice and/or data services in rural areas using any other technology including Wi-Fi, Cor-DECT, fibre, and so on should also get subsidy from USOF, just like cellular/uasl operators. According to TRAI, only those access service providers who contribute towards USO should get support at this stage, that is, service providers such as ISPs or franchisee shall not be eligible to get support from USOF. However, there are others who argue that by not allowing proliferation of small operators (in contrast to the policy for cable operators), we may be slowing the spread of services. Some of these operators are too small to have the wherewithal to become a franchise of the service operator. It is conceivable that a small operator, who starts the initial business would like to sell it to more established businesses later. In such cases, the operator should return the quantum of USOF support, along with the interest to the USOF. This model is relevant as the larger service providers Box A Possible Roadmap for Enhancing Rural Teledensity using USO Fund The key features of the rural network are the access through largely wireless means and connectivity of these wireless base stations to the main network. About 20,000 base stations are required to cover 80 to 90 per cent rural population. As the population distribution is not uniform, the initial installations in relatively densely populated areas would provide mobile signals to around 75 per cent of rural population across 2 lakh larger villages. Table B4.1.5 Funds Required from USOF for Incentivizing Mobile Towers Mobile Towers Circular Cells Hexagon Cells Total geographical area of India (sq km) 3,287,263 3,287,263 Total covered rural area (sq km) 2,761,300 2,761,300 Average radius covered per site (km) Area under one site (sq km) Total sites required 15,634 18,917 Inter-site distance (km) No. of sites considered 15,000 20,000 Incentive per site for 3 operators (lakh) = 36 Total incentive for sites (in crore) = 7200 Source: TRAI (2004 and 2005b).

121 Rural Telecom 97 The total cost of setting up these 20,000 BTSs can be estimated from the configuration of the BTS, the height of the tower, the size of the power plant, the size and type of the backup power plant. The purpose will be served if the costs are estimated on the basis of average configurations a 40 metre tower with suitable power plant and other features. The cost of one such BTS (including electronic equipment) based on estimates obtained from various operators, works out to around Rs 50 lakh. In case three operators share the tower, the cost of tower plus operator electronic equipment (Rs 10 lakh for each operator) for three would be around Rs 70 lakh. USO funds could be used to incentivize the roll out through partial subsidy without fully supporting it. This could be done through a support to cover part of the capex as well as part of the recurring operating costs for a limited period of time. Another important hurdle for the expansion of network in rural areas is the expensive and time consuming process of setting up backhaul connectivity of these BTSs to the base stations controllers (BSCs) and the main telecommunication network. With the existing 600,000 route-km of optic fibre cable network, each base station should, on an average, be within 15 km or so of optic fibre reach. However, this fibre is largely with a single service provider, the incumbent. The Access Service Provider and Universal Access Service Licenses (UASL) provide for the licensees to develop their own infrastructure for rolling out their networks. Thus, unless there is substantial motivation and a win-win deal for all, mandating the provisioning of leased lines even in rural areas, could create disputes. At the same time utilizing this infrastructure rather than waiting for a new one to be laid, has to be a national priority, subject to adequate compensatory commercial terms being offered. TRAI in its Tariff Order dated 21 April 2005 on Domestic Leased Circuits mentioned that it would consider making recommendations to the government on the issue of providing direct support from USO fund to bandwidth providers in rural/remote areas. Quite evidently, the extent of such support would depend upon the price at which bandwidth services are to be made available to the service providers in such areas within the ceiling tariff specified in the said Order. Thus, if it is mandated that those who own optic fibre connectivity in a given rural/remote area, must provide leased lines, these facility owners/service providers could be provided subsidy through the USO fund, possibly to the extent of covering 30 per cent discount on specified ceiling. Assuming that fibre connectivity is already available to each new tower installation within 15 to 20 km and the average distance between BTS and BSC is around 170 km, then an additional burden on USOF for 20,000 BTSs for 5 years would be about Rs 1040 crore. This amount is based on the assumption that each BTS will be connected with its BSC with one E1 only through leased circuits. Even if it is assumed that a minimum of two E1s will be required to connect each BTS, this amount works out to Rs 2080 crore over a period of five years. It is also quite likely that since lease line connectivity between BSC and BTSs is in a point to multi-point configuration, because of usage of common optical fibre cable and other equipment, this burden on USOF may be reduced. This is an indicative figure. It can be seen that through a support from USOF of about Rs 9000 crore it will be possible to install 20,000 base stations in rural areas with two E1 connectivity to the main network to cover about 80 to 90 per cent of the villages providing access to wireless signals of appropriate bandwidth. Operators will be able to offer telecom services of the type required by rural population at price levels where the cost-benefit ratio will clearly suit its large number of target customers. There will be some balance amount (approximately Rs 9000 crore) in USOF even after meeting all the contractual commitments for VPTs, RCPs, MARR replacements and rural DELs. Therefore, it would be possible to provide support for network infrastructure expansion and it may not be necessary to increase the contribution from existing level of 5 per cent of AGR of the contributing operators. After contractual commitments for the existing VPTs, RCPs, MARR replacements and rural DELs are completed, only the network infrastructure expansion approach should be followed for providing USOF support. Since the amount of support in this network expansion approach will be less and ultimately the growth of telecom services in rural areas will pick up, therefore, in future the reduction in USO level from the existing level of 5 per cent of AGR may also be considered. However, since ADC Regime has to come to an end in the year 2008 and it has to merge in USO Regime, the contribution towards USO may be suitably adjusted keeping in mind the merger of ADC Regime and also the objectives of USO policy at that point of time. Judging by the past experience in the urban areas and the response received in the pilot trials, a rural tele-density figure of about 15 per cent should be entirely feasible with this proposed enabling approach of infrastructure creation, in the next few years. The operator who installs BTSs in rural/remote areas should be given one time support (in two installments) of Rs 12 lakh per BTS from USOF, provided the installed infrastructure is shared with at least one other operator. Given the number of operators, three operators per rural tower would be the ideal solution. The other two operators who roll out their services in rural/remote areas and share the infrastructure like tower/shelter and power supply with the already existing operator in that area will provide the infrastructure. Ground based towers (as is common in rural areas) would receive support of such magnitude. In case roof-top/pole mounted towers are used, the support and distance criteria can be suitably scaled down. This support should also be given for existing BTSs, which start sharing and are installed beyond cities/towns and the service providers give the mobile connections in their coverage areas. In order to avail the above mentioned support the two ground based towers installed in rural areas must be empirically 15 km apart. However, looking at different terrains, the distance might vary and therefore, it may be prescribed that for eligibility under the scheme, the minimum distance should be 12 km. It is also possible that the passive infrastructure like tower, shelter and back up power supply may be installed by infrastructure provider. This infrastructure provider will have to settle their commercial arrangement with these access providers.

122 98 India Infrastructure Report 2007 are going to take the top down approach to diffusion of rural services as highlighted earlier. At present, the necessary clearances (including SACFA clearance) are required to be taken in advance for installing the tower. Even if post facto approval is permitted for installing towers, Wireless Planning and Co-ordination (WPC) wing of DOT will have a centralized database of all towers installed by operators. This may help in verifying the location of towers and thus make the scheme simpler from the implementation point of view. There are several management challenges in the above suggested plane. For example, does the USOF have adequate staff and requisite support to roll out this plan? The roll out envisages active coordination with private operators, seeking collaborations and monitoring the rollouts. In this context, a third party study that can identity the bottlenecks in the existing USOF has not been planned. Since the existing USOF plan and the proposed plans are highly visible programmes, there should be an early review mechanism designed as a part of the plan.

123 Rural Telecom 99 ANNEXE Table A4.1.1 Computation of Committed Subsidy towards VPT, MARR, and RCP (Public Access Facility) Particulars 1. VPT Subsidy Number of VPT (in lakhs) 3.2 OPEX subsidy per VPT per year average (in Rs) 5357 Total VPT subsidy per year (in Rs Cr.) Total VPT subsidy for 7 years (in Rs Cr.) MARR replacement Number of VPTs (in lakhs) 1.86 CAPEX per year Average (in Rs) Total MARR susbsidy per year (in Rs Cr.) 214 Total MARR subsidy for 7 years (in Rs Cr.) Uncovered Villages Villages covered through satellite Upfront per satellite (in lakh) 1 Total upfront cost-capex (in Rs Cr.) 140 OPEX per year (in Rs) average OPEX per year (in Rs Cr.) 16 OPEX per year for 5 year (in Rs Cr.) 82 Non-satellite Villages Upfront per village Total upfront cost (in Rs Cr.) one time 115 OPEX per year Average (in Rs) 4295 OPEX per year (in Rs Cr.) OPEX per year for 5 year (in Rs Cr.) 99 Total subsidy for uncovered villages RCP Total Number of RCP Upfront per RCP (Average) Total upfront cost (in Cr.) 107 OPEX per year Average (in Rs) 2000 OPEX per year (in Cr.) 9 OPEX per year for 5 year (in Cr.) HPTIC Total no of HPTIC 2000 Upfront per HPTIC (Rs in lakh) 1.5 Total upfront cost (in Rs Cr.) 30 OPEX per year per HPTIC (in Rs) OPEX per year (in Rs Cr.) 5 OPEX per year for 5 year (in Rs Cr.) 25 Total commitments (Rs Cr.) 3344 Source: TRAI.

124 100 India Infrastructure Report 2007 Table A4.1.2 Total DEL Subsidy required to achieve additional 66 lakh rural DELs by 2007 (estimation by USOF) DELs Subsidy Subscriber Base DEL (from 1/4/2005 DEL (from 1/4/2002 to 31/3/2010) to 31/3/2005) Sub- Additional Subscriber Estimated Estimated scriber subscriber base as Capex Opex Total base as during on 31 st Estimated to be (to be Capex Opex Amount 1 st April the year March Capex disbursed Estimated disbursed Disburse- Disburse- Disburse- S. (in Rs (in Rs (in Rs (in Rs (in Rs Opex (in (in Rs ments in ments (in ments (in No. Year Crore) Crore) Crore) Crore) Crore) Rs Crore) Crore) Rs Crore) Rs Crore) Rs Crore) 1. 1/4/ , Total Allowed disbursement Approx Approx 2600 Total Disbursement required Note: Total subsidy required for meeting present commitments (VPC, MARR, RCPs and DELs) = 3344 Rs crore Rs crore (DELs) = Rs crore. Source: TRAI. Table A4.1.3 Total DEL Subsidy required for achieving 4% rural tele-density by 2010 Subscriber base DEL (from 1/4/2005 to DEL (From 31/3/2005) 1/4/2002 to 31/3/2010) Addi- ADC for Subscriber tional lines not Base subs- Subscriber covered Opening criber base at Opex Capex Opex Total by the for Fina- during Closing Capex Disbur- Disbur- Disbur- Disbur- USO ncial year the year of Fin. Capex Disbursed sement sements sements sements Fund Year (in Rs (in Rs Year (in due (in (in Rs (in Rs (in Rs (in Rs (in Rs (Estim- Total S. No Ending Crore) Crore) Rs Crore) Rs Crore) Crore) Crores) Crore) Crore) Crore) ation) USO Total Note: It is assumed that ADC regime gets concluded in the year ADC calculated for Rs crore Rural DELs not covered in USO Total subsidy required for meeting present commitments (VPT, MARR, RCPs & DELs) = Rs crore (DELs) = 5103 Rs crore ADC for rural lines not covered by USO = Rs crore. Source: TRAI.

125 Rural Telecom 101 REFERENCES FCC (2001). (Federal Communication Commission), Federal-State Joint Board On Universal Service Petition of The State of Alaska for Waiver for the Utilization of Schools and Libraries Internet Point-of-Presence in Rural Remote, December FCC (2004). Consumer & Governmental Affairs Bureau Reports on Status of Lands of Opportunity: Building Rural Connectivity, July 8, 2004, available at attachmatch/doc a1.pdf Jain, Rekha (2001). A Review of the Indian Telecom Sector India Infrastructure Report 2001: Issues in Regulation and Market Structure, New Delhi: Oxford University Press. (2004). State-wide Area Network, India Infrastructure Report 2004: Ensuring Value for Money, New Delhi: Oxford University Press. (2006). Report on Accelerated Provision of telecom Services, Working Paper, Indian Institute of Management, Ahmedabad. Morgan Stanley (2005). Micro-Prepaid comes to India, Telecommunications Industry Overview, Morgan Stanley India, Mumbai. NCAER (2002). India Market Demographics Report 2002, New Delhi. The Hindu (2005). Abstract from a story that appeared on Sep 12. TRAI (2004). Growth of Telecom Services in Rural India, Consultation Paper, Telecom Regulatory Authority of India, New Delhi. (2005a). Recommendations on Unified Licensing Regime, Telecom Regulatory Authority of India, January, New Delhi. (2005b). Recommendations on the Growth of Telecom Services in Rural India, Telecom Regulatory Authority of India, New Delhi. TRAI (2006). Press Release No. 66/2006, Telecom Services Maintain Its Growth in June 2006, Telecom Regulatory Authority of India, New Delhi. (2006a). Allocation and Pricing of Spectrum for 3G Services and Broadband Wireless Access, Consultation Paper No. 9/2006, Telecom Regulatory Authority of India, New Delhi. World Bank (2002). Telecommunication and Information Services for the Poor, World Bank Discussion paper No. 432.

126 102 India Infrastructure Report 2007 PART II ACCELERATING RURAL TELECOM PENETRATION: A STATE LEVEL ANALYSIS 4 Rekha Jain and G. Raghuram INTRODUCTION Regulatory and technological changes in the recent past have resulted in tremendous growth in teledensity. Total teledensity between 1998 and 2005 grew from 1.9 per cent to 9.08 per cent. Urban teledensity (UTD) increased from about 6 per cent to 26 per cent, but rural teledensity (RTD) increased from 0.4 per cent to about 2 per cent only in the same period. Here we suggest a framework for targetting of policy options, understanding of the nature of demand and perceived benefits of rural telecom services for prioritizing rollout and structuring of the Universal Service Obligations Fund. This research seeks to identify attributes that should determine policies related to rural telecom across and within states. We examined trends in RTD growth at the state level and related them to the state level development parameters such as (i) fixed line UTD, (ii) literacy rates, (iii) rural literacy rates, (iv) rural income per capita, and (v) percentage of rural population. We also examined consumption patterns across states to understand the nature of rural demand in relation to telecom services and supply side policies such as lower rentals that are likely to drive growth trends with its possible implications of rural demand. FIXED LINE TELECOM DENSITY IN STATES States were categorized on the basis of RTD, to examine if there were common characteristics that contributed to their classification in a particular group and understand the relationships among the development parameters and their possible influence on RTD. Over five years of the study, all the states witnessed improvements in rural telecom density at varying rates, resulting in the national average teledensity rising from 0.65 per cent to 1.58 per cent. The CAGR (excluding states where appropriate data was not available) nationally was per cent during 2000 to There were large variations in RTD across different states during 2000 to 2004 (Table 4.2.1). Kerala, Andaman and Nicobar (A&N), and Himachal Pradesh (HP) had the top three RTDs of 8.45 per cent, 8.36 per cent, and 5.50 per 4 This is an abridged version of the report to the Department of Telecom (DOT) (sponsored by World Bank) on policy and regulatory options for Accelerated Rural Telecom Services submitted in April cent respectively while Jharkhand, Chhattisgarh, and Uttar Pradesh (UP) had the lowest RTDs at 0.46 per cent, 0.47 per cent and 0.48 per cent respectively. There were certain discrepancies in the data as highlighted in notes to the Table A review of the RTDs facilitated state groupings as presented in Figure There exist four natural categories. These are states having high (over 4 per cent), medium (those having from 2 per cent to 4 per cent), low (those having more than 0.9 per cent to 2 per cent) and poor RTD (below 0.9 per cent). We examine the RTDs with respect to the following developmental parameters: (i) fixed line UTD, (ii) literacy rates, (iii) rural literacy rates, (iv) rural income per capita, and (v) percentage of rural population, category wise in Table A Category 1: High RTD States Kerala, A & N, HP, and Punjab fall in this category. The UTD in this category was 73.0 per cent above the national average. HP had a UTD which was per cent above national average and Punjab had the lowest UTD, but even this was 45.8 per cent above average. The literacy rate was 25.3 per cent above average. While Kerala had the highest literacy rate of 40.3 per cent above average, the same for Punjab was 7.6 per cent above average. The rural literacy rate in these states was 66.4 per cent above average, showing higher correlation of rural literacy rates with RTD than with overall literacy rates. Kerala had the highest rural literacy rate at per cent above average, while Punjab, which ranked the lowest, had a rural literacy rate of 19 per cent above average. Rural per capita income was 30.2 per cent above average for these states, showing a correlation between higher RTD and rural per capita income. Punjab had 68.1 per cent above average, while HP and Kerala were 9.9 per cent and 5.1 per cent above average only. The relationship between RTD and SDP/capita showed SDP/capita 20.9 per cent above average for this group the difference between Punjab, HP and Kerala was not pronounced for this parameter being at 16.9 per cent, 12.6 per cent and 12.1 per cent above average respectively. The percentage of rural population was 0.3 per cent above the national average. While HP had a rural population 24.9 per cent above average, Punjab had 8.5 per cent below average rural population.

127 Rural Telecom 103 Table State-wise Fixed Line RTD with CAGR Sr. RTD as on 31st March (%) No. States/UTs CAGR (%) 1 Kerala A&N Islands HP Punjab Gujarat Haryana Karnataka Andhra Pradesh Maharashtra Tamil Nadu Uttaranchal NA NA 12 Rajasthan North East NA 14 West Bengal Orissa Madhya Pradesh Jammu & Kashmir Assam Bihar UP NA 21 Chhattisgarh NA NA 22 Jharkhand NA NA India Source: BSNL Internal Documents. Notes: a) NA: not available. b) Highlighted areas indicate discrepancies of reducing teledensity. We had sought clarification from BSNL. These are provided below: 1. In respect of Bihar and Madhya Pradesh, formation of Jharkhand and Chhattisgarh states in 2001 has contributed for the distortions. 2. The correct population figures for the year 2000 for North East are not available. The telephone connections have shown ~25 per cent growth in absolute terms. The tele-density figures may perhaps be revised backwards. 3. In Tamil Nadu there was re-organization of rural/urban areas. 4. The discrepancies for UP and Uttaranchal could not be explained. 5. No explanation for Gujarat was provided and the figures were stated to be correct. Category 2: States with Medium RTD Gujarat, Haryana, Karnataka, Maharashtra, and AP fall in this category. The UTD in these states was 8.6 per cent above average while Haryana had a UTD which was 35.3 per cent above average, TN had a UTD that was just 0.18 per cent above average. The literacy rates of the category was 7.6 per cent above average, Maharashtra had the highest literacy rate which was 18.7 per cent above average, whereas AP had the lowest literacy rate of 6.6 per cent below average. The rural literacy rate of the category was 10.7 per cent above average, showing higher correlation of rural literacy rates with RTD than with over all literacy rates as was the case with category 1 states. TN had the highest rural literacy rate while AP had the lowest, which was 19.8 per cent below average. The rural income per capita was 25.1 per cent above average for this category, which for Haryana is 50.9 per cent above average and Gujarat a close second at 48.1 per cent above average. For AP rural per capita income is lowest for the category at 12.1 per cent above average. The relationship between RTD and SDP/ capita was stronger than category 1. Maharashtra had the highest SDP/capita at 38.8 per cent above average. Haryana, Gujarat, and TN are 35.3 per cent, 29.3 per cent, and 25.9 per cent above average respectively, while AP is 2.6 per cent below average value. The percentage of rural population was 12.3 per cent below the national average for the group. TN, Maharashtra and Gujarat are 22.3 per cent, 20.2 per cent

128 104 India Infrastructure Report 2007 RTD (%) KRL A&N HP PB 3.00 GJ HR KTK AP MH TN 2.00 India UCL RJ NE WB 1.00 OR MP J&K AS BH CGH JKD States A&N Andaman and Nicobar AP Andhra Pradesh AS Assam BH Bihar CGH Chhattisgarh GJ Gujarat HP Himachal Pradesh HR Haryana JKD Jharkhand J&K Jammu & Kashmir KRL Kerala KTK Karnataka MH Maharashtra MP Madhya Pradesh NE North East OR Orissa PB Punjab RJ Rajasthan Fig States by Rural Tele-density (2004) and 13.3 per cent below the national average in terms of percentage of rural population. Category 3: States with Low RTD Uttaranchal, Rajasthan, NE, WB, and Orissa comprise this category 5. The UTD of this category was 10.6 per cent below average. The literacy rates for this category were 0.8 per cent above average, with Rajasthan having the lowest value in this category at 6.8 per cent below average. The rural literacy rate of the category was 4.8 per cent below average. Rajasthan had the lowest rural literacy rates at 34.9 per cent below average. The rural income per capita was 11 per cent below average, with Orissa at 42 per cent below average and Rajasthan, 8.6 per cent above average. The SDP/capita in this category was 19.7 per cent below average. WB had the highest SDP/capita, but that was 7.8 per cent below average. Orissa had the lowest SDP/capita, at 44 per cent below average. The percentage of rural population was 5.7 per cent above the national average. WB had the lowest percentage of rural population (0.3 per cent below average) and Orissa had the highest percentage (17.7 per cent above average). Category 4: States with Poor RTD MP, J&K, Assam, Bihar, UP, Chhattisgarh, and Jharkhand fall in this category. The UTD of these states was 26.1 per cent below average substantially lower than category 3 states. While Assam had a UTD which was 3.8 per cent above average, Chattisgarh had a value per cent below average. MP, Jharkhand and Bihar also had very low values at 37.4 per cent, 30.9 per cent and 28.5 per cent below average. The literacy rates for this category were 13.3 per cent below average, with Bihar having the lowest value in this category at 27.5 per cent below average. In terms of the rural literacy rate, the category average was 21.2 per cent below average. Bihar had the lowest rural literacy rates at 27.8 per cent below average. The rural income per capita was 26.8 per cent below average for this category, with UP at 31.5 per cent below average and Assam 12.9 per cent above average. The SDP/capita in this category was 47 per cent below average. MP had the highest SDP/capita in the category, but that was 29.3 per cent below average. Bihar had the lowest SDP/capita, at 69 per cent below average. The rural population was 12 per cent above the national average. MP had the lowest percentage of rural population (1.5 per cent above average) and Bihar had the highest percentage (24 per cent above average). Quantitative Analysis of Effect of Development Parameters on RTD Further analysis was done using simple and multiple regressions to quantify the effects of the various causal development parameters on RTD. 6 In the single variable model, UTD was the most significant driver of RTD, followed by rural literacy. The multiple regression models showed that rural per capita income and the UTD were more significant. It was possible that rural literacy was related to rural per capita income which in turn could be a determinant of RTD. It also appears that some of the variables, after a threshold value would have multiplier effect on the growth of telecom services. This model could help in sequencing roll outs by relating the influence of rural literacy, UTD, or rural per capita income on RTD. LINKING CONSUMPTION PATTERNS TO TARGET POLICIES The fact that the number of mobile subscribers worldwide was far greater than fixed line subscribers, despite the higher call rates, seems to indicate that customers are willing to pay for service they value. In India too, though mobile growth has been fuelled by urban subscribers, increasingly, demand for handsets and services in rural areas indicates a willingness to pay. 5 Some of the data was not available for category 3 and 4 states. 6 The details are available on request from the authors.

129 Rural Telecom 105 A study by A.C. Nielsen indicated that about 9 million families belonged to the more affluent class R1+R2+R3A 7 and comprised nearly 22 per cent of the rural families. 8 Also, that the basket of items of consumption for urban and rural users was similar for certain categories of rural users. The increase in spending on telecom services in urban areas could also be expected to replicate in affluent rural categories. A state level analysis of top 20 per cent of the rural population ranked according to the level of consumption helped us to estimate the state level demand. The middle class in rural areas comprising million people has an annual consumption of Rs 10,309 per capita compared to million in urban areas with an annual per capita consumption of Rs 14,513 (Sen, 2004). The consumption patterns of the top20 (representing the top 20 per cent of the population by consumption) at the state level are quite diverse and their annual per capita consumption expenditure shows wide variations (Table 4.2.2). The rural top20 having an above national average consumption comprises nearly 50 million people across different states. (For UP, the average consumption level for top 20 was slightly lower than the national average of Rs 10,309. We took one third of this category as the relevant category. This comprised nearly 7.6 million people.) Relating this distribution to the RTD categorization we find that even in states that had lower RTD and per capita income, there were segments where telecom services could become commercially viable. If low RTD was associated with specific pockets within states that displayed higher consumption levels, then, it may be an indicator of lack of supply rather than that of demand. However, a supply driven approach would need to be adopted for the large number of rural areas that had poor telecom services and low ability to pay. PRICE REGULATION AND ITS EFFECT ON DEMAND Registration charges, rentals, and cost per call have been identified both by the government and independent studies as important determinants of rural people s acquisition and usage of a telephone (Rao and Kumar, 2000). A policy initiative of keeping registration fee for rural areas lower than in urban areas has been taken. The government s policy has been adopted by TRAI, so that while it has foreborne on regulating both cellular and fixed service tariffs in urban areas, it also regulates 7 The Rural Sector is divided into SEC R1, R2, R3, R4 (calculated as a function of Educational Qualifications of the Chief Wage Earner and the type of the household he/she stays in Pucca, Semi Pucca or Kaccha). Someone with a professional degree living in a pucca house will come in R1 category and an illiterate living in a kutcha house will be classified as R4 (Source FICCI Press Release September 9, 2005). 8 Business Today January 30, Table The Indian Middle Class: Where does it Live? Average Monthly per Annual per Capita Number Capita Consumption of Consumption Expenditure Persons Expenditure States (Rs) (millions) (Rs) Kerala rural top20 1, ,376 Punjab rural top20 1, ,540 Haryana rural top20 1, ,616 TN rural top ,400 Gujarat rural top ,376 Maharashtra rural top ,716 Rajasthan rural top ,608 Karnataka rural top ,368 UP rural top AP rural top WB rural top Punjab rural mid Kerala rural mid Haryana rural mid MP rural top Source: The Hindu Business Line, Saturday, January 22, rural tariffs. The registration fees had been lowered from Rs 3000 to Rs 1000 in 2000 and further to Rs 500 in The rentals for rural areas were lower than those for urban areas. These have also been reduced from the earlier Rs 70 9 in 1999 to Rs 50 in December This has boosted rural demand as shown by the increasing rural DELs since 2000 (Figure 4.2.2). Although lowering the price boosted rural demand, the competitive pressure from mobile telephony led to reduction in incremental demand of DELs after Moreover, the reduction in charges led to a wider viability gap, making rural telecom unattractive for the BSNL. 10 Another policy initiative was lowering local call charge (in relation to such calls in urban areas) and the increasing distance over which local call charges were applicable. This substantially increased the differential between the costs of travelling to a neighbouring village vis-à-vis a call, thus boosting demand for telecom services (Rao and Kumar, 2000). 9 The rental depends on the category of exchange. Higher rentals are linked to higher capacity exchanges. This is the lowest rental. 10 BSNL captured the demand by rolling out mobile telephony under the brand name One India since

130 106 India Infrastructure Report 2007 Number of Rural DEL addition (in million) Source: TRAI (2004). Fig Rural DELs additions IMPLICATIONS AND RECOMMENDATIONS Even though the DoT had targets for increasing RTDs at the national level, the outcomes were extremely uneven across states. The analysis helped to disaggregate the state level RTD by socio-economic attributes rather than based on geographic (for example hill states or by regions (north, south, east, west) or administrative considerations alone. For example, the analysis shows that within hill states, HP falls within the high RTD category, whereas all other states fall within the low or poor category RTD states. The analysis shows that UTD, rural literacy rate, and rural income per capita, were important determinants of RTD. This has implications for future deployments of USOF, in terms of prioritizing investments. This implies that USOF, TRAI and DoT may want to focus on specific states, rather than overall RTD targets. While on one hand, the focus should continue to be on states that had achieved higher than average RTD, as due to the network externalities, smaller investments could lead to substantially higher demand, a significant part of which could be commercially viable. The states that were consistently (50 per cent or more) below average such as Assam, Bihar, J&K, UP, MP, Chhattisgarh, and Jharkhand require sustained development focus if the disparities of RTD were to substantially decrease. Even within low RTD states, areas with higher growth potential driven by rural consumption should be targetted to ensure greater commercial viability. The USOF needs to take into account the factors that drive demand in formulating its guidelines. For example, adopting a cluster approach would require it to focus on sequencing of roll out. The USOF examines both cost and revenue data for support and to that extent incorporates the demand profile. New technological options have the potential to fundamentally change the demand profile and institutional support for further work on such technologies is called for. There was a requirement to explicitly focus on how the government would provide the policy framework to enable wireless broadband in the rural areas. While TRAI has requested that rural broadband access be considered for Universal Service Obligation (USO), the Broadband Policy 2004 does not make specific mention of this. Another important decision point relates to pricing in rural areas vis-à-vis urban areas. This would have a bearing on network growth and financial sustainability of rural operators. Many countries have geographically averaged tariffs that is tariffs were not differentiated by different geographic areas. In India, choice had been made to keep tariffs low in rural areas. This was one of the factors that may make rural telecom unviable. In Chile, operators were free to decide rural tariffs for individual connections and rural payphone tariffs had been kept higher than in urban areas. Given that providing rural communications was more expensive than providing urban communication, experts working in developing countries now argue that regulators should consider allowing rural operators to charge their customers more for the service.

131 Rural Telecom 107 APPENDIX Table A4.2.1 Category-wise RTD with Respect to Development Parameters RTD (%) Fixed UTD Literacy Rural Literacy Rural Income SDP Rural Popul- (%) Rate (%) Rate* (%) Per Capita Per Capita ation (%) Greater Greater Greater Greater Greater Greater or or Greater or or or or Value Below Value Below or Below Below Below Below (Rs Average (Rs Average Below Sr. States/UTs Value Average Value Average Value Average Value Average 000s) (%) 000s) (%) Value Average No. (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) Category 1: High RTD Rates 1 Kerala A&N Islands NA NA NA NA HP Punjab Average Category 2: Medium RTD Rates 5 Gujarat Haryana Karnataka AP Maharashtra TN Average Category 3: Low RTD Rates 11 Uttaranchal NA NA NA NA NA NA Rajasthan North East NA NA NA NA WB Orissa Average Category 4: Poor RTD Rates 16 MP J&K NA NA NA NA NA NA Assam Bihar UP Chhattisgarh NA NA NA NA NA NA Jharkhand NA NA NA NA NA NA Average All India Average Source: Columns (2) and (4) BSNL Internal Documents, Column (10) - Indian Market Demographics Report reported in The Nature of Rural Infrastructure: Problems and Prospects by Suman Bery, D.B.Gupta, Reeta Krishna and Siddhartha Mitra, Introductory chapter of the Indian Rural Infrastructure Report, Columns (6), (12) and (14) Columns (3), (5), (7), (9), (11), (13) and (15) Author s Analysis. Notes: NA: not available. Categories are as per the text and Figure * Literacy Rate, Rural Income Per Capita, Per Capita SDP and Percentage Rural Population are based on data from Census India Rural literacy rate has been calculated by us based on data from Census India 1991.

132 108 India Infrastructure Report 2007 REFERENCES Rao, Pernyeszi, and Yadagiri, Kumar (2000). Micro Surveys of Rural Telecom in India and USA and Their Implications for India s Public Policy. Sen, Abhijit and Himanshu (2004). Poverty and Inequality in India I, Economic and Political Weekly, September 18, 2004, pages The Hindu Business Line (2005). Saturday, January 22, TRAI (2004). Consultation Paper on Growth of Telecom Services in Rural India, The Way Forward, The Telecom Regulatory Authority of India, New Delhi. Wellenius, Björn (2002). Closing the Gap in Access to Rural Communications, Chile

133 5 RURAL ROADS J.K. Mohapatra and B.P. Chandrasekhar A community without roads does not have a way out A poor man, Juncal, Ecuador If we get the road, we would get everything else, community centre, employment, post-office, telephone A young woman, Little Bay, Jamaica Many of the poor communities are isolated by distance, bad road conditions, lack of or broken bridges and inadequate transport. These conditions make it difficult for people to get their goods to market and themselves to place of work, to handle health emergencies, to send children to school, and to obtain public services. Narayan et al INTRODUCTION Rural Road connectivity is a key component of rural development, since it promotes access to economic and social services, thereby generating increased agricultural productivity, non-agriculture employment as well as non-agricultural productivity, which in turn expands rural growth opportunities and real income through which poverty can be reduced. A study (Fan et al. 1999) carried out by the International Food Policy Research Institute on linkages between government expenditure and poverty in rural India has revealed that an investment of Rs 1 crore in roads lifts 1650 poor persons above the poverty line. Public investment on roads impacts rural poverty through its effect on improved agricultural productivity, higher non-farm employment opportunities and increased rural wages. Improvement in agricultural productivity not only reduces rural poverty directly by increasing income of poor households, it also causes decline in poverty indirectly by raising agricultural wages and lowering food prices (since poor households are net buyers of foodgrains). Similarly, increased non-farm employment and higher rural wages also enhance incomes of the rural poor and consequently, reduce rural poverty. This study estimated that while the productivity effect of government spending on rural roads accounts for 24 per cent of total impact on poverty, increased non-farm employment accounts for 55 per cent and higher rural wages accounts for the remaining 31 per cent. Further, of the total productivity effect on poverty, 75 per cent arises from the direct impact of roads in increasing incomes, while the remaining 25 per cent arises from lower food prices (15 per cent) and increased wages (10 per cent). Similar results are found in other developing countries. The study by the same institute (Fan et al. 2000)) in China revealed that with every 10,000 Yuan (about $1200) spent on rural roads eleven persons are lifted above the poverty line. Living Standard Survey in Vietnam in 2002 showed that populations living within 2 km of all-weather roads have lower poverty rates as noted in the draft Vision Document for Rural Roads, 2006 (MoRD, 2006). Statistical evidence apart, the link between poverty and lack of accessibility is quite apparent. Nearer home, a household survey (APERP, 1997) conducted in the state of Andhra Pradesh indicated that the rural road improvements lead to substantial reduction in freight charges, increase in household income, more employment opportunities, and expansion of cultivated land as shown in Figures 5.1, 5.2, and 5.3. STATUS OF RURAL ROADS IN INDIA Roads are classified under a time-honoured system into National Highways (NHs), State Highways (SHs), Major District Roads (MDRs), Other District Roads (ODRs), and Village Roads (VRs), with well-recognized standards for construction and maintenance laid out in respect of each

134 110 India Infrastructure Report 2007 Rupees Annual Average Income and Expenditure per Household 0 Connected Annual Average Income in Rs Unconnected Annual Average Expenditure in Rs Fig. 5.1 Comparative Average Income and Expenditure of Connected and Unconnected Villages Rupees Quintal per Km Average Goods Transportation Cost All Weather Roads in Good Condition Fair-Weather Roads Badly Maintained Roads Fig.5.2 Goods Transportation Cost on Different Types of Roads Impacts of Improvement on Roads 24% 25% Bringing outside Teachers Bringing outside Doctors Purchase of more fertilizers Fig. 5.3 Impact on Standard of Living from Improvement on Roads 6% 10% 21% 14% Expansion of cultivated land More seasonal work opportunities Higher intensity of cultivation (SGRY), scarcity relief funds, and untied funds devolved by States. Consequently, it is difficult, if not impossible, to assess the exact amount that is being spent for the maintenance and construction of ODRs and VRs. The overlapping of responsibilities and the fragmentation of funds between agencies for maintenance and development of roads is a source of inefficiency and confusion. Quite often, the only point where all these responsibilities and funds converge is at the level of the local implementing officer, the Assistant Executive Engineer, who is used by all agencies named above for implementation. This thinly spread management structure is inefficient; it does not ensure good monitoring or downward accountability and unnecessarily complicates planning. India has a rural road network of about 2.7 million km developed with an investment of almost Rs 35,000 crore, estimated to have a replacement value of about Rs 180,000 crore. This constitutes over 80 per cent of the total road network, however, about a million km length of the road does not meet the technical standards required. According to government statistics, by year 2000, India had connectivity to almost all villages with populations of over 1500, 86 per cent with 1000 to 1500 inhabitants, and 43 per cent of villages with less than 1000 population (Figure 5.4). Successive plans aimed at achieving higher road densities and managed to over achieve it (Table 5.1). Even though, the total length of rural roads targetted at the end of the Lucknow Plan appeared to be large, it must be noted that almost 100,000 km of the roads were constructed under different employment generation schemes and poverty alleviation programmes such as Food for Work, National Rural Employment Programme and Jawahar Rojgar Yojana. The roads were of indifferent quality constructed by unskilled labour. The objective of these programmes was provision of sustenance support to the rural people. The technical standards of asset quality were not insisted upon and construction was often restricted to earthen tracks with no provision even for category. Generally speaking, there are clearly understood demarcations of responsibility in terms of governmental offices expected to deal with each category. However, while the activity mapping with respect to NHs and SHs is clear cut, with respect to MDRs, ODRs, and VRs, these distinctions are blurred. In many states, though PRIs are assigned responsibilities with respect to ODRs and VRs, a plethora of agencies and line departments undertake formation and repairs of roads. These include the state government s PWD wing, the Agricultural Produce Marketing Committees (APMCs), parallel bodies created by multilateral agencies, Forest department, Development authorities and so on. There are several general funds that are used for roads, apart from special schemes tied to specific road projects. Thus roads are repaired using Sampoorna Grameen Rozgar Yojana Number of villages connected (%) By 1980 By 1985 By 1990 By 1995 By 2000 Village Population > <1000 Total Fig. 5.4 Connectivity Status Source: Planning Commission & MoRD (2006).

135 Table 5.1 Basis for assessment, assessed targets and expected densities in the Road Development Plans. Rural Roads 111 Targets Achievement Target density Name of the Plan Basis of fixation of targets km km (All roads) Nagpur Plan Length of ODRs + VRs 332, , km per sq km ( ) assessed on the basis of number of villages with population 500 and less, , , and Bombay Plan Length based on the number of villages 651, , km per sq km ( ) with population less than 500, , , and Lucknow Plan Length assessed on the basis of number 2,189,000 2,994, km per sq km ( ) of villages and towns. cross drainage or side drainage. Since water is the main enemy of the sustainability of roads, roads constructed under such employment generation schemes were often not durable. Rural roads have suffered greatly due to lack of systematic planning. While rural road development plans provided for a network structure and target lengths of different types of roads, specific connectivity requirements of individual settlements (villages/habitation) and issues of regional imbalances were not adequately addressed. This led to more than one connection for the same village resulting in redundancy and development of a large unmanageable network. While constructing rural roads, adequate care was not taken in adopting need based designs, parameters for pavement construction, quality assurance, and quality control. Multiplicity of organizations involved in the rural roads development led to uncoordinated efforts, adhoc decisions, and a lopsided network structure. Gaps in the Planning Process The planning of the network structure was not taken seriously. The structure of the network was not subjected to evaluation through the assessment of indices concerning accessibility, connectivity, circuitry and so on. Though the conceptual plans and targets had been worked out, the absence of detailed work plans resulted in a non-integrated network, with several missing links and critical bridges. This invariably resulted in the loss of mobility due to discontinuities in the network and forced circuitous journeys. During the development of the roads interfaces among the hierarchical roads were not properly addressed, resulting in deficiency in the functionality and efficiency of the total network. Need for Integrated Network Development Conceptually, traffic flows from the lower order settlements to the higher ones in pursuit of opportunities. If planning fails to capture this phenomenon with appropriate integration of roads, the total system suffers often resulting in undesirable rural urban migration. Investments are concentrated only in the higher order roads for construction and maintenance with rural roads receiving less priority than they deserve. Rural households are deprived of their legitimate right to basic access. This calls for policies and programmes that aim at developing an integrated network with due priorities and necessary interfaces. In the context of rural roads, a higher degree of care is required at the planning stage to integrate connectivity needs of scattered settlements. The construction of a road connecting a habitation must be augmented by means of transportation, enhanced by appropriate facility creation in health, education and so on. The utility of the network can be best appreciated with such integration of accessibility with social infrastructure. Keeping this in mind, the central government constituted the National Rural Roads Development Committee (NRRDC) in January The report of NRRDC 2000 resulted in the formulation of the Pradhan Mantri Gram Sadak Yojana (PMGSY) with an aim to provide all-weather roads to almost all rural habitations in the country (MoRD 2000). PRADHAN MANTRI GRAM SADAK YOJANA Launching and Operationalization of PMGSY Based on the recommendations of NRRDC the GOI launched the PMGSY on 25 December 2000 under the Ministry of Rural Development, as a 100 per cent centrally sponsored scheme. Fifty per cent of the cess on high speed diesel was earmarked for financing this scheme. The primary objective of PMGSY is to provide connectivity, by way of allweather roads (with necessary culverts and cross drainage structures operable throughout the year) to unconnected habitations in the rural areas in such a way that habitations with populations of 1000 persons and above are covered in three years (2000 3) and all unconnected habitations with a

136 112 India Infrastructure Report 2007 Box 5.1 The Concept and Utility of Core Network The DRRP is a compendium of the existing and proposed road network system in the district which clearly identifies the proposed roads for connecting the yet unconnected habitations to already connected habitations or all-weather roads, in an economically efficient way. While selecting the connectivity to the unconnected habitation by single all weather road, optimization principle is applied through Utility Value and Road Index for linkage of the selected habitation with an already connected habitation. The Core Network (CN) is a subset of DRRP and represents the minimum network that ensures connectivity to all the eligible habitations through single all weather roads. This enables continuity with the nearest market centre (either existing or a potential one). This network is the minimum network that is to be kept in good condition. It consists of identified link routes and through routes. Link Route: Link Routes are the roads connecting a single habitation or a group of habitations to through routes or district roads leading to market centres. Through Route: Through routes are the roads which collect traffic from several link roads or a long chain of habitations and lead it to marketing centres either directly or through the higher category of roads. Source: Ministry of Rural Development. population of 500 persons and above by the end of the Tenth Plan Period (2007). In respect of the Hill States (North-East, Sikkim, Himachal Pradesh, Jammu & Kashmir, Uttaranchal) and the Desert Areas (as identified in the Desert Development Programme) as well as the Tribal (Schedule V) areas the objective would be to connect habitations with population of 250 persons and above. Detailed guidelines were issued to all the states for the implementation of PMGSY, identifying state nodal agencies, Executing agencies, and Programme Implementation Units (PIUs). Guidelines also envisaged the setting up of State Level Standing Committees (SLSCs) for monitoring and coordinating programme implementation. Guidelines were provided for project preparation, scrutiny, tendering, execution, quality management, monitoring of the project, maintenance, as well as procedures for fund flow. Institutional Development under PMGSY To ensure efficient, streamlined execution of works under PMGSY, a series of interventions have been made to enhance the programme implementation capacity of the states and to ensure on time completion, cost management, and rigorous quality control. These interventions are summarized below. DRRP and Core Network The concept of Core Network has been operationalized for the first time, under PMGSY, in order to focus on the set of roads considered essential to provide connectivity to all habitations of the desired size. The District Rural Road Plan (DRRP) which inventorizes the entire Road Network is the starting point of the exercise. The Core Network will be the basic instrument for prioritization of construction, upgradation, and allocation of funds for maintenance. The concept of DRRP and CN are important to achieve network efficiency (Box 5.1). A typical Block map with DRRP and Core Network are shown in Figures 5.5 and 5.6 respectively. Quality Control System Under the PMGSY, quality is sought to be ensured through a three-tier Quality Control System, in which the Executing Chiarikani Kindardega Hathabari Banabira Kinbira District Rural Roads Plan Simdega Block, Simdega District, Jharkhand Lelong Gondalipani Asanbera Purnapani Karamukh Takaba Hardibera Khanjaloya Bengarpani Keondih Basatpur Kobang Kairbera Kesalpu Pakartanr Paledih Katasaru Bhundupani Sarlonga Kuskela Jamadori Ghaghari Bhelwadih Pahargurda Kongseri Taisera Maskera Tamara Biru Kulkera Dumardih Manesera Belkarcha Sikiriatar Chiksura Fulwatanga Sokari Sarkhutoli Tabhadih Ankara Arani Sogara Barkatangar Sewai EhuSabera Bandojore Madhuban Birkera Kochedega Khotitoli Hawatoli Baghlatta Bangru Koliadamar Sunsewai Ghosara Birkera Kudrum Bhawarpani Guida Bigari Tilga Sarja Pithara Kasaidohar Tumdegi Barabarpani Thailkobera Chotabarpani Merumloya Katukona Kharwagartha Bindhaitoli Belgar Jogbalrai Barkichhapa Tina Muia Fig. 5.5 DRRP for a Typical Block Danargurda Kamtara N W E S POPTOTAL and above Million less Central Road Research Institute, New Delhi

137 Rural Roads 113 Chiarikani Kindardega Hathabari Banabira Kinbira Core Network Plan Simdega Block, Simdega District, Jharkhand Lelong Gondalipani Asanbera Purnapani Karamukh Takaba Hardibera Khanjaloya Bengarpani Keondih Basatpur Kobang Kairbera Kesalpu Pakartanr Paledih Katasaru Bhundupani Sarlonga Kuskela Jamadori Ghaghari Bhelwadih Pahargurda Kongseri Danargurda Kamtara Taisera Maskera Tamara Biru Kulkera Dumardih Manesera Belkarcha Sikiriatar Chiksura Fulwatanga Sokari Sarkhutoli Tabhadih Ankara Arani Barkatangar Sogara Sewai EhuSabera Bandojore Madhuban Birkera Kochedega Khotitoli Hawatoli Baghlatta Bangru Koliadamar Sunsewai Ghosara Birkera Kudrum Bhawarpani Guida Bigari Tilga Sarja Pithara Kasaidohar Tumdegi Barabarpani Thailkobera Chotabarpani Merumloya Katukona Kharwagartha Bindhaitoli Belgar Jogbalrai Barkichhapa Tina Muia Fig. 5.6 Core Network for the Above Block Agency is primarily responsible for maintaining quality through its executive engineers, at the district level, as well as through an independent Quality Control Agency, whether departmental or otherwise, which is responsible to the officers of the Executing Agency or the Nodal Department independent of the field engineers at the state level. In addition, the NRRDA engages National Quality Monitors (NQMs) to verify at random the quality of road works. The reports of the NQMs are sent to the state government for necessary action. About 21,000 inspections have been carried out so far, out of which about 18,000 works have been found satisfactory. Any infringement/deficiency, detected by the NQMs, is rectified before the State Authorities can make further payments. Online Management & Monitoring System A web-based Online Management & Monitoring System (OMMS) is being used for the PMGSY. The website can be accessed at A new website has also been developed by the Rural Connectivity Division containing details of the PMGSY Schemes, Guidelines, Agencies involved, role and responsibilities, progress, and so on and can be accessed at Streamlined Administration and Accounting N W E S POPTOTAL and above Million less Central Road Research Institute, New Delhi State Rural Roads Development Agencies (SRRDAs) have been set up in all states with the task of functioning as the dedicated agency of the state nodal department for rural roads to ensure the integrated development of all rural roads schemes, including PMGSY. Funds for the PMGSY programme are routed to these SRRDAs and are operated by the designated officers in each of the district PIUs, under a works accounting system specifically designed for PMGSY by the Institute of Public Auditors of India (IPAI). Technical Agencies Fifty State Technical Agencies (STAs), mainly National Institutes of Technology and Government Engineering Colleges of repute have been identified in consultation with the state governments to advise and assist the Executing Agencies by scrutinizing the project proposals prepared by the state governments, providing requisite technical support to the state governments, and undertaking training programmes. The NRRDA has also identified seven Principal Technical Agencies (PTAs) to act as the Regional Coordinators of the STAs as well as the extended arms of NRRDA in the pursuit of its objectives. The PTAs oversee the activities of the STAs in the region, carry out random checks of the Detailed Project Reports (DPRs) scrutinized by STAs, evaluate specifications and practices, develop course material for training programmes, and act as resource institutions. The PTAs are also to assist the NRRDA in quality audit of roads. The identified PTAs are the Central Road Research Institute (CRRI), IIT, Mumbai, Department of Civil Engineering, University of Bangalore, IIT, Kharagpur, IIT Roorkee, Birla Institute of Technology, Pilani, and National Institute of Technology, Warangal. Rural Roads Manual The original manual, called Manual on Route Location, Design, Construction and Maintenance of Rural Roads was brought out by the Indian Roads Congress as a publication in 1979 (IRC: SP: ). Following the launch of the PMGSY, the Ministry of Rural Development constituted three Committees in January 2001 to go into various aspects of rural road construction and the manuals on these different aspects brought out by the committees were combined into a separate Rural Roads Manual and published as an IRC publication (IRC:SP: ) in supercession of the earlier manual (MORD 2004a and 2004b). This manual is now the basis of all works under the PMGSY. Standard Bidding Documents To standardize the tendering process of the states, a Standard Bidding Document has been prepared which is used by all states for procurements of works under PMGSY.

138 114 India Infrastructure Report 2007 Book of Specifications and Standard Data Book In order to streamline the process of estimating and to standardize contracts, a separate Book of Specifications and Standard Data Book have been prepared for rural roads. State governments have been advised to publish Annual Schedule of Rates for rural roads based on these documents. Operations Manual The NRRDA has prepared an Operations Manual which is utilized by all the Executing Agencies in the field in the implementation of projects cleared under the PMGSY. This is expected to provide clear and uniform guidelines to the executing agencies in the states in regard to standards, specifications, guidelines, and prioritization criteria. Maintenance Management Huge assets are being created as a result of construction of new roads and upgradation of existing roads in order to provide full farm-to-market connectivity. Guidelines provide for the ways and means to ensure regular and systematic maintenance of the assets created under PMGSY. The state governments are expected to take steps to build up capacity in the District Panchayats and devolve funds and functionaries unto them to enable them to manage maintenance contracts for rural roads. All PMGSY roads (including associated main rural links/ through routes of PMGSY link routes) are covered by 5-years maintenance contracts entered into along with the construction contract, with the same contractor, as per the standard bidding document. Maintenance funds to service the contract are to be budgeted by the state government and placed at the disposal of SRRDA in a separate maintenance account. The states have also been advised to prepare comprehensive maintenance management plans. While these interventions have brought about some degree of professionalism in the programme management and fostered a culture of quality in the rural roads sector, the absorption capacity of the states as well contractors is still well below the levels required to achieve the targets set under Bharat Nirman. Assessment of Targets All states have been requested to prepare DRRPs as compendiums of all existing roads and those roads proposed for connecting the unconnected target habitations, starting from Block Maps and identification of the Core Network Based on such maps which were prepared with full inventory, eligible habitations have been identified as per programme guidelines and the length required as well as the costs at constant prices assessed (Table A5.1). In tune with the objectives, assessment was also made for the upgradation of the existing rural roads in all the states (Table A5.2). The target for connectivity/upgradation includes new connectivity to about 60,000 habitations of 1000 plus population, to 81,000 habitations of 500 plus population and to 29,000 habitations of 250 plus population. Total cost of new connectivity is about Rs 79,000 crore. Upgradation of about 370,000 km rural roads at a cost of Rs 53,000 crore is also planned. Thus, the total envisaged cost of the PMGSY is about Rs 132,000 crore. Achievements under PMGSY. Proposals under PMGSY prepared by the states are being cleared in different phases since The physical and financial status and achievements so far under PMGSY are summarized in Table A5.3. While completion of over 90,000 km of roads under the scheme may appear impressive as compared to the past record in the rural roads sector, actual achievements have fallen far short of the targets originally envisaged. The original goal set under the scheme was to provide connectivity to all unconnected habitations with a population of 1000 or more by 2003 and all unconnected habitations with a population of 500 and above by the end of the 10th Plan period (by year 2007). All habitations with a population of 250 or more in the hill states, desert areas, and tribal areas were also targetted to be covered by As against these programme targets originally set, the proposals cleared so far are expected to provide connectivity to only 56,638 habitations. The status of habitation coverage so far under this scheme has been indicated in Table 5.2. With only 15.8 per cent of habitations having been actually connected so far, it is evident that the scheme would miss the 10th Plan target by a huge margin. Recognizing this slippage the time frame for providing full connectivity to habitations with population above 1000 (above 500 in hill, desert and tribal areas) has been reset under Bharat Nirman. Table 5.2 Connectivity Status under PMGSY* No. of habitations No. of covered by No. of Population eligible projects habitations category habitations approved connected 1000 and above 59,855 28,361 16, ,466 21, , Total 172,772 56,638 27,303 Note: *June Source: Ministry of Rural Development.

139 Rural Roads 115 PMGSY under Bharat Nirman Announced as a time bound business plan for augmenting rural infrastructure, Bharat Nirman has rural roads as one of the six components. The targets announced by the Finance Minister in his budget speech on 28 February 2005 seek to provide all-weather connectivity to all habitations having population of 1000 or more (500 or more in hill, tribal and desert areas) by While the primary objective of PMGSY has been to provide last mile connectivity to all eligible unconnected habitations, in order to ensure full farm-tomarket connectivity Bharat Nirman also includes an upgradation component. It is estimated that under Bharat Nirman 66,802 habitations would be provided new connectivity with a road length of 146,185 km. Besides, 194 thousand km of existing through routes of the Core Network would be upgraded/renewed. The total investment on rural connectivity under Bharat Nirman has been estimated at Rs 48 thousand crore over The year wise targets for new connectivity and upgradation have been detailed in Table A5.4 and Table A5.5. Critical Evaluation of PMGSY Evaluation by Planning Commission An evaluation was carried out by the Planning Commission in the year 2005 to: 1. assess the extent to which objectives of the programme have been achieved; 2. make a qualitative assessment of the physical and financial performance of the programme; 3. assess the impact of the programme on socio-economic conditions of the residents of villages provided with road connectivity under the programme; and 4. identify the constraints in the implementation of the programme and make suggestions to modify the same. The study covered ten states in the country with fourteen districts selected for the micro level study. Physical performance at the state level varied from as low as per cent to well above 92 per cent with an average of about 60 per cent (Planning Commission, 2005). Similarly the achievements in the selected districts varied from 78 per cent to about 98 per cent. In many cases the performance at district level was found to be generally above the state performance. The evaluation revealed that cost of construction per km varied from state to state as well as among the districts. Financial performance at the state level exhibited similar trends with fund utilization varying from per cent to over 90 per cent in different states. The evaluation study noted that the 3 Tier Quality Control System prescribed by PMGSY yielded good results and the quality of roads constructed was generally rated as Very Good. The reasons for shortfall in targets as identified by the evaluation team included procedural impediments, new work practices that consumed more time, non availability of land, local panchayats not being taken into confidence, scarcity of skilled labourers, and prolonged monsoons in certain states. In order to achieve targets the study suggested augmentation of resources, provision of cash compensation for acquisition of land, speedier identification of unconnected habitations, periodic updation of on-line information, realistic fixation of upgradation target, complete involvement of Panchayat institutions, enhancement of time limit for completing projects, adoption of centralized tendering system, meticulous project preparation, avoidance of multiple agencies, deployment of exclusive staff for PMGSY, utilization local labour, efforts for lowering of construction costs and constitution of a state level vigilance committee. In short, programme evaluation revealed that PMGSY has succeeded in providing connectivity to most deserving habitations, although the pace of implementation in some states is rather slow. The selection strategy was found to be okay and quality was found to be generally good. PMGSY has improved the accessibility of beneficiary villagers and resulted in higher incomes. Notwithstanding the fact that there are certain measures required to be taken for meeting its objective, the critical evaluation complimented the efforts that have gone into and hoped for better performance in future. Performance Audit by C&AG A performance audit of the programme was conducted by the Comptroller and Auditor General between January June, 2005, covering the period during (C&AG 2006). The services of CRRI New Delhi were commissioned for technical inspection of more than fifty roads for assessing the quality of the roads constructed under PMGSY (MoRD 2004). The audit also covered the effectiveness of operationalization and utility of OMMS and focused on the deficiencies, problems of software, validation checks, security features, and lack of utilization of OMMS for monitoring the programme. While the objective of the PMGSY at the time of its launch was to provide connectivity to all habitations, only about 24 per cent of the target set was achieved during the first five years of the programme. The database used at the time of launch appears to be inadequate for setting the targets and also the guidelines were not firmed up properly. In the absence of clarity in the guidelines, bias towards upgradation was noticed in the project proposals of the first two phases. The estimated fund requirement of Rs 58,200 crore was also found to be unrealistic in the light of the fact that the revised estimate for achieving the same objective was found to be more than Rs 130,000 crore. Adequate measures have not been taken for the mobilization of funds, in tune with the targets set, which can be seen from the fact that only Rs 12,290

140 116 India Infrastructure Report 2007 crore were mobilized up to March Discrepancies in non-utilization of funds in some states revealed spends in purposes beyond those specified in the guidelines. Efforts were not made to ensure integration of other related on-going schemes in securing programme objectives. Abandoning of works sanctioned and incompleteness of connectivity came to light during the performance audit in almost fourteen states. Completion was found to have overshot by large margins, time limits set in the guidelines, providing evidence of inadequate project management. The audit noticed poor competition among tenderers in more than ten states. The absorption capacities of states and PIUs were not adequately understood for the implementation of the programme. The performance audit also noticed certain deficiencies in the quality monitoring mechanism and quality of the final product. Even though OMMS is a step in the right direction, its utilization as a monitoring tool is not achieved and several deficiencies in the system management were noticed. Based on the deficiencies noticed in the evaluation process, CAG made the following recommendations: 1. There is a need for firming up of targets on realistic database. 2. The ministry should also firm up the targets on the basis of funds that can be actually provided and utilized. 3. The ministry in coordination with the state government should ensure that the guidelines are scrupulously followed. 4. States should be advised to support the project proposals with correct and relevant documents proving the availability of land free of all encumbrances. 5. The states should be advised to take prompt action against the contractors in case of failure to honour to time or quality commitments. 6. The independent quality assurance should be reinforced by involving independent research and educational institutions. 7. Ministry should issue detailed directives for greater attention to project preparation and exercise periodical checks. 8. Ministry should persuade the states to make suitable provisions for maintenance. 9. All efforts must be made to correct the deficiencies in the OMMS to create an additional tool for monitoring and management. Audit examination revealed that the performance of the programme could have improved if 1. The magnitude of the programme and the capacity of the states had been assessed realistically, funds of the required magnitude provided and frequent revision of guidelines and the data on unconnected eligible habitations to be covered under the programme avoided; 2. The DRRP and the CN were complete and based on reliable data; 3. OMMS were introduced promptly along with the programme after ensuring and obtaining satisfactory proof of the reliability of all the features and facilities in the software including validation checks and after imparting effective training to the users; and 4. It was ensured through focused monitoring that there were no deviations from sanctioned specifications to prevent sub standard quality of work. Impact Assessment of PMGSY on Rural Economy Ministry of Rural Development commissioned a series of quick assessments of socio-economic impact of PMGSY in Assam, Himachal Pradesh, Madhya Pradesh, Mizoram, Orissa, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal. These studies were conducted by independent agencies during January to February, 2004 (MoRD 2004). Major findings of these studies are as follows. Impact on agriculture Construction of the PMGSY roads has substantially benefitted farmers. Prior to the construction of the PMGSY roads, farmers found it difficult to sell agricultural goods in bigger markets located far away from their villages. PMGSY road connectivity has led to a better transport systems during all seasons. Farmers mentioned that the problem of not being able to access the markets during monsoon has been solved by the construction of roads. This impact has been greatly felt in the states of West Bengal, Himachal Pradesh, Mizoram, Assam and so on. The PMGSY roads have made it easier to transport agricultural inputs to villages which has led some farmers to switch from food crops to cash crops (such as ginger, jute, sugarcane, sunflower). An increase in the number of families rearing goats/sheep for commercial purposes was mentioned by beneficiaries in the states of Rajasthan, Himachal Pradesh, and Uttar Pradesh. Many families have bought cycles after the construction of the road to be able to carry dairy products for sale to nearby towns. Employment generation After the construction of PMGSY roads, an improvement in the employment situation in terms of more job opportunities, avenues for self-employment, and so on were observed. Onfarm employment opportunities also increased due to shift from grains to cash crops and also multiple cropping particularly in the state of Tamil Nadu, Madhya Pradesh, and Mizoram. More people are going to nearby towns and villages for odd jobs like selling woods, vegetables, dairy products and locally made items like pickles, papad and so on due to expansion of local industries, which in turn has generated employment opportunities.

141 Rural Roads 117 Cottage industry Beneficiaries reported that the pottery and brick making industry of Orissa has benefited from the PMGSY roads. Cottage industries of Tamil Nadu, Handloom industry of West Bengal, and agro industry in Assam also benefitted from road connectivity. Health There has been an overall improvement in access to health facilities like PHCs, sub-centres, and district hospitals in the states of West Bengal, Uttar Pradesh, Orissa, Tamil Nadu, Himachal Pradesh, and Madhya Pradesh. Positive impact was observed on accessibility to preventive and curative health care facilities; better management of infectious diseases, and attending to emergencies and increase in frequency of visits by health workers. Improvement in antenatal and post-natal care was observed by beneficiaries, thereby decreasing obstetrics emergencies, in the states of Mizoram, Madhya Pradesh, Orissa, Tamil Nadu, Uttar Pradesh, and West Bengal. Road connectivity and an improved transport system enabled families to opt for institutional deliveries in hospitals outside the village. Decrease in infant and child mortality especially in the states of Orissa, Madhya Pradesh, Himachal Pradesh, Tamil Nadu, Uttar Pradesh, and West Bengal was reported. Education With the construction of PMGSY roads, there has been an improvement in the accessibility to education facilities. This has resulted in increased school enrolment and school attendance in all the states, especially, in the number of girls going to schools in Assam, Madhya Pradesh, Orissa, Tamil Nadu, and West Bengal. Most parents mentioned that they were now more confident about sending their daughters to schools unescorted. Moreover, regular attendance of the teachers throughout the year is observed and greater willingness is evident among parents to send boys and girls for higher studies and college education outside their villages. Governance and public services The road connectivity has increased the frequency of visits by government officials and grass root level functionaries like health workers/auxilliary Nurse and Midwives (ANMs), Village Level Workers (VLWs) and Village Anganwadi Worker (VAWs) in Orissa, Himachal Pradesh, Madhya Pradesh, and West Bengal. There has been an improvement in accessibility to banks, the Post and Telegraph offices, and quicker access to the police. Transport services The benefits of rural connectivity have been felt most keenly in Mizoram and Rajasthan where PMGSY roads have made it easier for the beneficiaries to cope with the difficult terrain. There has been an increase in ownership of bicycles and two wheelers especially in the states of Assam, Rajasthan, West Bengal, and Tamil Nadu. Also, there has been an improvement in the public as well as the private transport systems in all the states. Quality of life An immediate and direct impact of providing rural road connectivity was observed in the quality of life as cooking gas became available in villages. The states of Mizoram, Tamil Nadu, West Bengal reported conversion of kuchcha houses to pucca houses. The connectivity led to sudden escalation of prices of land adjacent to the PMGSY roads. This also led to an increase in the sale of land for commercial purposes. Poverty alleviation The roads, directly or indirectly have provided opportunities for on-farm and off farm employments as well as selfemployment. With the improvement in on-farm and non-farm employment opportunities, beneficiaries in all the states reported increase in their average household income, thus, reduction in poverty. Distributional and equity issues Though it has been revealed through several impact studies that rural roads have multi dimensional beneficial impacts on the rural community, these benefits may not be equitably distributed. Well-off households with better resource endowments, capabilities, and skill sets generally derive more benefits from the improved access as compared to poor households. This calls for prior indepth analysis of the potential input from the major stakeholders with a view to devising appropriate mitigation measures to make this scheme inclusive in terms of its benefits. Though rural roads provide accessibility, the assurance on transport availability and affordability must be looked into. For instance, a rural road serving as a means of transportation may permit people to use their own mode of transport, but unless public or intermediate public transportation is available, the benefit of the rural road will not reach all. Further, even when public transport service is available, the affordability to use the services may once again put the very poor at a disadvantage. In short, roads are clearly a critically enabling condition for improvement of living conditions and quality of life in rural areas. Distribution of economic benefits can now be

142 118 India Infrastructure Report 2007 ensured to all sections through the creation of complementary activities for broadening livelihood opportunities to economically weak sections of the rural society. Cost Trends under PMGSY Cost of road construction is mainly determined by the type of terrain, soil condition, projected traffic, availability of construction materials, rainfall, and other environmental factors. As such, cost of construction under PMGSY varies widely across states and even within a state and across districts. Cost of construction also depends on the choice of technology used and labour machine mix. In a labour-surplus economy like India, it is, therefore, not only necessary to design the rural roads on the basis of meticulous field investigations; it is also equally important to adopt the optimal technology for construction. Under PMGSY, executing agencies are required to prepare DPRs, which are then scrutinized and vetted by the designated STAs (reputed engineering colleges). While this institutional development in project planning and preparation is a marked improvement over the previous practice, approving projects on the basis of line-estimates, the extent to which it has succeeded in optimizing the cost of construction is yet to be investigated in detail. Currently, cost varies from Rs lakh per unit length to as high as Rs lakh per unit length in different states (Table A5.6). Probable reasons for cost variation include topography of the local area, distance from the availability of construction material, earthwork required and so on (Box 5.2). Box 5.2 Why Cost varies across Regions A typical rural road consists of compacted sub-grade, granular sub-base, base-course with graded aggregate and thin bituminous surface course in the form of pre-mix concrete with a seal coat. In order to ensure the serviceability of the road through out the year with safety, necessary cross drainage (CD) structures, side drains, road signs, and other road furniture should be an integral part of the rural road. The detailed analysis of cost variation of rural roads was carried out at IIT, Roorkee covering 480 roads in 50 districts of Bihar, Uttaranchal, and Uttar Pradesh. The analysis decomposed the cost of construction into cost towards site clearance, retaining walls, CD structures, earthwork, sub-base, base-course, and surface course. The average cost of different components per km of the sample analysed is presented in the table below. Table B5.2.1 Average Cost Variation of Rural Roads in Bihar, UP, and Uttaranchal Cost per km of (in Rs lakh) No. Av. Transp- Name of Avg. No. Dist. of ortation of the roads of CD Const- Site Retaining CD Earth quarry Cost/ State analyzed structure ruction clearing wall structure work Sub-base Base Surface (km) km Bihar U.P Uttaranchal The analysis clearly brought out that: 1. Total cost of construction is 33 per cent higher in hill areas than in plain areas. 2. On an average, the number of cross drainage structures required per km of road in plain area is 3, whereas in the hilly region this requirement is 8. This explains the higher cost of CD works in Uttaranchal (Rs 6.3 lakh) as compared to the cost of these works in Bihar and Uttar Pradesh (Rs 1.05 lakh and Rs 1.35 lakh respectively) 3. The cost of site clearance is a significant component of the total cost in hilly areas (Rs 2.47 lakh in Uttaranchal), whereas it is negligible in plain areas (Rs per km in Bihar and Uttar Pradesh). 4. The haulage cost for bringing construction material is more in the state of Bihar (Rs 7.61 lakh) followed by Uttar Pradesh (Rs 6.02 lakh) compared to Uttaranchal (Rs 4.76 lakh). This explains higher cost of construction in Bihar as compared to Uttar Pradesh even though the regional and climatic conditions are similar. The analysis also revealed that even within a state, cost variation can be significant across the districts owing to the site specific conditions. The findings of the study warrant greater attention to detailed site investigations and technology option study at the time of preparing of DPR.

143 Rural Roads 119 ALTERNATIVES TO REDUCE COST OF RURAL ROAD CONSTRUCTION Moderation of Geometric Standards Based on the recommendations of NRRDC, the widths of formation and pavement have been fixed at 7.5 m and 3.75 m respectively, though, the Rural Roads Manual permit 6 m and 3 m roadway and carriageway when the expected traffic is 100 motorized vehicles. However, most states are adopting the higher widths, regardless of the traffic volume, resulting in higher cost of construction. Therefore, it is necessary to estimate the base year traffic realistically for adopting lower geometrics to reduce the cost. Association of American State Highway and Transport Officials (AASHTO), USA has suggested lower geometric standards for very low volume roads. Need-based Stage Construction Under PMGSY, all roads are built with full provisions including the base and surface courses at one go. However, in many parts of the country on the new roads, connecting the habitations of lower population by link roads, the traffic expected definitely is less and a good gravel surfaced road with necessary drainage and protection systems in place can serve the rural population effectively. As and when the traffic builds up over time the roads can be strengthened through the provision of base and surface courses. This results in almost 40 per cent cost reduction in the initial stage, enabling larger coverage in a given budget. However, keeping in view the difficulties in the maintenance of gravel roads as well as the dust problem, efforts should be made to develop appropriate sealing techniques for the gravel surfaces borrowing experiences from abroad as well as R&D efforts in our country. Use of Locally Available Material The situation in many states indicates non-availability of materials of requisite standards in nearby areas. Material haulage is resulting in very high cost. If the available technologies are exploited, it is possible to reduce the cost of long haulages by utilizing locally available materials, including the marginal aggregates and industrial waste material. One of the proven technologies for the use of local soil and marginal aggregates is stabilization. The stabilization process could be mechanical or chemical. Several types of stabilizing agents have proved to suit different conditions of soil and environment. Noteworthy among them are stabilization with lime or cement or a combination of lime and cement. In addition to these standard technologies, other types of technologies which are also being tried include the use of rice husk ash, phosphogypsum, and sodium chloride. A major constraint in the use of local material lies in the procedures adopted by the field agencies and lack of awareness and exposure. It is possible to popularize the use of stabilization techniques through appropriate training and capacity building of the field engineers. The reluctance of the field agencies to deviate from the conventional methods and to try out innovative technologies also calls for attitudinal changes through HRD interventions. In addition to the stabilization techniques, there is a large array of technologies to promote the use of industrial waste/ by products in road building. Use of the industrial waste materials fly ash, steel and copper slag, and marble dust has already been field tested (Box 5.3). In addition, techniques suitable for conditions of low bearing capacity soils, marshy lands, location with drainage problems are also available. Research studies indicate that natural geo-textiles such as coir have huge potential for application on rural roads in areas where subgrade is of poor quality. Based on the experiences of the use of Jute Geo Textiles (JGT), Ministry of Rural Development in collaboration with Jute Manufactures Development Council is implementing a pilot project to test the efficacy and cost-effectiveness of different types of JGT under different soil and environmental conditions (Box 5.4). Similar experimentation through pilot project for the other technologies will be tried in the construction of rural roads under PMGSY, so as to enable standardization and popularization of cost effective solutions. Recently, a number of environment friendly enzymes have come into the markets such as fuzibeton, terrazyme, and earthzyme which are expected to provide excellent riding surfaces when mixed with in-situ or suitable borrowed soil. This technology is designed to eliminate the use of aggregates. As such, these materials can also be tried out in the rural roads construction once their efficacy is proved in the local conditions through pilot projects. Some field studies have shown that life cycle cost of cement concrete roads under certain circumstances would be much less than conventional bituminous construction. This may be due to avoidance of huge routine maintenance and periodical maintenance costs in the conventional construction. Costeffectiveness of cement concrete roads in rural areas should, therefore, be field-tested for life-cycle cost through a pilot project under PMGSY. MAINTENANCE OF RURAL ROADS Rural roads need to be maintained at a minimum level of acceptable serviceability. Lack of adequate and timely maintenance is bound to accelerate the process of deterioration of the roads, which in turn results in loss of time, agriculture output, access, and eventually the asset itself. Further,

144 120 India Infrastructure Report 2007 Box 5.3 Use of locally available materials Anil Kumar Sagar FLY ASH FOR ROAD CONSTRUCTION WORKS Coal is the most easily available fuel for power generation in India. Huge quantities of fly ash are produced as waste by-product of coal combustion. The present annual generation of fly ash is estimated to be about 140 million tonnes. The physical and chemical properties of fly ash depend upon the type of coal, its grinding and combustion techniques, collection, and disposal systems. Fly ash reacts with lime in presence of moisture to form cementitious compounds. This is known as pozzolanic activity. The pozzolanic property of fly ash enables it to be used as an alternate binder in place of cement. While coarser fly ash can be used as fill material, the finer ash can be used for replacement of sand and cement in road construction works. Use of fly ash for rural road work has been covered in IRC:SP: and Rural Road Manual (MoRD, 2004b and Vittal, 2000). Sub-base course can be constructed using pond ash or bottom ash replacing conventionally used moorum. Laboratory and field studies conducted in India and abroad have established that fly ash can be adopted for stabilization of sub-base/base. Fly ashes are cohesionless materials, and therefore non-plastic in nature while soil particles are generally cohesive. Mixing of soil and ash in suitable proportions improves the gradation and plasticity characteristics of the mix, thereby improving the strength. Addition of small amounts of lime greatly improves the strength characteristics of fly ash stabilized layers. 3 to 5 per cent of lime is used depending upon the quality of lime. The use of stabilized fly ash sub-base/base courses would be particularly attractive in locations where fly ash is easily available and supply of aggregate is expensive. The proportion 1:2:9 of lime, fly ash and moorum or sand has been found to provide the best performance. Fly ash can be utilized for constructing semi-rigid pavements in the form of lime-fly ash concrete, dry lean fly ash concrete. Pavements constructed using these mixes possess higher flexural strength than flexible pavements and hence they are classified as semirigid pavements. Fly ash can be used for construction of rigid pavements also by using cement-fly ash concrete, high performance concrete, roller compacted concrete and so on. Fly ash can be used in place of soil to construct road embankments. Typically in developed urban and industrial areas, natural borrow sources are scarce, and as a result borrow soil is very expensive. Environmental degradation caused due to use of top soil for embankment construction is also very high. Fly ash can provide an economical and suitable alternative material to earth for construction of embankments. Coal ash can be used for construction of embankments of rural road projects near thermal power plants. The notification issued by Ministry of Environment and Forests, Government of India dated August 27, 2003 has made usage of coal ash compulsory in all projects being undertaken within 100 km radius of the thermal power plant. The notification states that, No agency, person or organisation shall, within a radius of 100 km of a thermal power plant undertake construction or approve design for construction of roads or flyover embankments in contravention of the guidelines/specifications issued by the Indian Road Congress (IRC) as contained in the specification No. SP:58 of 2001 (Kumar et al. 2005). Various demonstration projects involving use of fly ash have been undertaken. One such project was the construction of Salarpur Dadupur rural link road using fly ash. The project was taken up by the CRRI in collaboration with NTPC Ltd under the Canadian International Development Agency (CIDA) initiative. The site is situated at a distance of 5 km from National Capital Power Station (NCPS), Dadri in U.P. Salarpur and Dadupur villages are part of a same panchayat and have a combined population of about 2000 persons. The length of the Salarpur-Dadupur link road is about 1.4 km. In this project bottom ash was used as embankment fill material and fly ash collected in dry form was used for stabilization and as admixture in roller compacted concrete. The embankment was constructed using bottom ash as core material with soil cover of 30 cm thickness. Fly ash stabilized using cement (8 per cent cement and 92 per cent fly ash) was used for laying base course (compacted thickness of 10 cm). Fly ash and cement were mixed in a concrete mixer and water required to bring moisture content to Optimum Moisture Content (OMC) was added during mixing. The mix was manually laid to conform to grade and camber. Compaction was carried out using static roller. The stabilised layer was cured for seven days by sprinkling water at frequent intervals before placing the subsequent layer. A total quantity of about 5000 tonnes of ash was used for both fill and pavement works in this project. Keeping in view the fact that the link road is located in a remote area and only light traffic is expected to ply on the road, the pavement is providing satisfactory service. The construction work was taken up in March 2002 and completed in about 60 days. The total construction cost of the road was Rs lakh. Since disposal of fly ash is a problem for thermal power plants, it has also been argued that fly ash be provided at a negative cost to the TPP. In such cases, fly ash is provided free of cost to the road manufacturer and the cost of transportation of fly ash to the site is borne by the thermal power plant. IRON AND STEEL SLAG FOR ROAD CONSTRUCTION Steel making is a strategic requirement of the economy of developing nation like India. Many steel plants have been set up in our country. However, production of iron and steel is associated with the generation of waste materials like slag. Normally, production of

145 Rural Roads 121 one tonne of steel results in generation of one tonne of solid waste. Big steel plants in India generate about 29 million tonnes of waste material annually. In addition, there are several medium and small plants all over the country. Slag reduces the porosity and permeability of soil, thus increasing the water logging problem. It causes respiratory ailment among nearby residents, contaminates ground water, and adversely affects the landscape of the area. Slag can be used as pavement material in a variety of forms. It can be used as a base or sub-base material either in bound or unbound condition. It meets all the requirements set forth by the MoRTH. As per IRC: , Rs 5 lakh per km can be saved by using slag as road material (Kumar et al. 2002). It is evident that steel plant by-products, either as such or in suitable combination, can be used in sub-base or base course layer of a road pavement. In order to compare the structural performance of these materials test sections were constructed using slags at Rourkela in Post construction performance monitoring showed that the test sections are comparable to control sections constructed using conventional materials. MARBLE DUST Widely found in Rajasthan, it is a waste material of marble industry. It has been shown that the California Bearing Ratio (CBR) of the sub-soil may be increased by upto 40 per cent to 50 per cent by mixing 15 per cent to 25 per cent of marble dust depending upon the nature of soil. Thus the cost of construction may be reduced considerably. PHOSPHOGYPSUM It is a by-product of phosphoric acid based fertilizer plants. It can be used to stabilize black cotton soils as it reduces the shrinkage and swelling of black cotton soil. The fertilizer plant of Indogulf Corporation located at Dalhej, Gujarat has demonstrated usage of this technology. The cost of road after phosphogypsum stabilization is about 25 per cent less than the normal construction cost (Misra et al. 2004). MUNICIPAL WASTES IN ROAD CONSTRUCTION It is estimated that the average daily refuse generation in a metropolitan city like Delhi is approximately about 4000 tonnes. Disposal of this large quantity of wastes need careful planning. Presently, municipal corporations dispose these solid wastes mainly through sanitary land fill method and composting. While organic wastes are used for composting to yield manure, inorganic wastes are difficult to dispose. Under the aegis of Ministry of Environment and Forests, a project was taken up at CRRI to use inorganic part of the processed wastes in road construction. A small length of the road in north Delhi was identified for construction as test section. Soil samples were collected from subgrade and borrow areas to study their strength and geotechnical characteristics in order to design suitable pavement cross sections using inorganic part of the municipal wastes in appropriate layers of the proposed test section. The processed waste not being a suitable material in itself, additives like local soil, cement, lime, fly ash were used in different proportions in sub-base/base course construction. Pavement specifications were developed for construction of test section at the identified site. The construction work was completed satisfactorily in May Waste plastic has also been used in the construction of rural roads. A pilot road namely Saint Tirisulam road at Saint Thomas Mount Panchayat Union in Kancheepuram district, Tamil Nadu was laid by the joint effort of Government of Tamil Nadu and Government of India. The technical support was provided by CRRI, IIT Chennai, and Theyagarajar College, Madurai. The road was laid using waste plastic mixed bituminous mix. This road had better resistance to raveling and offered more resistance to stripping and formation of pot holes. The aggregates coated with plastics and binders presented better resistance to water. USE OF DHANDLA IN CENTRAL RAJASTHAN Due to non-availability of hard stone within economical distances in desert areas, particularly in Central Rajasthan, road construction has been posing serious problems, especially in rural areas. It is a common observation in desert areas that on account of the noncohesive nature of desert sand sub-grade, the sub-base material has the tendency to sink into the subgrade resulting in deformations of various shapes and sizes. These deformations are subsequently reflected in the road surface causing either immobility or hampering the vehicular traffic. It is, therefore, considered an essential pre-requisite to provide adequate support to the pavement for better performance. This could be achieved either by stabilizing the desert sand sub grade with additives or by providing additional thickness in the sub-base. Such treatments would result in increased cost of road construction. The Central and Western parts of Rajasthan have, at present, quite thin density of population where the rate of growth in the volume of traffic on rural roads is not expected to rise at a fast rate in the near future. It is quite imperative, therefore, to utilize the locally available road materials to the maximum possible extent. A calcareous material locally known as Dhandla is found in abundance under an overburden of 1.5 to 2.5 metres. Dhandla, being quite soft, gets completely crushed under the road roller. It has been found that the bearing capacity of Dhandla was considerably improved when compacted manually and could be effectively used in the lower layer of low-volume roads. Test tracks have been laid using Dhandla. It is seen that substantial economy can be achieved by using this low grade material for road construction.

146 122 India Infrastructure Report 2007 Box 5.4 Pilot Project on Application of Jute Geo-Textile in Rural Roads Jute Geo-Textile (JGT) is a natural technical textile laid in or on soil to improve its engineering properties. JGT is made out of yarn obtained from the jute plant. It has high moisture absorption capacity, excellent drapability, and high initial tensile strength. It is environment friendly, biodegradable, easily available, and economical. Use of JGT leads to natural consolidation of sub-grade soil and has a potential to enhance the CBR value of the sub-grade by 1.5 to 3 times. Use of JGT dates back to as early as in 1920s when it was tried in some sections of a road at Dundee in Scotland. It was also used in a major road in Calcutta by the British in The NRRDA has taken up a pilot project in collaboration with the Jute Manufacturers Development Council (JMDC) to demonstrate the potential benefits of the use of JGT in construction of rural roads. This pilot project aims at standardization of different types of JGT. Under the pilot project, ten roads have been selected in Assam, Chhattisgarh, Madhya Pradesh, and Orissa covering a length of km (Table B5.4.1). Central Road Research Institute has been engaged as a technical consultant for this project for project preparation, quality control, monitoring, and performance evaluation. Table B5.4.1 Details of Jute Geo-Textile Pilot Projects State Name of the Road Road Conventional Cost with Length Cost JGT (km) (Rs lakh) (Rs lakh) Orissa Jaipur-Mahananagal Orissa MDR14 to Chatumary Madhya Pradesh Berasia to Semrakalan Approach road Madhya Pradesh Ghelawan village to PMGSY Road Chhattisgarh Kodavabani to Khursi Chhattisgarh Khairjhiti to Ghirghoisa Road West Bengal Notuk to Dingal West Bengal Nandanpur to Marokhana High School Assam Rampur Satra to Dumdumla Assam UT Road to Jarabari/Barnagaon Total Cost Average Cost/km The detailed projects reports indicate that use of JGT would reduce the total cost of construction by Rs 2.40 crore and the average cost by Rs 5 lakh per km. All the projects are now in progress. CRRI would monitor performance of the roads upto 18 months after completion of each road. Source: National Rural Roads Development Agency. rehabilitation cost is high with increase in the vehicle operating costs. In case of loss of asset there may be isolation. Regular maintenance of rural roads is a critical precondition for sustaining the positive impacts that roads bring to rural communities. Routine minor maintenance is often neglected not only because of lack of funds, but also because there is little political capital, or mileage in maintaining roads regularly as the outcome is not highly visible. Instead, politicians prefer to authorize major rehabilitation or reconstruction after the road has deteriorated considerably. Though this is a universal phenomenon, it is time this issue of sustainable rural roads maintenance is taken seriously. The maintenance strategies adopted in PMGSY require that the maintenance cost be borne by the respective state governments. This strategy assures maintenance of the road in the initial five years of construction. The problem of maintenance beyond that is still unresolved. The concept of projectized maintenance cost may be thought of and the options of mobilizing funds for maintenance need to be studied, in order to keep up the sustainability of the rural roads.

147 Rural Roads 123 Strategies adopted in different countries enable us to identify the main requirements for ensuring sustainable rural roads maintenance as summarized below: 1. Policy decision on maintenance and commitment of the government for the preservation of rural road assets deviating from the bias towards new construction. There is an urgent need to projectize the cost of maintenance at the time of planning the new construction itself, in order to achieve sustainability. 2. Development of Technical Standards for design and construction along with a streamlined Quality Assurance System as these have a bearing on subsequent maintenance. 3. Adopting suitable Maintenance Management System for planning, implementation for optimal use of constrained resources, with clear policy of prioritization and supported by well-defined documentation of database. 4. Institutional arrangements with clearly identified functions and functionaries. 5. A dependable funding mechanism for maintenance. 6. Capacity building for the institutions as well as contractors with necessary training for improvement of technical skills and adoption of innovative methods of executing the maintenance operations, in tune with the present day technology. 7. Involvement of local governments and community at the appropriate levels for undertaking maintenance of rural roads with a systematically designed awareness programme bringing out the consequences of inadequate and deferred maintenance. 8. Need based Research and Development (R&D) efforts. Estimation of Fund Requirements for Maintenance Annual routine maintenance for rural roads is estimated to be around Rs 20,000 per km/year on an average and periodic renewal may cost about Rs 4 lakh for a 5 year cycle amounting Table 5.3 Alternate Maintenance Strategies for Rural Roads Budget Full Requirement Maintenance Strategy Carry out full length Routine Maintenance/ Renewals in rural Core Network (CN). 50% of Full Carry out Routine Maintenance over full Requirement length of rural CN. Carry out Renewals of rural Through Routes. 25% of Full Carry out only Routine Maintenance for Requirement full length of rural CN. Less than 25% of Carry out routine maintenance of Rural Full Requirement Through Routes in CN as per prioritization based on PCI and AADT to about Rs 80,000 per year (at current prices). As such, the annual requirement per km of the rural roads maintenance covering routine and periodic maintenance is Rs 1 lakh per km per year. Based on the length of the rural roads, particularly of the CN, estimation of fund requirement can be worked out for budgeting purposes. However, with the availability of full or partial budget, the maintenance strategy that may be adopted is presented below. Organizational Shortcomings As multiple agencies are involved in the construction and maintenance of rural roads, there is dilution of responsibility and lack of accountability for maintenance. Further, there is virtual absence of an institutionalized mechanism for inventorization and pavement condition survey. There is no planning and management system for rural roads for identification and prioritization of the required maintenance interventions. The Panchayati Raj Institutions (PRIs), particularly the District Panchayats are expected to ultimately take over the responsibility of rural roads, particularly for maintenance. However, in most states, hardly any progress is noticeable with regard to transfer of funds, functions, and functionaries to the District Panchayats. As a result, it has not so far been possible to put in place a decentralized community participation mechanism to ensure proper upkeep and maintenance of rural roads. Currently, the work of maintenance is being undertaken both departmentally and through contractors. However, a very large percentage of the available funds is spent on salaries and wages leaving grossly insufficient amounts for non-wage maintenance components. Though financial audit of public expenditure on maintenance is undertaken by the C&AG in the states, there is no formal arrangement in place for technical audit processes to enhance focus on asset management. As a large part of rural roads network is with the state governments and ultimately maintenance of PMGSY roads would also rest with state governments, there is a need to reevaluate and relook at the maintenance of rural road network (Box 5.5). ROLE OF PANCHAYATI RAJ INSTITUTIONS Keeping in view the Indian conditions a decentralized maintenance model has been suggested by Sikdar (2006) (Box 5.6). This model defines the extent of responsibility at each level, suggests how exactly each level would carry out its mandated responsibilities and what kind of technical, financial, and organizational support would be required for building the capacity at each level. The model needs to be piloted to evolve a workable system of decentralized maintenance of rural roads through the empowerment of the

148 124 India Infrastructure Report 2007 Box 5.5 Relook at Maintenance of Rural Roads Anil Kumar Sagar MAINTENANCE STRATEGY The basic elements of the strategy based on the maintenance needs are as follows: Road Vision The state governments should formulate a long term vision covering all aspects of maintenance, the funds available through PMGSY and other poverty alleviation and employment generation programmes. Norms for Maintenance A study should be undertaken to determine the quantum of funds required for maintenance works. This would include routine and periodic maintenance for earth, WBM, black-top roads in different traffic, and climatic conditions prevailing in various states. Minimum essential requirements and those considered desirable for better level of service should be spelt out including allowances for emergency works and special repairs. Not all roads are maintainable. It is necessary to identify the maintainable part of the road network and preserve the assets by setting up an appropriate maintenance regime. Maintainable roads may be defined as all roads with drainage and gravel surface that are in a reasonable condition, so that routine maintenance is possible without need for extensive rehabilitation. Fund Allocation A dedicated fund for maintenance of roads like the one in Uttar Pradesh needs to be set up in all states. The state governments should realize that a decision to construct a road implies that it will be maintained subsequently. The source of these funds could be cess on petrol and diesel, additional cess on agricultural produce, additional royalty on mining and quarries, road maintenance fee in the form of annual road tax on vehicles, and surcharge on insurance premium for vehicles. The fund should be managed in a transparent manner and systems and procedures need to be established to ensure accountability. Core Network The State PWDs should identify the core roads for each district. It would be appropriate to give priority of maintenance to roads in the core network. The states should formulate a five year plan for removing the basic deficiencies in the core road network in the first instance and other roads subsequently. Improved Monitoring A system of performance evaluation should be introduced. Some of the performance indicators that can be considered for the purpose are percentage of maintenance expenditure to required expenditure as per norms, percentage of core road network actually subjected to periodic maintenance, and percentage of core road network in poor condition. A few African countries which had set up dedicated road funds for maintenance are regularly monitoring improvements in road condition. Performance audits should relate financial flows and physical performance indicators to the condition of roads. Creation of Maintenance Management System A simple but rational maintenance management system for rural roads should be developed. The system should help in providing network condition, road inventory, and need based priorities based on deterioration prediction models, annual maintenance plans for a given budget, multi year road work programming, and impact on deterioration of roads for which funds are not allocated. A survey should be conducted to establish a pavement condition index (PCI) of village roads as a tool for prioritization. A further sub-prioritisation needs to be done on the basis of annual average daily traffic (AADT). For roads that cannot be maintained, a systematic approach to appraisal is needed to determine whether they should be rehabilitated or upgraded. Such an approach should take account of the life cycle costs of the road, its function and benefits and availability of resources. Ensuring quality One of the factors leading to high levels of maintenance is lack of compaction of earthwork, sub-base and base courses, and poor attention to drainage works during construction of rural roads. Low crust thickness in some cases also contributes to early deterioration. Review gang labour system In some countries, a system of mobile gangs and reorganization of maintenance operations for improved efficiency of the existing gangs either as a patrol gang system or area wide system has been introduced. A strategy for redeployment of existing gang labour into labour cooperatives and outsourcing of maintenance work to medium and small contractors need to be looked into.

149 Rural Roads 125 Responsibility of PRIs PRIs could be made responsible for maintenance of some non-core village roads and gang labour transferred to them. Some functions, functionaries and funds (3 Fs) need to be transferred to PRIs. Experience of road maintenance in some of the South American countries where such strategies have been successful can serve as reference. A summary of contracting the work of routine maintenance to community based micro enterprises in Peru is given in the following section. Drainage Provision of adequate drainage is a critical requirement. A drainage audit must be undertaken for all existing rural roads and deficiencies in this respect removed in a time bound manner. Initial design for new roads should take into account such requirements in any case. Maintenance of WBM roads A good length of rural roads has Water Bound Macadam (WBM) surface. Their maintenance is a major problem. Generally, these roads deteriorate very fast under the traffic and often develop poor riding surface. A thin gravel surfacing is found to be effective in Andhra Pradesh for the repair of these roads. Financing of Road Maintenance Some states have created a State Road Fund that is used for maintenance of roads. A part of this fund is also used for maintenance of rural roads. Such funds are also used in African countries like Ghana and Zambia. However, the criteria for utilization of these funds are not very clear. There is a need to support the management committee of the fund by a lean but strong professional cell for effective administration of the fund and strengthening the operation process and putting in place scientific principles of prioritization of maintenance treatments based on regular condition survey of roads. The current system of monitoring of physical and financial targets does not give a clue to the improvements achieved in condition of roads. Despite the creation of a dedicated fund for road maintenance, the amounts available for maintenance from all sources continue to be inadequate. There is a shortfall of over 60 per cent in availability of funds compared to needs. Practically, no funds are allocated for maintenance of roads constructed by departments other than the state PWD. A detailed estimate of funds required for maintenance of rural roads on realistic basis is needed with clear break up for routine and periodic maintenance for earth, water-bound macadam, black-top roads in different traffic and climatic conditions prevailing in different parts of the country. The norms should consider the frequency of various maintenance tasks required. Minimum essential requirements and those considered desirable for better level of service should be spelt out including allowance for emergency works and special repairs. To begin with the MoRTH report on norms for maintenance can serve as a starting point (MoRTH 2000). Renewal Cycle for Rural Road Maintenance A disturbing feature in the maintenance policy laid down by the state governments relates to the renewal cycle provided for rural roads. In UP, a period of 8 year cycle has been indicated for rural roads. Technically, it is well known that not only traffic but also environment plays a key role in the life of the top wearing coat with bituminous binder (because of oxidation effect of bitumen) and that is why, the Road Maintenance Manual of UP provides for a renewal cycle of 4 years. The inadequacy of funds alone does not appear to be a sound logic in giving a go by to the norms laid down as a result of experience and experimentation on the ground (Gupta 2003). The expert committee set up under the chairmanship of the Director General (Road Development) and Special Secretary to the Government of India recommended norms for maintenance which are as follows: Table B5.5.1 Maintenance Norms for Rural Roads Category SD-I PC MSS SDBC M R - I of Roads Traffic Group Rainfall SD-II 20mm 20mm 25mm ODR/VR Less than 3000 mm 5 5 (Plains) More than 3000 mm Less than 3000 mm More than 3000 mm SD = Surface Dressing; PC=Premix Carpet; MSS=Mix Seal Surface; SDBC=Semi-Dense Bituminous Carpet; MR=Metal Renewal. Source: (MoRTH 2000). The cycle recommended by the Expert Committee of the MoRTH is ideal and could be the target to be achieved at least in respect of the core rural roads network.

150 126 India Infrastructure Report 2007 In absence of a proper road inventory and condition survey, it is not possible to make a precise estimate of the maintenance funds required annually in respect of rural roads. There is no organized data base for roads inventory, condition, and traffic counts which can help in formulation of need based maintenance plan. The budget grants for maintenance are usually distributed in a lump sum manner assigned to road length. Only financial monitoring of expenditure against allotment is carried out. Maintenance works are not subject to strict budgetary discipline. The system of performance budget whereby details of physical achievements against prespecified targets (activity and work-wise) does not exist in many states. Maharashtra has developed suitable formats for performance budgeting and can serve as a good reference. Rural Road Co-operative for Maintenance the Finnish experience The Government of Finland has promoted rural road maintenance using road cooperatives. A road cooperative is a rural road maintenance organisation whereby a road is maintained by the people living along it. The Finnish Government has provided a legal framework which stipulates the right-of-way, cooperative ownership, and the formula for distribution of maintenance costs amongst the road users and property holders along the road. Participation in the road cooperative is compulsory for property owners who use the road. The cost of road maintenance is shared amongst the members of the cooperative depending on the benefits to each member in the form of the size of the holding and the created traffic. Each cooperative holds an annual general meeting to decide the fees, to accept new members and to audit the previous year s accounts. (Isotalo 1992) Routine Maintenance by Community Based Micro-enterprises in Peru In Peru, the Rural Roads Project (RRP) has set up a cost-effective routine maintenance system based on contracting out labourintensive maintenance works to micro-enterprises, local cooperatives, and other community based organizations. The composition of the micro-enterprises varies according to the length of the road. Their average size is about thirteen people and the average length of the roads covered under a contract is about 34.6 km. Typically, micro-enterprises are made up of eleven to twenty people living close to the road. Priority is given to unemployed people who have previous experience in construction works. The micro-enterprises are engaged through performance based contracts with Peru Roads Department (PCR) and paid on a monthly basis. Micro-enterprise members designate their president and executive council, and determine how the monthly payment is allocated to the various uses (wages, tools, rentals, transportation, savings, and other investments). On an average, wages account for 89 per cent of the expenditure. Micro-enterprises carry out simple works, continuously throughout the year, to clean the ditches and culverts, control vegetation, filling potholes and ruts, maintaining the surface camber, remove small landslides and undertake other emergency works. They have also demonstrated capacity to build retaining walls and small bridges and handle El Nino emergency works under the guidance of PCR. The micro enterprise is a cost effective way of keeping the roads rehabilitated in good condition. The programme generates direct employment for its members. The micro-enterprise becomes a focal point for community work and communal activities to ensure continuous support from the community. Lessons for India Using community based micro-enterprises has important lessons for India that has a very high percentage of unskilled labourers living in rural areas. The study highlights the active involvement of people in maintaining their own roads. Importance of group work can also not be neglected. It has been shown by people organized into groups that they can face the harshest of situations. MoRD has started an ambitious programme Swarnjayanti Gram Swarozgar Yojana (SGSY) wherein people in villages are organized into groups for self employment. These groups can provide a good beginning for taking up road maintenance works in rural areas. Since rural roads carry low volume traffic, the requirements for routine road maintenance will be minimal as compared to periodic maintenance or rehabilitation. The Government also provides funds to generate employment in rural areas by schemes such as Sampoorna Grameen Rozgar Yojana (SGRY), National Food for Work Program (NFFWP), and National Rural Employment Guarantee Scheme (NREGS). However, under the present guidelines, funds available under these schemes cannot be spent for maintenance of existing assets. Moreover, the schemes stipulate formation of proper estimates before taking up any work. However, funds for routine maintenance should not wait for preparation of estimates. Under routine maintenance, funds should be given on a normative basis. Formation of estimates would delay maintenance works and defeat its very purpose. The guidelines under these schemes can be suitably modified so that groups of people can work for routine road maintenance. This would have the dual benefit of providing employment as well as ensuring adequate maintenance of roads. Typically, a village is connected by one road. In such cases, one group in the village may be given the task for maintaining that road. However, in villages with multiple connectivity, more than one group may be formed for routine maintenance works. A group should consist of eleven to twenty men who should be given preliminary training for taking up road maintenance works. The training can be given by existing state PWD engineers or master trainers specially trained for this purpose. Funds for training can be provided through the SGSY scheme.

151 Rural Roads 127 State PWD NREGs SGSY GROUP Routine Roads Maintenance Fig. B5.5.1 Model for Rural Road Maintenance As in Peru, the state PWD department may also enter into a contract with these groups so that the groups are ensured a steady source of income and middlemen are eliminated. Depending on their performance, the groups should also be given incentives so that their needs for other equipment are also taken care of. After gaining enough experience in routine maintenance, these people may also be considered for taking up periodic maintenance, obviously, under strict control of the state PWD. The above scheme would have the benefits of routine road maintenance, employment in rural areas, poverty reduction, no extra requirement of funds for maintenance, feeling of ownership amongst the rural masses, a step towards decentralization keeping in spirit of the 73rd amendment, creation of workforce for maintenance in all rural areas, effective planning for road maintenance, and control on routine maintenance (Figure B5.5.1). Note: Views expressed here are of the author of the box. Box 5.6 A Proposed Model of Community Participation in Rural Road Maintenance Ensuring sustainability of rural roads requires (i) rigorous planning and design, (ii) an effective delivery system, (iii) mobilization of adequate resources, and (iv) appropriate technology and mechanism for the maintenance interventions. The three-tier Panchayati Raj System (PRIs), which has come into existence by virtue of the 73rd Amendment of the constitution, offers an excellent opportunity to institutionalize a hierarchical, decentralized system of maintenance with more technical and complex operations assigned to the district level and the most routine and low technology operations to be tackled by the village panchayats through the maintenance gangs (MGs). The model envisages formation of MGs with four or five able-bodied villagers to be selected from the village itself and imparted training on simple maintenance activities. The suggested model of allocation of maintenance responsibility is as follows: Table B5.6.1 Model of Allocation of Maintenance Responsibility Admn./Orgn Extent of Road Responsibility Unit Length, km. District Planning and assessment of maintenance needs regularly; rehabilitation and renewal works periodically every 5 7 years. Block (Inter Procurement of materials and equipment/implements & distribution to central mediate panchayat) village gang (CVG). Central village 8 10 Collection of materials and equipment/implements from Block HQ and storing for gang (for a group distribution to MG. of villages) Maintenance 1 2 Execution of routine maintenance by the MG of the village. gang of village Each MG would be made responsible for maintaining 1 2 km of road located very close to the village. The intermediate panchayat level set up will have the responsibility to procure and store materials (aggregates and cold bituminous emulsion) and implements required for maintenance which will be distributed to the central village gangs (CVGs) for further distribution to the MGs of the villages. Normal agricultural/household implements used by villagers would actually be utilized for carrying out maintenance works. A specially made push-cart will be used by the MG for transporting materials and implements to the sites for maintenance works. A manually operated pug-mill fitted to the push-cart will be used for mixing the aggregates and bitumen for producing the cold mix to be used in maintenance of bituminous layer. A calibrated small metal container of known volume can be used for batching of the mix and a normal rammer will be used for manual compaction of the repaired shoulder, side slope, side drain, or location of the crack

152 128 India Infrastructure Report 2007 repaired. The proposed framework envisages availability of engineers at the district level to assess the maintenance needs and current pavement conditions every 6 months in rotation and to pass on the status report to the intermediate panchayat for onward transmission to the village panchayats. The district level maintenance unit will have facilities for periodic maintenance and renewal interventions based on pavement condition evaluation. Fair and equitable distribution of funds and material resources for operationalising this arrangement will be ensured by the functionaries at the district and the intermediate level. The proposed model allocates responsibility to the three-tiers of the panchayats commensurate with the capacity available at each level. The model also envisages competition among the panchayats and MGs to increase effective community participation in maintenance of rural roads through the PRIs. Source: Sikdar (2006). Box 5.7 Citizen Monitoring of Rural Roads Citizens and taxpayers, being the ultimate users, have a right to demand good quality roads. However, this right cannot be divorced from their duty to exercise due diligence and vigilance in order to ensure proper utilization of funds spent and to ensure that the quality of the assets created meet the prescribed standards. It is, therefore, necessary to evolve and institutionalize a system of monitoring the quality of road works by the citizens. For this purpose, however, the essential requisite and features of successful citizen participation need to be demonstrated and validated experimentally. In this context, a pilot project has been taken up, under PMGSY, in collaboration with Public Affairs Centre, Bangalore, to demonstrate the utility of involving the citizens in monitoring of road construction. Under the pilot project, sixteen rural road projects will be identified in four districts in Karnataka and Tamil Nadu (two districts in each state). Each of the identified roads will be citizen monitored in sections up to 50 per cent of their length. Each critical stage of road construction will be monitored by the citizen volunteers with appropriate quality checks. In each road, the citizen monitors will act as relay teams handing over responsibility to the next monitoring team after construction of a section of the road is completed and monitored. For each road project three to four citizens will be chosen to act as the core group of monitors. The monitors could be Civil Engineering students from the nearby colleges, volunteers from civil society organizations, citizen associations, Gram Panchayats, Mahila Mandals, and so on. However, they must have minimum requisite literacy/education and should have commitment and enthusiasm to perform the required tasks. These citizen monitors will be imparted basic training at convenient field locations by the experts with the help of a simple booklet detailing their tasks relating to monitoring and quality control. They would also be provided with a basic field kit of testing devices. A package of simple physical tests for monitoring and quality assurance of rural road projects will be designed under the guidance of eminent domain experts specifying the devices and testing modalities. In-house and on-site training would be provided to the citizen monitors for carrying out these field tests. Greater participation of rural citizens will be secured by treating the citizen monitors as focal points of the local groups. The citizen monitors are expected to assume leadership role and train others from the village to participate in the monitoring process. Four road experts would be identified for each state, to provide peer guidance and to assist the citizen monitors. The experts will also carryout certain tests which are beyond the competence of the citizen monitors and which require more sophisticated testing devices not included in the standard tool kits. Each expert would undertake ten to fifteen field inspections during the pilot phase. The duration of the pilot phase is expected to be six months. All the processes involved in this exercise would be fully documented for experience sharing and for developing a replicable model for citizen monitoring of infrastructure projects on a wider scale. PRIs for which resources available under SGSY and NREGS can be pooled as suggested in Box 5.5. Since construction and maintenance of rural roads is almost exclusively funded through public expenditure, it is the tax payer s money that needs to be accounted for. Besides, the ultimate recipients of the service, the road users, should be made aware of the investment made in the creation of the assets and they should also be entitled to assess the cost effectiveness and quality of the assets created for their benefit. Institutionalization of a system of social audit by the citizens and the road users is, therefore, essential, even though monitoring road construction and maintenance involves a high degree of technical proficiency and competence. In this connection, it may be worthwhile to mention that under PMGSY, states have been advised to fix citizen information boards displaying physical and financial details of the project, quantity of materials to be used and persons responsible for construction and supervision. This is a measure to enhance the level of transparency in programme implementation. Further a pilot project has been initiated through the Public Affairs Centre, Bangalore, to involve the citizens in monitoring road quality (Box 5.7).

153 Rural Roads 129 WAY FORWARD The debate is whether one ought to centralize or decentralize rural road development and maintenance. Protagonists of centralization assert that roads have certain special characteristics that make them different from other dispersed rural infrastructure. First, good roads require a reasonably high and uniform standard of construction and repair and second, roads are not necessarily used by the local residents alone. In the pursuit of standardization and adherence to norms, centralization can also be carried to extremes, putting wide powers in the hands of a few, totally eliminating scope for community participation and flexibility for local initiatives and innovations. PMGSY is a CSS and capital is provided by the central government to the state governments to build the road network as per the central government norms. The key issue remains of maintenance of this network as it is handed over to the state government after constructing the road. State governments are obliged to provide from their budgets for its maintenance. Ensuring Community Participation Intensive community participation is being widely recognized as a major requirement for ensuring long term sustainability of investment on rural infrastructure. Participatory planning and management facilitates assessment of the needs of the rural households in order to create integrated utilities for them. Such an approach also provides opportunities to the community to reinforce their identity as a key stakeholder and to exercise their choices and rights freely. This promotes a sense of ownership of the assets created and provides incentive for their participation in construction and subsequently, in the management of the assets. While designing systems for community participation and management, however, there is an important concern which needs to be properly addressed. When community management entails cash or labour contributions, the burden generally falls disproportionately on the poor households, since they may be forced to contribute free labour time leaving less time for them to engage in their primary productive tasks. This might adversely affect their ability to meet subsistence needs and food security. They may also be forced to contribute towards maintenance of infrastructure assets, which they rarely use. What we should really aim at in the involvement of the community is the assessment of needs and decisions regarding maintenance and management. This will ensure that community participation is inclusive and pro-poor, since the poor will develop a stake in using and maintaining the appropriate roads which serve their needs. Promoting use of Labour Intensive Technology While the poor households face fundamental deficiencies in their assets to capture benefits of the opportunities that a rural road may bring, one aspect of the rural road development, which benefits the poor directly, is the opportunity that construction and maintenance of these roads offer for employment when labour intensive methods are used. Experience from Asian and African countries reveals that the principal gains for the poor from rural road programmes is through employment generated during the construction. Although employment on road construction is temporary in nature, this provides an opportunity for the workers to accumulate savings which can provide the necessary start up capital to invest in alternative livelihoods to cross the threshold of poverty. Labour intensive, intermediate technologies are expected to generate five to six times more jobs in construction of rural roads as compared to the highly equipment oriented methods used for the highways. Furthermore, adoption of labour intensive construction methods need not affect the quality of works adversely, contrary to the popular belief. It has been successfully demonstrated in Cambodia and Peoples Republic of China that the quality of works, using labour intensive methods, can be atleast as good as that of the contractors using heavy machineries. There is, therefore, a need to incentivize and promote use of labour intensive techniques for rural road programmes with a focus on poverty reduction. Decentralization of Maintenance Rural roads, by their very nature, are small in size and are dispersed over a wide geographical area. Construction and maintenance of rural roads are, therefore, not easily amenable to centralized supervision and monitoring. Efficiency considerations weigh in favour of a decentralized system for maintenance and management of rural roads. Case studies of different developing countries have shown that regular maintenance of rural roads is a critical pre-condition for sustaining the positive impact which these assets generate for the rural community. Ensuring adequate and timely maintenance, both routine and periodic, however, requires not only adequate availability of funds, but also major institutional reform. This is because the institutional responsibility for rural roads is often not very clearly established. In many states there appears to be lack of clarity, at least in practice at the field level, over who is responsible for maintaining which roads and also over the sources of funding their maintenance requirements. In the absence of proper institutional systems, very often there is no transparency and objectivity with regard to prioritization and selection of roads, maintenance

154 130 India Infrastructure Report 2007 and rehabilitation. The ability to get a road included in the annual maintenance programme or a rehabilitation scheme, consequently, tends to depend heavily on the political strength and influence that the beneficiary community can exert. Poorer and more backward areas and communities are likely to suffer under such a regime since they are less likely to have the capacity and the power to lobby effectively for better roads. There is a clear case, therefore, to move towards an efficient system of decentralized maintenance of the rural roads by empowering the PRIs. It is hoped that a clear road map for this purpose would be set out at least in the 11th Five Year Plan. Cost Benefit Framework for Investment on Rural Roads It is a common perception that all-weather roads should be necessarily black topped. Black topping, no doubt, provides better riding quality and stability to the surface as well as pavement structure. It prevents water percolation and arrests the dust problem. However, black topping of fully constructed crust becomes necessary only on the roads carrying high traffic volumes. Investment of this type on roads connecting smaller habitations with low traffic volumes can be rarely justified on economic considerations. This calls for need based road construction keeping in view the expected economic returns from the investment. While the rural roads Manual treats gravel road with necessary cross drainage and protection work as an all-weather road, almost all the roads under PMGSY are currently being black topped irrespective of the projected traffic. Indeed a whole range of proven, cost effective pavement options are now available as alternatives to bitumen surface for low volume rural roads. Most of these paving options require relatively smaller capital investments and optimize use of local materials and use intermediate labour based technology. A policy and institutional framework needs to be developed to mainstream these alternatives for rural roads. Providing all weather connectivity helps in promoting economic growth and alleviates poverty. The PMGSY has accelerated works in connecting habitations all over the country and its impact on rural economy is perceptible not only in economic life of people but in social life as well. There is no clear policy on maintenance of these newly created assets, though all PMGSY roads are covered by five years maintenance contracts entered into along with the construction contract, with the same contractor. But as funds are to be provided through the state budget, there are no earmarked funds for the maintenance of rural roads. There is little doubt that rural roads are vital to agrobased industry and rural development, to create jobs, and to make the country s growth more broad based. As all-weather road network through PMGSY is expanding we are witnessing social and economic change beyond our expectations. Though a watertight system to maintain this vast network is not in place, it is unlikely that village community would let it fall into disuse.

155 Rural Roads 131 Table A5.1 Length and Cost of Rural Roads required for New Connectivity under PMGSY Cost for Eligible Unconnected Habitations connectivity No. of Total length under S. Name Unconnected Length Length Length to be PMGSY No. of State habitations No. (km) No. (km) No. (km) covered (km) (Rs million) 1 Andhra Pradesh Arunachal Pradesh Assam 15, ,987 51,950 4 Bihar 24,321 11,717 26, ,351 66,470 5 Chhattisgarh 24, , , ,634 37,556 76,700 6 Goa Gujarat ,210 8 Haryana Himachal Pradesh 11, , Jammu & Kashmir , Jharkhand 21, , Karnataka Kerala Madhya Pradesh 34, ,131 10,645 31, , , Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa 28, , ,374 69, Punjab Rajasthan 20, , ,948 40, Sikkim Tamil Nadu Tripura Uttaranchal ,430 22, Uttar Pradesh 61, ,300 15,358 22, ,725 87, West Bengal 35,667 11,941 13,192 11, ,652 70,200 Total 330,647 59, ,949 81, ,955 31,451 69, , ,180 Source: ANNEXE

156 132 India Infrastructure Report 2007 Table A5.2 Length and Cost of Rural Roads Required for Upgradation under PMGSY Length of Core Network (Rural Roads) Length of Estimated Through roads Link roads Total upgradation cost S.No. State (km) (km) (km)to be covered (km) (Rs Million) 1 Andhra Pradesh ,495 66,071 17,201 25,820 2 Arunachal Pradesh , Assam 10,551 16,632 27,183 13,046 33,400 4 Bihar 12,746 38,898 51,644 18,581 27,770 5 Chhattisgarh 12,536 29,040 41,576 16,892 27,850 6 Goa Gujarat ,668 43, Haryana , ,150 9 Himachal Pradesh ,577 29, , Jammu & Kashmir ,238 18, , Jharkhand ,677 37,654 12,429 17, Karnataka ,539 66,679 16,921 18, Kerala ,734 16, Madhya Pradesh 25,330 79, ,710 37,237 57, Maharashtra ,130 81,035 19,724 27, Manipur Meghalaya Mizoram Nagaland Orissa 19,138 61,257 80,395 28,327 43, Punjab ,751 25,235 10,147 12, Rajasthan 14,821 75,304 90,125 26,117 27, Sikkim Tamil Nadu 14,317 52,561 66,878 22,201 30, Tripura Uttaranchal ,124 21, , Uttar Pradesh 40, , ,767 57,074 99, West Bengal 13,410 36,991 50,400 18,958 45,330 Total 238, ,642 1,134, , ,330 Source:

157 Table A5.3 Physical and Financial status and achievements under PMGSY Statement showing Physical & Financial progress under PMGSY (Phases I to VI + ADB/WB) (Rs in crores, length in kms) Rural Roads 133 No. of road Length of % of % Exp. Value Amount No. works road works completed % Length to amount of released of Length completed completed road works completed Exp. released S. proposals (up to road of road (up to (up to (up to (up to up to (up to No. State cleared ) works works May, 06) May, 06) May, 06) May, 06) May, 06 May, 06) AP Arunachal Assam Bihar Chhattisgarh Goa Gujarat Haryana HP J & K Jharkhand Karnataka Kerala MP Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura UP Uttaranchal West Bengal Grand Total Source:

158 134 India Infrastructure Report 2007 Table A5.4 Bharat Nirman Targets for New Connectivity (Length in km, Habitations in Numbers) Sl. Name of Total No. the State Length Habs Length Habs Length Habs Length Habs Length Habs 1 Andhra Pradesh Arunachal Pradesh Assam , Bihar , Chhattisgarh , Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerala Madhya Pradesh , , Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan , Sikkim Tamil Nadu Tripura Uttar Pradesh Uttaranchal West Bengal , ,874 Total 15, , , ,071 51, ,567 14, ,802 Source:

159 Rural Roads 135 Table A5.5 Bharat Nirman Targets for Upgradation (Length in Kms) Sl. Name of Total No. the State Length length Length Length Length Andhra Pradesh Arunachal Pradesh Assam Bihar Chhattisgarh Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka , Kerala Madhya Pradesh , Maharashtra , Manipur Meghalaya Mizoram Nagaland Orissa , Punjab Rajasthan , Sikkim Tamil Nadu , Tripura Uttar Pradesh , , Uttaranchal West Bengal Total 11, , , , , Source:

160 136 India Infrastructure Report 2007 Table A5.6 Cost Trends under PMGSY State NC UP NC UP NC UP NC UP NC UP NC UP 1 Andhra Pradesh 2 Arunachal No proposal Pradesh 3 Assam Bihar Chhattisgarh Goa No proposal Gujarat Haryana Himachal Pradesh 10 Jammu & Kashmir 11 Jharkhand Karnataka Kerala Madhya Pradesh 15 Maharashtra Manipur NA No proposal No proposal Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh 27 Uttaranchal West Bengal Source:

161 Rural Roads 137 REFERENCES APERP (1997). Rural Transport Survey 1997 Andhra Pradesh Economic Restructuring Project, World Bank, Washington D.C. C&AG (2006). Performance Audit of PMGSY, C&AG Report No. 13, 2006, GOI, New Delhi. Fan, S., L. Zhang, and X. Zhang (2000). Growth, Inequality, and Poverty in Rural China: The Role of Public Investments. Research Report 125, International Food Policy Research Institute, Fan, Shenggen and Peter B.R. Hazell and Sukhdeo Thorat (1999). Linkages between Government Spending, Growth, and Poverty in Rural India, Research reports 110, International Food Policy Research Institute (IFPRI), Washington DC. Gupta, D.P. (2003). Maintenance of Rural Roads: Developing Policy and Implementation Plan for Uttar Pradesh, mimeo, Government of Uttar Pradesh, Lucknow. Isotalo, Jukka (1992). Community Participation in Rural Road Maintenance: Finnish Experience and Lessons for Sub-Saharan Africa, Transportation, Water and Urban Development Department, The World Bank, Transport No. RD-13. Washington, D.C. Kumar, P., H.C. Mehndiratta and S. Rokade (2005). Use of Reinforced Flyash in Highway Embankments, Highway Research Bulletin, 73, pp Kumar, P., S.S. Jain and L.N. Singh (2002). Use of Steel Industry Slag in Bituminous Mixes Indian Experience, Highway Research Bulletin, 67, pp Misra, A.K., R. Mathur, P. Goel and V.K. Sood (2004). Use of Phosphogypsum An Industrial By-Product in Stabilisation of Black Cotton Soils, Highway Research Bulletin, 70, pp MoRD (2000). Empowerment of Rural India through Connectivity, Ministry of Rural Development, May, (2004). Impact Assessment of Pradhan Mantri Gram Sadak Yojana PMGSY, Ministry of Rural Development, (2004a). Specifications for Rural Roads, Indian Roads Congress. Ministry of Rural Development, New Delhi. (2004b). Rural Road Manual: IRC:SP: , Indian Roads Congress. Ministry of Rural Development, New Delhi. (2006). Rural Roads Development Plan: Vision 2025 (Draft), Ministry of Rural Development, Government of India, New Delhi. MoRTH (2000). MoRTH: Norms by the Expert Group 2000, Ministry of Road Transport and Highways, New Delhi. Narayan, Deepa, Raj Patel, K. Shafft, A. Rademacher and S. Koch- Schulte (2000). Voices of the Poor. Crying out for Change, The World Bank, Oxford University Press. Planning Commission (2005). A quick Concurrent Evaluation of PMGSY, Project Evaluation office (PEO), Planning Commission, New Delhi. Sikdar P.K. (2006). Proposed model of Community Participation in Rural Road Maintenance, Indian Highways, Vol. 34, No.6, Special No. June. Vittal, U.K.G. (2000). Use of fly ash in Roads and Embankments, in Proceedings of 2nd International Conference on Fly Ash Disposal and Utilisation organized by CBIP and Fly Ash Mission.

162 138 India Infrastructure Report ELECTRIFICATION AND BIO-ENERGY OPTIONS IN RURAL INDIA PART I RURAL ELECTRIFICATION Prem K. Kalra, Rajiv Shekhar, and Vinod K. Shrivastava INTRODUCTION The genesis of rural electrification lies in India s need for food security. India learnt through the bitter experience of the drought of the late 1960s that it must be self-sufficient in food to enjoy political freedom in the international arena. Water was a must for the rain-fed agriculture sector but canal based irrigation systems could not be developed in the short-term. The only immediate solution was to have ground water-based irrigation using electrical pumps. For that, village electrification meant grid extension to farms and not to village habitations. Over the past forty years as economic growth has accelerated from a rate of 3 per cent to 7 per cent, the objective of village electrification has changed from energizing water pumps to providing electricity to village households living below the poverty line. Autarkic industrial development, Green Revolution, and India s closed economy model of development in the 1970s and the 1980s required large supplies of electricity which was provided by the state. As demand for electricity far exceeded the supply and price of electricity was capped, there were leakages, commercial mismanagement, and rent seeking. The Indian economy was forced to open up in 1991 and the creaking electricity sector was then left to fend for itself. The development and planning issues in rural electrification and rural energy services have direct linkages to the process and progress in rural development. Success in these areas can be achieved by boldly confronting the difficulties that have incapacitated the power sector for decades and by adopting a multi-pronged approach to revitalize energy services in India. Future efforts must implement best practices and address setbacks in all of the following areas: distribution, power generation, tariffs, and subsidies. Here, we review (i) role of electricity in rural development, (ii) The Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) in the light of the Electricity Act 2003 (EA, 2003) and 73rd CAA, (iii) issues related to electricity supply and distribution models for rural areas, (iv) rural electrification and panchayats, (v) issues in distributed generation and connectivity to grid (vi) funding and tariff of rural electricity, and (vii) way forward to provide sustainable electricity and energy services to rural population for improving their quality of life. ROLE OF ELECTRICITY IN RURAL DEVELOPMENT It would not be out of place to re-emphasize that the scaledup objective of rural electrification at the household level is the cornerstone of India s economic growth as it enables basic minimum facilities of lighting and communication. Viable and reliable electricity services result in increased productivity in agriculture and labour, improvement in the delivery of health and education, access to communications (radio, telephone, television, mobile telephone), improved lighting after sunset, the use of time and energy-saving mills, motors,

163 Electrification and Bio-energy Options in Rural India 139 and pumps, and increased public safety through outdoor lighting. Thus, providing electricity to village households is a means to help meet the aspirations of the rural population. Electrification rates given in official statistics do not reflect changed priorities but household electrification at the national level is still below 50 per cent (Figure and Table A6.1.6). 1 The per capita GDP and electrification rates of all major states show indisputable positive correlation between household electrification and rise in per capita SGDP (Figure 6.1.2). After all-weather road connectivity, a primary demand from rural folks is electricity as it enables access to potable drinking water, home entertainment, and freedom from drudgery; in short, a means to improve quality of life. Irrigation, power supply, and rural poverty are strongly interlinked in the Indian economy. Irrigated areas in India Cumulative number of Electrified Villages Source: REC (2005). Electrified villages (%) Source: Census (2001) Fig Village Electrification in India MH 16.0 AR PB 14.0 TN GJ AP KRL KTK HP 8.0 WB RJ 6.0 MP 4.0 OR UP 2.0 BH SDP per capital (Rs 000) Fig Domestic Product and Percentage of Electrified Household 1 The pace of village electrification has been slowing down with only 18,500 villages electrified during the 9th Plan ( ) compared with 120,000 during the 6th Plan. However, the same period saw a rapid increase in pump set energization with states declaring zero tariff for power supply to agriculture. Share in total gross income (%) Marginal Small Medium Large Overall Electricity Tariff Pump Maintenance Motor Burnout Purchase of Water Fig Irrigation Costs as Perentage of Farm Income Haryana Electricity Pumps Source: The World Bank (2003). contribute two-thirds of food grains output and provide livelihood and income to more than 650 million people in India. Of the 57 million ha net of irrigated area, as much as 34 million ha is from private investments in tubewells, pump sets, and water distribution channels. The poor frequently pay a high fraction of their gross farm income for irrigation (Figure 6.1.3) (Modi, 2005). Irrigation pumping for agriculture is the dominant form of irrigation but it cannot be named as the principal cause of poor cost recovery and the ailing financial health of the State Electricity Boards. Irrigation reduces poverty by increasing employment, incomes, and real wages and reduces food prices for poor, both, urban and rural. In un-irrigated districts of India (less than 10 per cent area irrigated), 69 per cent of the people are poor, while in irrigated districts (more than 50 per cent area irrigated), poverty level drops to 26 per cent. Agricultural performance is fundamental to India s economic and social development and will critically determine the success of efforts in poverty reduction. Hence, a sudden and substantial shift away from current pricing of electricity for agriculture could jeopardize agricultural activity as the primary source of livelihood in rural areas. The challenges for rural electrification are to: 1. Expand access of electricity to un-electrified villages. 2. Increase penetration rates in electrified villages. 3. Strengthen technical and operational performance of the distribution network in villages. 4. Provide a sustainable model for rural electrification. CURRENT STATUS Fixed cost of pump The number of villages electrified as on March 31, 2001 was 508,515 (of the total number of 587,258 villages). The number of villages that remain to be electrified is thus 78,240. The number of remote and inaccessible villages is estimated at 18,000. There are a number of hamlets that are one to three km away from the main villages, with populations ranging

164 140 India Infrastructure Report 2007 between 50 and 200, which are often not officially listed as villages and are not electrified. In terms of households, only 44 per cent of all rural Indian households are electrified and only 60.2 million households out of a total of 138 million households in the country use electricity as the primary source of lighting (Census, 2001). The heavy losses of the State Electricity Boards (SEBs) over the years have had direct implications for the poor implementation of the rural electrification programme. Utilities have shown no interest in electrifying the areas with low per capita income. Utilization of the funds has been inconsistent across states. For example, achievement against allocation under Kutir Jyoti varied from 22 per cent in Uttar Pradesh to more than 100 per cent of allocation in Andhra Pradesh and Karnataka. Low users charges with high cost of delivery and high T&D losses, low collection efficiency, and low revenue keep the power utilities in a vicious cycle of underperformance. Low collection efficiency results in high AT&C losses leading to low revenues, poor financial health, and consequently, lower technical and operational efficiency, which further results in low collection efficiency and so on. There is absolutely no reliability of supply in the rural areas. The performance reports of Electricity Board/Utilities and PFC results show that states which have high AT&C losses are also the ones which have lower levels of household electrification. For example, the state of Bihar with more than 70 per cent AT&C losses has only 5 per cent households electrified. In the state of Jharkhand the AT&C losses are 65 per cent, with only 10 per cent rural households electrified. On the other hand, Himachal Pradesh, with around per cent AT&C losses has more than 90 per cent of the households electrified. Goa, Punjab, and Haryana also present similar results. According to the earlier definition a village was electrified, if electricity was being used within its revenue area for any purpose whatsoever. Translated into reality, even a single transmission pole located within its precincts would electrify a village. Hence, the numbers on rural electrification routinely churned out, were, well, simply statistics! This definition of village electrification was reviewed in consultation with the state governments and State Electricity Boards and the following new definition was adopted: 1. The basic infrastructure, such as distribution transformer and/or distribution lines, is made available in the inhabited locality within the revenue boundary of the village, including at least one hamlet/dalit Basti, as applicable. 2. Any public place like schools, panchayat office, health centres, dispensaries, community centres, etc. avail power supply on demand. 3. The ratings of distribution transformer and LT lines to be provided in the village are finalized as per the anticipated number of connections decided in consultation with the Panchayat/Zila Parishad/District Administration who also issue the necessary certificate of village electrification on completion of works. 4. At least 10 per cent households in an un-electrified village have to be electrified for a village to be declared electrified. Clearly, even the new definition is not comprehensive because it does not: 1. Address issues of power quality and regularity of supply, the bane of rural electrification. 2. Spell out the policy/time frame for electrifying the remaining 90 per cent of the un-electrified households. 3. Specifically account for economic activity in rural areas. The growing domestic and global concerns over the increasing divide between rural and urban areas led the Electricity Act 2003 to enshrine rural electrification in law for the first time. Section 6 of the act mandates the hitherto implied Universal Service Obligation by stating that the government shall endeavour to supply electricity to all areas including villages and hamlets. Section 5 further mandates the formulation of national policy on rural electrification focusing, especially, on management of local distribution networks through local institutions. Subsequently, the GoI has released a draft paper on National Rural Electrification Policy, giving further boost to rural electrification. The EA2003 in Section 4 also frees stand-alone generation and distribution networks from licensing requirements. The broad goals of the rural electrification programme (REP) are accessibility, availability, reliability, quality, and affordability. While the REP seeks to achieve 100 per cent household electrification by 2012, primarily through grid extension, stand-alone systems are also envisioned for areas where grid extension may not be possible on account of techno-economic factors. Pursuant to the REP all state governments are required to formulate state level strategies. Last year (2005 6), village electrification saw considerable increases, as presented in Tables A6.1.3, A6.1.4, and A The first report of the Standing Committee on Energy of the Fourteenth Lok Sabha in , identified rural electrification as an essential infrastructure input for improving production oriented activities and speeding up the pace of development of the rural economy. Following that the Ministry of Power proposed creation of a Rural Electricity Distribution Backbone (REDB) and Village Electricity Infrastructure (VEI). This also included distribution transformers in each village where grid access was feasible, and a decentralized distributed generation and supply for villages where grid connectivity or NCES (non conventional energy sources) might not be possible or cost effective. 2 The Committee, while accepting the Ministry of Power s new proposal, had, however, highlighted that despite 2 A total of 25,000 villages out of the 100,000 villages identified for electrification under the RGGVY would be electrified using renewable energy sources.

165 Electrification and Bio-energy Options in Rural India 141 the availability and sanctioning of funds, the actual utilization of funds for rural electrification projects was low. The Rajiv Gandhi Grameen Vidyutikaran Yojana is the response of the government to the concerns of the law makers. RAJIV GANDHI GRAMEEN VIDYUTIKARAN YOJANA The RGGVY, launched by the Ministry of Power for rural electrification builds on the Kutir Jyoti Programme launched in and the Rural Electricity Technology Mission initiated in The Kutir Jyoti Scheme, started in 1989, connected nearly 6 million households in 15 years, or approximately 400,000 households will per year. The current goal of the RGGVY is challenging because approximately 6 million households will have to be electrified every year for the next four years over 15 times the rate of electrification achieved under Kutir Jyoti. The additional generation capacity required over the next four years to attain this accelerated pace of rural household electrification is about 14,000 MW. It is also worth noting that nearly half of this new capacity will be needed just in the three states of UP, Bihar, and West Bengal. The additional capacity requirement for the RGGVY would be comparable to capacity additions since These requirements are over and above the additional generation required to feed the economic growth rate of 8 per cent p.a. RGGVY has the following objectives: per cent electrification of all villages and habitations in the country. 2. Electricity access to all households. 3. Free-of-cost electricity connection to BPL (Below Poverty Line) households. For achieving the said objectives, the RGGVY envisions creating: 1. Rural Electricity Distribution Backbone (REDB) with at least one 33/11 KV (or 66/11 KV) substation in each block. 2. Village Electrification Infrastructure (VEI) with at least one distribution transformer in each village/habitation. 3. Decentralized Distributed Generation (DDG) systems where the grid is not cost effective or feasible. Significant features of the RGGVY The RGGVY positions rural electricity as a necessary component for broad based economic and human development, looking beyond the prevalent rural electrification framework of increasing agricultural production through irrigation. The programme, in addition to meeting the household electricity needs, looks at 24-hour supply of quality grid power to rural areas for spread of industrial activity, provision of modern healthcare facilities, and the use of IT. The RGGVY recognizes the need for revenue sustainability for rural electrification projects and boldly states that electricity supplied must be paid for. The scheme proposes the management of rural distribution through franchisees which could be user associations, cooperatives, NGOs, or even individual entrepreneurs. The state governments are also required to make adequate provisions for revenue subsidy to the utility. Thus RGGVY, for the first time, while providing capital subsidy for rural electrification projects, links subsidy provision to revenue sustainability, barring which the Rural Electrification Corporation (REC) could convert the said capital subsidy into interest bearing loans (Modi, 2005). Universal Service Obligations (USO) In terms of targets for achieving the USO under the electricity access goals over the next 5 years, the number of un-electrified villages in the country is estimated at 112, The ministry estimates that the number of un-electrified villages is likely to rise to 125,000 as per the new definition of village electrification. The Census of India 2001 reports household electrification at 10 per cent in Bihar, 24 per cent in Jharkhand, 32 per cent in UP and 70 per cent in MP. Several states like Himachal Pradesh and Punjab show over 90 per cent household electrification (Table 6.1.1). A two-pronged approach is required to address, first, villages that are already electrified Table Status of Rural Electrification Electrified Household State Per Capita (%) Domestic Product Punjab Haryana Gujarat Maharashtra Tamil Nadu Kerala AP HP Karnataka MP Rajasthan Chhattisgarh 53.1 West Bengal Orissa North-East 33.2 UP Bihar Jharkhand 24.3 Source: Census (2001). 3 This is as of March, 2004 based on Census 1991.

166 142 India Infrastructure Report 2007 and need intensive household electrification, and second, extending the grid to the remaining un-electrified villages. Critical Evaluation of RGGVY To attain the goals set by the GoI in an efficient manner, well-planned central-level schemes are necessary for bringing grid connections to all rural households. Geographic isolation and lack of infrastructure leave rural households without access to energy services. In order to bring these benefits to the rural poor while maintaining a profitable electricity industry, policy initiatives must ensure that grid expansion and distributed generation are given equal importance. For example, under the RGGVY scheme a single household grid connection (effectively Rs 1500/HH or $30/HH) is barely adequate for households that are not within 25 meters of a distribution network. A careful analysis of the cost structure is needed since the geographic distances assumed are not supported by data. The costs of new metered hookup are lower than the lowest costs of rural electrification found anywhere in the world by in approximate factor of four. Low voltage distribution wire and poles alone can cost $1 to $1.50/meter. While India has one of the lowest costs of extending the grid, the rising costs of materials need to be accounted for. Hence, a pitfall of the scheme lies in under-funding in some areas, leading to under-utilization of funds and under-achievement of the targets. RURAL ELECTRIFICATION MODELS RGGVY plans to adopt a two-pronged approach for implementing rural electrification. In India, the major thrust of rural electrification will be on grid extension rather than on distributed generation. Hence, issues related to grid connectivity will be discussed first. However, given the demand-supply gap, grid extension by itself may not fulfil the electrical energy needs of the rural population. Hence, distributed generation will, in all probability, be a reality as back-up/supplemental power even in rural areas connected to the grid. Grid Extension The major concerns in grid extension are (i) selecting an appropriate model for transmitting electricity and (ii) minimizing costs of transmission infrastructure without compromising on the reliability of supply. Models for Electricity Transmission CURRENT INDIAN CONFIGURATION Rural electrification in India is essentially a three-phase system either from the grid or from distributed generation units. EUROPEAN CONFIGURATION This is a medium-voltage (MV) distribution system characterized by widespread use of a three-phase, three-wire configuration where consumers are generally served by relatively few transformers of a higher capacity. Single-phase distribution relies on supplying loads with two rather than all three (phase) conductors. Only recently has single-wire earth return (SWER) distribution been widely used for supplying to domestic load in remote rural areas (Box 6.1.1). NORTH AMERICAN CONFIGURATION This is a MV distribution system that is characterized by (i) the widespread use of a three-phase, four-wire configuration, with the fourth (neutral) wire solidly grounded at numerous points along the line and (ii) the heavy use of smaller, single phase transformers to serve most consumers. Single-phase distribution relies on supplying loads with the neutral conductor and only one of the three-phase conductors. Single-phase distribution is widely used for supplying rural areas. VEE-PHASE DISTRIBUTION This is also used as an alternative to the North American distribution system configuration in which supply is provided by the neutral, and only two of the three-phase conductors, increasing line capacity when compared to single-phase distribution and permitting low-cost access to three-phase power. Capital Costs of Electrification The capital cost for rural electrification consists mainly of material costs, which, in turn, consists of the cost of conductor, pole and pole-top assembly accessories, and transformers. For reducing material costs, it is necessary to ensure that the poles, conductors and line hardware incorporated in the line in the existing design are optimally used and that the lines are efficiently designed and constructed. POLES Poles are often the costliest component required for grid extension for rural electrification. So, reduction in poles would lead to lower cost of grid extension. The spans should be maximized to take advantage of the strength of the conductors while ensuring a generally acceptable degree of safety. Pole height should not exceed that which is necessary to meet the established ground clearance requirements and safety factors. CONDUCTORS One of the important options for reducing the cost of grid extension is to reduce the size of the conductor. Conductors should be designed to handle realistic demands and growth

167 Electrification and Bio-energy Options in Rural India 143 Box Single Wire Earth Return 4 Single wire earth return (SWER) or single wire ground return is a single-wire transmission line for supplying single-phase electrical power to remote areas at low cost. It is principally used for rural electrification, but also finds use for larger isolated loads such as water pumps, and light rail. SWER is a good choice for a distribution system when conventional return current wiring would cost more than SWER s isolation transformers and small power losses. SWER is considered to be equally safe, more reliable, less costly, but with slightly lower efficiency than conventional lines. The SWER line is a single conductor that may stretch for tens or even hundreds of kilometres, visiting a number of termination points. At each termination point, such as a customer s premises, current flows from the line, through the primary coil of a step-down transformer, to earth through an earth-stake. From the earth-stake, the current eventually finds its way back to the main step-down transformer at the head of the line, completing the circuit. SWER violates common wisdom about electrical safety, because it lacks a traditional metallic return to a neutral shared by the generator. SWER s safety is instead assured because transformers isolate the ground from both the generator and user. However, grounding is critical. Significant currents (of the order of 8 amperes) flow through the ground near the earth point, so, a good quality earth connection is needed to prevent the risk of electric shock near this point. SWER s main advantage is its low cost. It is often used in sparsely populated areas where the cost of building an isolated distribution line cannot be justified. Capital costs are roughly 50 per cent of an equivalent two-wire single-phase line. They can be 70 per cent less than three-wire three-phase systems. Maintenance costs are roughly 50 per cent of an equivalent line. SWER also reduces the largest cost of a distribution network, the number of poles. Conventional two wire or three wire distribution lines have a higher power transfer capacity, but can require seven poles per kilometre, with spans of 100 m to 150 m. SWER s high line voltage and low current permits the use of low-cost galvanized steel wire. Steel s greater strength permits spans of 400 m or more, reducing the number of poles to two and a half per kilometre. Reinforced concrete poles have been traditionally used in SWER lines because of their low cost, low maintenance, and resistance to water damage, termites, and fungus. Local labour can produce them in most areas, thus lowering costs further. SWER lines tend to be long, with high impedance, so the voltage drop along the line is often a problem, causing poor power quality. Variations in demand cause variation in the delivered voltage. To combat this, some installations have automatic variable transformers at the customer site to keep the received voltage within legal specifications. When used with distributed generation, SWER is substantially more efficient than when it is operated as a single-ended system. For example, some rural installations can offset line losses and charging currents with local PV, wind power, small hydro or other local generation. This can be an excellent value for the electrical distributor, because it reduces the need for more lines. in demand over the next several years. Care should be taken to ensure that conductors are not oversized. However, reducing the conductor size beyond the optimal limit has two very pronounced adverse impacts: 1. Increase in recurring costs because of energy losses through resistive heating. 2. High voltage drops can occur along the line, adversely affecting the quality of power for consumers, especially those towards the end of the line. Both of these impacts also depend on the magnitude of the current transmitted by the line. It is clear that increasing the voltage decreases the current required to meet the same power demand. Doubling the line voltage halves the current, which then reduces the voltage drop to half and line power loss to one quarter. By using higher voltage, the conductor size can be reduced for the same voltage drop and line power loss. This reduces the line cost per kilometre by approximately 20 per cent. When a three-phase line is replaced by a singlephase, a larger and costlier conductor is required to maintain 4 the same voltage drop and power loss. Still, a reduction of 15 per cent results from the conversion to single-phase construction because of the use of two conductors rather than three as well as lesser hardware and lighter construction. DISTRIBUTION TRANSFORMERS The cost of distribution transformers is typically, a small part of the construction cost of the distribution system in rural areas. However, although the cost for constructing a line is generally borne by the hundreds or thousands of consumers served by the line, the capital cost of each transformer is usually borne by the much smaller user group it serves. Depending upon design, this cost can be significant. Moreover, transformers consume power 24 hours a day, independent of the load imposed on them. Hence, the recurring costs incurred in operating transformers can be more significant, and in order to consider the cost of transformers, their life cycle cost, that is, the sum of both their initial capital cost and their operating cost must be considered. Although the conductor for a single-phase line of European configuration would cost 67 per cent of the cost of the three-

168 144 India Infrastructure Report 2007 phase configuration, only 50 per cent of the original power would be transmitted for the same conductor size, line voltage, and voltage regulation. For the North American design, the efficiency decreases even furthers. Even though the rationale of using three-phase lines for increased transmission efficiency is valid, this applies more to high voltage transmission lines and medium voltage lines serving larger load centres. Appropriate Model A cost comparison of the different configurations is given in Figure The selection of configuration depends upon load, Cost Relative to 3-phase line phase 3-phase 4 wire Fig Cost Comparison of Transmission Systems Source: Malengret et al. (1995). Phasephase Phaseneutral SWER location, and population density. While SWER may be the cheapest option for supplying electricity to, households buildings with relatively higher loads such as Panchayat offices, community halls and so on, single-phase, two-wire systems may be better suited. Because of technical reasons, the abovementioned configurations may not be able to support agriculture or small scale industry loads, for which development of cost effective, single-phase to three-phase electronic converters may be a more suitable option. The implementation of such technologies by electrical utility services in these areas may lead to cost reduction while fulfilling increasing demands for better quality services. Single-phase feeders have been considered a less costly alternative as far as installation and maintenance is concerned. In this case, the converter output must operate as a four-wire three-phase system, in order to supply single and three-phase loads (Box 6.1.2). For higher loads, the evaluation of single- phase with three converters versus three-phase system with four wire system may provide insights depending upon various factors for cost savings. For cost effective implementation of grid extension, studies indicating technical and financial comparisons of various configurations carried out by competent authorities with respect to Indian villages should be made public. In addition, the studies should also be carried out while indicating clearly the quality and reliability indices. It is well understood by experts in the area that to carry out an exhaustive comparison, load profiles and mix for villages for ten to fifteen years must be computed. Even though the choice of technology can reduce the cost of grid extension, issues related to electricity supply have mainly to do with commercial sustainability of the service. Box Single-phase versus Three-phase Power Supply Single-phase power supply is adequate for most domestic appliances. However, there are farms, hospitals, workshops, and home industries where three-phase motors and rectifiers would be beneficial. Additionally, improved quality of supply can also be obtained as the converter can dynamically compensate for supply variations as well as impedance voltage drops due to load transients and harmonics due to non-linear loads. Three-phase equipment is generally more efficient, less expensive, and more readily available than the single-phase equivalent. Single-phase motors have inferior characteristics such as low starting torque, very high starting currents and pulsating torques which lead to mechanical failure and noise. In addition, three-phase supply enables the use of a simple star-delta starter which reduces the starting currents for loads such as pumps and fans. Single to three-phase converters are easily available. The use of two-wire, single-phase configuration of either European or North American variant provides several ways of reducing the cost of grid extension for rural electrification. A smaller length of conductor is required (even though a somewhat larger conductor or a higher voltage might be needed, depending on the projected demand). Fewer pole-top assemblies are required (furthermore a cross-arm and braces are not required if the North American configuration is used). In case cross arms are used, wider spacing of the pole-top insulators permits longer spans, and therefore, fewer poles are required between conductors before being limited by clearances (unless provision must be made to later convert to a three-phase line; in this case using mid-span line spacers is another option sometimes used). Fewer conductors would mean less transverse wind-loading and may allow the use of smaller diameter poles. The stringing of lines, installation of pole-top hardware, and mounting of transformers are easier and do not require the use of any heavy equipment, and consequently, reduce cost. SWER could be an acceptable model for supplying power in residential units.

169 Electrification and Bio-energy Options in Rural India 145 Distributed Generation Distributed generation is an integral part of the RGGVY to achieve its target. Many states have started using distributed generation for electrification of remote villages (Table A6.1.3). Even before it was enshrined in the EA2003 Act, many remote areas used micro-hydel plants to provide electricity in villages (Figure 6.1.5). The Janaki Chatti Micro-Hydel Committee is an outstanding example of a rural electricity co-operative. However, due to shortage of parts and trained mechanics, villagers used to go without lights for many days when there was any breakdown of generator or turbine. We have referred to distributed generation earlier without outlining its status, characteristics, costs, and efficiency parameters. Just to reiterate, distributed generation falls within the framework of EA2003 and it is attractive for electrically remote villages because it has many benefits: 1. The generator can be sited close to the end-user, thus decreasing transmission and distribution costs and electrical losses. 2. Sites for small generators are easier to find. 3. Distributed generators offer reduced planning and installation time. 4. Because the distributed generation units are distributed, the system may be more reliable. One unit can be removed for maintenance or service with only a moderate effect on the rest of the power distribution system. This is especially important for new technologies where the long-term reliability is not proven. 5. Newer distributed generation technologies offer an environmentally clean and low noise source of power. 6. Newer distributed generators can run on multiple types of fuels. This allows flexibility and reduction in cost of the infrastructure required to get the fuel to the generator. 7. The preferred fuel source differs in various parts of the world. However, the required quality of the selected fuel may be more important with certain new distributed generation technologies. 8. Newer distributed generators can run on fuels generated from biogasification. Biomass (wood, hog waste, agricultural by products) is a truly renewable source of fuel in most developing countries, and especially, in agricultural regions. 9. Power is readily available and in has improved quality and reliability as compared to power produced from central generating stations. 10. Depending on the nature of fuel used, electricity prices could be lower than power from central plants. Status of Distributed Generation in India The present installed capacity of distributed generation is about 13,000MW (10,000MW diesel, 3000MW renewables). The majority of this is accounted for by diesel engines that are used for back-up power (in the event of grid failure) and operate at very low load factors. The share of the energy generation from distributed generation is marginal (about 2 3 per cent of the total generation). Apart from the diesel engines, the distributed generation options that have been promoted in India are modern renewables. Figure shows the installed capacities of different renewable distributed generation technologies in India. Fig Notice of the Janaki Chatti Micro-Hydel Committee at the Panchayat Characteristics of Distribution Generation Distributed generations can be characterized on the basis of the fuel, engine, capacity, and cost. Table indicates technology and achievable power per module. In India, depending upon the size of the village, electricity requirements and population, different options for distributed generation are available. In Himachal, J.K., Punjab, and Haryana, where requirements may be much higher compared to Orissa, M.P., and Bihar the combined cycle or Internal Combustion Engine can be

170 146 India Infrastructure Report 2007 Installed Capacity (MW) Wind Small Hydro Fig Installed Capacities of Renewals in India Source: Banerjee (2006). Bio Combination Bio Cogen Gasifiers Waste Energy Solar PV considered. Possible applications, and the relative merits and demerits of different distributed generation technologies are listed in Table A All technologies listed in Table A6.1.1 may not be (i) fully tested, or (ii) economical for rural electrification at present. Cost and efficiency comparison of distributed generation technologies are listed in Table A6.1.2 for various technologies. While it is important in the context of distributed generation to demonstrate availability of technology, it is also important to focus on operational issues related to (i) mini grid of distributed generation and (ii) integrating distributed generation technologies to the existing grid. There are technical issues like islanding, 5 short circuit levels, protection coordination, and switching in/out methodologies. The interconnection of distributed generation with the distribution network requires a closer look to minimize safety and reliability risks. Table Technologies for distributed generation Technology Combined cycle gas T. Internal combustion engines Combustion turbine Micro-Turbines Renewable Small hydro Micro hydro Wind turbine Photovoltaic arrays Solar thermal, central receiver Solar thermal, Lutz system Biomass, e.g. based on Gasification Fuel cells (phosphoric acid) Battery storage Typical available size per module MW 5kW 10 MW MW 35 kw 1MW MW 25 kw 1MW 200 W 3MW 20 W 100 kw 1 10 MW MW 100 kw 20 MW 200 kw 2MW 500 kw 5MW Source: Linden (1999), IEA, Duffie et al. (2006). used. As the size of the village gets smaller and smaller, battery storage systems can be deployed. However, fuel transportation like gas or diesel can become a bottleneck. Punjab, Haryana, and UP, where cows and cattle dung collection and its use is prevalent, biomass may be a possible solution. In states like Bihar, Orissa, and Rajasthan where growing of plants and seeds is easy because of fallow land, bio diesel may be made available locally. The cost of electricity can be reduced significantly if distributed generations can run on locally available fuels. One must keep in mind that local fuel may vary seasonally. Further, environmental impact and capital cost are also required to be Mini-Grids for Distributed Generation Systems A mini-grid refers to mini-power plants that supply 220 volts 50 Hz three-phase AC electricity through low-tension distribution networks to households for domestic use, commercial activities (such as shops, cycle repair shops, flour mills), and community requirements such as drinking water supply and street lighting. They use state-of-the-art batteries and inverters to ensure long life and reliable field performance. Mini-grids can be classified in three different classes as follows: 1. Mini-grid with only renewable generation. 2. Mini-grid with a mix of renewable and diesel generators/ distributed generation. 3. Mini-grid based on only distributed generation. The major challenges are financing models because in most of the cases the government provides the capital cost and subsidy-sustainability becomes the major concern. Second, there are technical issues related to quality and stability. Among mini grids with only renewable generation, continuity of fuel supply can be an issue. Since fuel supply varies seasonally, the stability of input can be achieved by the hybrid model where electricity is partially generated with diesel generators. Also the mini-grid uses inverters and battery systems which affect the quality of supply. Mini-grids solely based on the diesel sets have issues related with environment and cost of generation. The renewable cost is generally subsidized so the cost may be lower. The insulation and protection coordination becomes a major challenge because of varying sources of generation. Supervisory Control and Data Acquisition (SCADA) systems for such mini-grids are available but benchmarking of design 5 The concept of islanding is to prevent the potentially hazardous situation where a distributed generation system may still be feeding electricity into the grid during a power outage while a lineman may think that the line is dead. Islanding prevents this situation from occurring.

171 Electrification and Bio-energy Options in Rural India 147 and performance has to be established. Maintenance, repair, and replacement in mini-grid are causes for concern because of non-standardization of equipment used in the mini-grids. Interconnection between Grid and Distributed Generation Systems Grid interconnection may be important in certain areas where excess electricity from distributed generation 6 can be fed back to the grid. Some of the important technical issues in this area are: 1. The clear specification of the required performance characteristics of the distributed generation scheme once it is connected to the host electrical network. This would typically include voltage regulation requirements, response to network faults, and voltage fluctuations, protection and control requirements, and so on. 2. The clear specification of the performance type testing that will be required prior to operational acceptance of the distributed generation system by the host network. 3. The influence of grid operation on the performance of distributed generation is also an important issue. In India, the grid system itself exists in non-ideal conditions. Therefore, the full responsibility of malfunctioning can be assigned to distributed generation. Hence, clear cut specifications must be defined for the Grid Code of distributed generation. For example, weak grid and poor protection coordination can damage distributed generation due to travelling of disturbances on the grid. 4. Maintenance and inspection of distributed generation must be done on a regular basis, and therefore, repair and replacement policy should be part of technical specifications. 5. Most of the new distributed generation technologies are connected to the network via an electronic interface. The class of rotating machines is represented by reciprocating engines, gas turbines, and some wind turbines. There are several substantial differences in application and influence on the network of the two different systems. For example, short circuit current for the induction and synchronous generator can reach per cent of rated power current, while converter connected generator at the same site will produce only about per cent current. 6. Distributed generators may introduce harmonics. In case of inverters 7 there has been particular concern over the possible harmonic current contributions they may cause. Fortunately, these concerns are in part due to the older inverter design. Most new inverter designs are capable of 6 Some sugar mills feed their distributed generation power to the grid. 7 Inverters convert low voltage DC, for example from a solar photovoltaic cell to high voltage AC which can run domestic appliances. generating a very clean output; furthermore, they are able to perform the function of harmonic filter. 7. Reverse power flow may cause over-voltage problems. Selection of a proper power factor of the distributed generation unit is one countermeasure. It is necessary to conduct further studies on the effect on distribution line voltage variation. Short-circuit current from a distributed generation unit may cause malfunction of over-current relays and fuses. It may be necessary to develop a new fault detection system. One obstacle may be the need for ensuring safety of distributed generation units. The possibility of operating as active filters reducing distribution system harmonics could make distributed generation units with electronic interface more attractive from the point of view of quality service. Criteria for Selection For electrification, rural areas can be classified as (i) near-grid, (ii) grid-remote, and (iii) not far from a grid. Three options exist for rural electrification: grid connectivity, distributed generation, or a mix of both. Distributed generation means modular electric generation or storage, located near the point of use. These are primarily stand-alone systems for exclusive supply to a small community. On the face of it, the choice of the electrification model seems obvious: grid connectivity for near-grid and distributed generation for grid-remote rural areas. Unfortunately, given the state of the power sector (shortages, poor quality and irregular supply, poor maintenance record) and the costs and sustainability issues associated with distributed generation, selecting a model for rural electrification is not straightforward. So, how does one identify the appropriate option? Some important parameters could be: 1. Infrastructure Costs For grid connectivity, the infrastructure costs are directly proportional to the distance of a rural area from an existing grid. Hence, remoteness from a grid, along with the land topography, becomes a key decision point. Another obvious factor affecting economies-of-scale operation and hence, costs, is the load that will be connected to the grid. 2. Operation and Maintenance (O&M) O&M includes both the financial and service aspects. More specifically it relates to (i) technical losses, (ii) speed of addressing faults, and (iii) component replacement costs. The ability to handle non-technical losses in the grid, given the intense politics and the rigid caste/class structure in village environments, could be an important consideration. The cost of fuel, especially for distributed generation technologies, becomes an important factor.

172 148 India Infrastructure Report Nature of Load For agro-industry and irrigation, where the load requirement is both high and continuous, grid electricity is preferable with distributed generation providing back-up power. In an agriculturally predominant rural sector, grid electricity can also be diverted to households where the primary use is for lighting and television. A word of caution is warranted here: fixed tariffs could lead to large-scale use of electricity for cooking. There may be a need to separate household and industrial loads. Household loads are normally single-phase, while industrial loads are three-phase. 4. Quality and Regularity of Supply Inadequate and irregular grid power supply has a well-known cascading effect, not only on the groundwater levels, but also adverse effects on transformers and loads connected to the grid. Moreover, the poor quality of electricity means higher costs, both in terms of rugged equipment and more frequent maintenance requirements. 5. Sustainability The issues to be addressed here are: life cycle of the electrical power source and scalability. The basic issue here is longevity of the selected rural electrification model. Clearly, sustainability is a function of fuel cost and supply, tariffs, environmental degradation and so on. Scalability refers to the expansion of the distribution network to accommodate increased load in a rural area with minimum cost. Scalability is important in the light of the RGGVY s objectives of initially electrifying only 10 per cent of the households. ALTERNATIVES IN POWER DISTRIBUTION IN RURAL INDIA In Indian conditions, most of the market driven electricity distribution models may not work in the rural sector. In fact, the models envisaged in Electricity Act 2003 need to be adapted to local realities to succeed due to heavy or full subsidy on electricity in rural areas. Inculcating payment practices is an important component because the rural consumers often do not pay the bill and under political pressure, the government waives it off at a later date. Given thinly dispersed rural population with limited purchasing power, electricity distribution models need to be different from urban models. GoI, through the REC, is pushing for franchisee model. Apart, from a franchisee model (Table A6.1.4), co-operative model and stand alone rural energy service company are two models which can be useful in the Indian context and fall within the EA2003. Section 5 of the Electricity Act 2003 states The Central Government shall formulate a national policy, in consultation with the State Governments & the State Commissions, for rural electrification and bulk purchase of power and management of local distribution in rural areas through Panchayat Institutions, users associations, cooperative societies, non-governmental organizations or franchisees. Franchisee Model The major problem of rural consumers is meagre financial resources (which limit their freedom to consume electricity), low propensity to save, domestic debt burden, frequent waiver of electricity dues by the government, unsatisfactory customer service and intermittent power supply, causing distrust of the utility. SEBs have started using the franchisee model to recover costs from consumers in rural areas. A franchisee of an electricity service company provides the services to consumer with respect to meter reading, billing, and collection. One of the successful examples is the Vidyut Pratinidhi of BESCOM (Box 6.1.3). Rural Electric Cooperatives The USP of rural electric cooperatives has been to include the village residents as shareholders. The broad objectives of the rural electric cooperatives are to: 1. extend the electrical network in their areas quickly and economically; 2. provide proper service to the consumers taking into account local conditions; 3. support the wider programme of development of the area for increasing agricultural production and stimulating the growth of rural industries; and 4. ensure local participation in the management of rural distribution of electricity. The success of the Bangladesh rural electrification programme, which is in line with the US model, is a good example. The major issue here is the functional autonomy of the cooperatives, with the government providing financial and technical assistance as well as laying down some the ground rules for the operation of cooperatives. In Asia, two different cooperative models are functioning successfully in the Philippines and Bangladesh (NRECA 2002). US Model The salient features of the rural electrification model in USA are listed below: 1. Farmers were required to form cooperatives. Representatives to the cooperatives were locally elected. 2. Cooperatives had to follow certain rules such as maintenance of reserve funds.

173 Electrification and Bio-energy Options in Rural India 149 Box Gram Vidyut Pratinidhi B. R. Vasantha Kumar, Vasuki and Karthikeya Pisupati Bangalore Electricity Supply Company Ltd. (BESCOM), a fully owned Company of Government of Karnataka, was incorporated on It covers an area of 41,092 sq km with a population of over 168 lakh and serving over 55 lakh consumers. The company has three operating zones Bangalore Metropolitan Area Zone, Bangalore Rural Area Zone, and Chitradurga Zone. The drought conditions that prevailed in the state in and paved the way for deterioration in billing and collection efficiency levels in rural areas. The drought situation also encouraged some of the unscrupulous rural consumers to resort to theft of power. As a result of this situation the power purchase cost increased across the Company on the one hand (as more units had to be supplied to the drought afflicted rural consumers for irrigating their lands) while, on the other, revenues of the company from rural areas started declining. THE GVP MODEL FRAMEWORK BESCOM in early 2003 decided to involve the local unemployed and qualified rural citizens as Gram Vidyut Prathinidhis (GVPs) in some of the distribution activities of BESCOM within the Gram Panchayat area so as to carry out some of the commercial functions in electricity distribution. The idea behind this innovation was that in the eyes of rural consumers, the credibility of a local person will be far higher as compared to a utility employee. By involving such persons for the commercial activities, BESCOM felt that it could create a Win-Win situation for both the parties i.e., utility as well as the rural consumers. BESCOM, on its part, would increase its commercial efficiency and the consumers on their part could expect a better consumer service from BESCOM if a local person was involved. Eligibility criteria to become a GVP are that the person should be a resident of the panchayat, he/she should have an ITI or engineering diploma or secondary level education with knowledge of billing and collection. He should be able to provide 15 days Revenue Billing as Bank Guarantee for the Period of Contract. The responsibilities of a GVP include meter reading, billing, bill distribution and revenue collection, depositing the collections with the utility, registering complaints and forwarding to Utility, facilitating attendance to the grievances of Low Tension consumers Viz. Domestic, AEH, Commercial, Small and Medium Industries up to 40 H.P. (excluding water supply, streetlights) and providing feed back to the utility on a regular basis. A draft contract document outlining terms of contract was prepared setting out the rights and obligations of BESCOM i.e. ensuring non-discriminatory behaviour towards the GVP in case of power supply shortage, responsibility for all O&M activities in the gram panchayat area, adequately supporting the GVP with the necessary hardware required for metering. The legal status of a GVP is not of an employee of BESCOM. RESULTS Based on the highly satisfactory performance of GVPs, improvement in the levels of customer satisfaction and revenue billing and collection efficiencies in the pilot areas BESCOM decided to extend the pilot project to all the rural areas of BESCOM. As of now over 948 GVPs have been appointed in 6 phases and are working across 6 districts of BESCOM (Table B ). Table B Phasing in of GVPs in BESCOM Particulars Phase-I Phase-II Phase-III Phase-IV Phase-V Phase-VI Month Aug. 03 Oct. 03 Dec. 03 March 04 June 04 Jan. 05 No s employed Progressive Total As of August 2005, out of 948 GVPs appointed, 935 are working in the rural areas of BESCOM. Services of some Gram Vidyuth Prathinidhis were terminated as their performance was not satisfactory and some others resigned on their own due to personal reasons. As on May 2006, 880 GVPs are working with average collection 125 per cent to 130 per cent to the baseline target. More than 70 per cent of the GVPs have been collecting more than the base line target. Since the GVP is a local resident and is visible to the public, cases of power theft have come down in the rural areas. Besides, as the GVP has to achieve the baseline target month on month he is motivated to bring cases of theft to the notice of BESCOM as any non-achievement of baseline target by him for a consecutive period of three months would be detrimental to him. As per the MOU signed by BESCOM with the GVP, non-achievement of baseline target for a continuous period of 3 months entails termination of contract with the GVP. GVPs are acting as informal communication channels between the Company and the Consumers. Sensitive decisions like increase in hours of load shedding, rostering, disconnection of agriculture installations for non-payment, are informally communicated to the rural consumers through the GVPs besides administrative action. Overall, the GVPs have facilitated improved electricity supply in villages, consumer satisfaction and financial performance of BESCOM. Besides, it has provided direct employment to approximately 1000 educated youth in rural Bangalore region. Note: Views expressed here are of the authors of the box.

174 150 India Infrastructure Report For infrastructure creation, loans were given at low interest rates with 40-year repayment periods. 4. Parties were given loans on the area coverage basis and not point-to-point basis. That is, every unit in a particular area had to be electrified. Even here cooperatives were preferred. 5. Loans, with long payback periods, were given for wiring and purchase of standardized equipment to increase demand. This facilitated load promotion leading to economies of scale. 6. The electricity authority fulfilled a supervisory role for tasks such as inspection of infrastructure. Philippines Model In the Philippines the boards of cooperatives were elected locally. However, the planning and operation was handled by professional managers who were guided by the NEA (National Electrification Authority). Here, loans were not made to the co-ops, but NEA built the systems and then obligated the coops to generate the revenue to pay back loans. The operating budget of the NEA depended on the revenues generated by the cooperatives. Started in the mid-1970s and continued through the 1980s, the cooperative structure started crumbling. A World Bank project performance audit in 1985 found a growing degree of corruption, weak oversight, and dramatically worsened performance in billings and collection rates. Co-ops were used by directors and managers as stepping stones to political power and appointments were sought and granted for this purpose. In some cases, co-ops funds were diverted to political or personal ends, leaving them deep in debt. Much of the blame was placed on the Marcos era when democratic rule was virtually suspended. During the period, the report indicated, NEA s strong leadership and oversight role was subverted by the worsening political environment. However, a number of the co-ops appeared to be immune to this trend. The report found that twenty-two of the coops were operating as well-managed commercial entities, and this was attributable to the presence of dedicated professional managers. With the help of donors led by USAID, the World Bank, and Japan s OECF, the co-ops were restored to their earlier state. In 2002, there were 119 electric cooperatives scattered throughout the Philippines islands, with a combined 5 million service connections that provided electricity to some 30 million people or 85 per cent of the rural population. Bangladesh The Bangladesh co-operatives, known as Palii Bidyut Samities (PBS) were modelled on similar lines as the Philippines. However, the REB (Rural Electrification Board) directly controls the financial operations of the co-ops. Co-ops are not independent private business entities and do not retain or control their operating margins. REB has established and energized 67 PBSs to date, constructed over 125,000 kilometres of line, and made 3.8 million service connections, giving electricity to over 15 million people. The programme serves only 20 per cent of the country s rural population, but new construction is proceeding at a rapid pace, providing 350,000 new connections a year. At the co-op level, the results are also quite impressive. There have been no defaults on debt, and bill collection rates have remained in the range of 97 per cent throughout the programme (government users are least compliant). Average system losses, both technical and nontechnical, are 16 per cent. Indian Experience Rural Electrification Corporation has so far sanctioned fortyone Rural Electrification Cooperatives in the country spread over twelve States. As on date, thirty-three are in operation as eight societies (three in Rajasthan and one each in the States of Bihar, Gujarat, Jammu & Kashmir, Uttar Pradesh, and Orissa) have since been taken over by the respective State Electricity Boards (SEBs). The thirty-three rural electrification Cooperatives Societies, presently in operation, are located in the states of Madhya Pradesh (17), Andhra Pradesh (9), Tamil Nadu (3), Maharashtra (1), Karnataka (1), and West Bengal (2). With a few exceptions the rural electric cooperatives are working under severe financial, institutional, and organizational constraints and appear to be struggling for survival. Reasons for this state of affairs vary from society to society. It is observed that these arise primarily out of certain internal and external drawbacks that these societies are presently saddled with. These can be broadly classified as: 1. Lack of freedom to fix tariff on commercial basis for different types of consumers in their area of operation. 2. Unfavourable load mix that is often forced on these societies on account of SEB s proximity and influence with the state government. 3. As outcomes of the Cooperative Societies Act, the management of these societies is highly susceptible to fluctuations in fortunes of political parties operating in the area, thereby affecting objectivity and professionalism in their own decision making. 4. Regulatory powers given to government under the Act for checking irresponsibility and delinquency in functioning of these bodies are at times misused to further the state governments own political priorities and compulsions. 5. Subjective and politically coloured functioning of the top cooperative management permeates downwards, resulting in inefficiency and corruption creeping in at the operational levels.

175 Electrification and Bio-energy Options in Rural India 151 As a result what one often sees is narrow political compulsions giving rise to subjectivity and irresponsibility within these organizations, very often matched only by similar subjectivity and irresponsibility by authorities overseeing and regulating functioning of these bodies. In spite of these limitations there are a few successful co-operative societies. Anakapalle Rural Electric Co-opeartive is an example of a successful rural electricity co-operative (Box 6.1.5). Proposed Model for India Given its success, the Philippines or the Bangladesh model appears to be the logical choice for India. Both these countries, in essence, have decentralized rural electrification cooperatives with strong central coordination through their rural electrification utilities. The major issues therefore are: (i) autonomy in the functioning of the co-ops and (ii) setting up of transparent systems to prevent politicization. The predominant objective should be to keep politicians and party politics out of the picture. Here one can draw from the AMUL model (Manikutty, 2002). The village level activities should be controlled by a co-operative with all residents of the village as members. These members should select a managing committee for overseeing and supervising the activities of the co-op. The major functions of the co-ops could be: 1. Monitoring the implementation of infrastructure for electrification. 2. Ensuring timely O&M. 3. Collecting dues from the residents. 4. Organizing education and training of residents for energy efficiency and conservation. 5. Providing inputs for capacity addition. High level of planning is essential right from the outset to make the cooperative model a success. As in the Bangladesh model, detailed guidelines for financial management, engineering, and operations, which the cooperatives must follow, should be formulated. This role was carried out by the Rural Electrification Board in Bangladesh (Dubash, 2004). Who will carry out this role in India? Rural electric supply and distribution has been the responsibility of an array of institutions. Historically, SEBs have been involved with developing and implementing rural electrification investments. Of late, central and private utilities have also become involved in rural electrification. 8 National Hydroelectric Power Corporation (NHPC) has taken up rural electrification projects in West Bengal, Bihar, Jammu and Kashmir, Orissa, and Chhattisgarh. NTPC Ltd is taking up Distributed Generation projects in remote un-electrified villages with the objective of demonstrating sustainable business models for such projects. Reliance Energy Ltd too has entered into an agreement with the Uttar Pradesh 8 The Hindu Business Line (15 December 2005 and 20 May 2006). Government to electrify over 600 villages near Agra, Aligarh, Hathras, and Mathura. REL plans to work for 100 per cent electrification of these villages, along with construction of seven 33 KV substations in the four districts, by March Mentoring and guiding the cooperatives can therefore, in principle, be accomplished by the utility companies. But, how does one ensure that the utilities, particularly the SEBs, do not meddle with the activities or harass the cooperatives? Dealing with utilities will not be easy for village co-ops on an individual basis. Hence, there may be a need to create a regional committee, which comprises of Chairmen of the village coops, an administrative, and a utility official at the district level. The functions of the district committee could be: 1. Dispute resolution. 2. Capacity planning. 3. Interfacing with the service providers. 4. Negotiating bulk rates for both distributed generation and grid supply. Is the Cooperative Model Feasible in India? There is a general feeling that the villagers are not capable of running their cooperatives, partly due to their illiteracy and partly due to village politics. However, several examples of co-operatives exist which illustrate that with the help of NGOs, villagers have found and managed solutions to their own problems. This is especially true when their collective interests are at stake. The Aravari River Parliament is an inspirational example that shows how rural areas can effectively manage their own affairs (Box 6.1.4). Anakapalle Rural Electricity Co-operative is an outstanding example of a successful cooperative in electricity distribution in rural areas (Box 6.1.5). Integrated Rural Services Company An integrated rural service company is the third type of model which can distribute electricity in villages. While the concept of energy service companies (ESCOs) is very well established, and in many cases successful, primarily in developing countries, the concept of rural energy service company (RESCO) is relatively new. RESCOs do exist in the form of cooperatives and private/public energy service providers. However, in developing countries, RESCOs have been surviving on government subsidies, because the scale of operation is small and widely/thinly dispersed, while the cost of services is very high. Thus, the real challenge lies in finding ways to deliver affordable services to rural communities that allow covering the cost. When the utilities find that it is very costly to create peaking facilities, they diversify into new activities such as demand side management. When a business venture becomes less profitable, it tries to diversify into similar activities and integrate them

176 152 India Infrastructure Report 2007 Box The Arvari River Parliament Arvari is a small river in the District of Rajasthan. The river had been reduced to a monsoon drain over the decades, while the region was reeling under chronic drought condition. The process of rejuvenation of this river was started in the year 1987 by local groups and inhabitants through small water harvesting structures, called Johads (especially in the rural areas of Rajasthan), Johads are traditional earthen dams built to harvest each single drop of rainwater falling on the ground. From1996 onwards the river regained its full flow and became perennial. As soon as the river had been revived and fish were seen to be multiplying, the state government awarded the contract of commercial fishing in the Arvari to a private contractor. This evoked stiff resistance from the local people who had made it their mission to revive and sustain the river. While most of the local inhabitants were vegetarian and not really interested in acquiring the fish harvest for themselves, they questioned the very basis of this governmental highhandedness and asked, Who owned the river? If today it is the fish, tomorrow it could be the water. The government, through the contractor, was intruding into the community s domain its right over the use of water which had been developed as a resource by the user group through painstaking effort. To discuss all these matters a Jan Sunwai (Public Hearing) was organized on 19th December 1998 on the banks of River Arvari. There was a unanimous decision to form a River Parliament to protect the rights of the people who brought the river back. This River Parliament would work towards the management and conservation of the river drawing up its own rules, regulations and laws keeping the community s needs and priorities in mind. The decisions taken by the Parliament would be binding upon the user community. So Arvari Parliament was formally formed on 26th January 1999 and the Arvari Sansad met for the first time in Hamirpur on that day. It had representation from 72 villages. This Parliament framed 11 rules for the use of Arvari waters. It meets four times a year and if required they can meet up in the face of any emergency. It has 142 members nominated by the respective village assemblies. Every village up to 500 hectares in size appoints one member. A Coordination Committee comprising members selected by the Parliament handles the operations and ensures that the rules are observed. The laws, rules and regulations for the proper management, conservation and utilization of the Arvari river, are framed upon the following considerations: 1. regulation of surface water irrigation from Arvari river and irrigation from the wells. 2. ensuring that crop production and marketing are free from middle men and setting up an equitable system, which fulfills the needs of the local people. 3. prohibiting sale of water and protecting the fish present in the river. 4. prohibiting sale of land to non-members and taking decisions regarding these issues as and when they arise. 5. working towards greening of the river basin and protecting the surrounding area from damage due to excessive mining. 6. prohibiting hunting of animals and illegal felling of trees in the Arvari River Area. 7. exploring various traditional methods of water conservation to revive these practices towards future sustainability of water resources. 8. preventing over-exploitation of water and promoting water conservation. 9. establishing an active system for the management of the river. 10. delineating the role of the Jal Sansad (water Parliament) and Village Gram Sabha towards the management of the water sources present in the villages. Subsequently, a liquor company expressed interest in setting a beer factory in the region as barley is the main crop here and water was available in plenty. The villagers, under the auspices of the Arvari Sansad, got together to ensure that no industrial concern exploited the river s resources. Source: Kishore (2003). Box Anakapalle Rural Electric Co-op 9 Vijay Mahajan, Preeti Sahai, and Sandeep Pasrija The Anakapalle Rural Electric Cooperative Society Ltd. (ARECS) in the Vishakhapatnam District of Andhra Pradesh was formed in 1974 with a mission to make electrical energy available to its members to promote the economic development in the area. In 1976, the Cooperative took over distribution operations and maintenance from the State Electricity Board. Thirty years later, with over 96 thousand members, the cooperative has achieved 100 per cent village electrification, increased the number of service connections by 2400 per cent, and is debt free and profitable. The expansion and outreach that the ARECS has 9 This case study is based on a presentation made by Sri Raghav Rao, Managing Director, Anakpalle Rural Electric Co-operative Society, in a workshop held at the Institute of Rural Management, Anand from July 24th to 27th, 2006 (Rao, 2006).

177 Electrification and Bio-energy Options in Rural India 153 achieved in a span of twenty years resulted from an amalgamation of community ownership, a supportive government framework and debt financing. EVOLUTION In addition to the initial cooperative share capital, the AP State Government invested a start-up capital of Rs 45 lakh in the cooperative. While this gave it an initial boost, it had to return this amount in twenty-five yearly instalments. REC issued an initial loan of Rs 115 lakh which was used for the first project undertaken by the cooperative and a second loan of Rs lakh was issued in As both the transmission and consumer tariffs were set by the state (currently A.P. Electricity Regulatory Commission), the viability of ARECS rested on efficiency in distribution (both technical and non-technical) and consistency in bill collections from consumers and healthy demand growth. During the first ten years, based on the amount of energy purchased and sold by the cooperative, line loss was reduced by 1/5th from per cent to per cent. There was a fourfold increase in revenue demand, and ARECS used loans to expand distribution capacity to accommodate the 400 per cent increase in overall consumption. By this time, all 153 villages and nearby settlements were being serviced by ARECS. Table B below captures ARECS s outreach at various points from inception to date. The loans from 1985 till 2004 (when all debts were repaid) of almost Rs 6 crore along with the equity due to growth in membership, went towards further expansion. The actual geographic outreach, while saturated by 1985, did not stop growth in demand, supply and infrastructure expansion. A consistent line loss decrease of approximately 5 per cent for each ensuing 5 year period highlights an emphasis on efficiency and collections. By 2006, the inherited line loss of 31 per cent was reduced to per cent and the number of service connections increased from 3707 to 97,107. Table B The growth of ARECS in Terms of Outreach, Demand, and Supply Taken over from AP SEB on Particulars No. of Villages Electrified No. of Hamlets Electrified Weaker Section Colonies HT Line km LT Line km Transformers No KVA Total Service Connections* Value of existing assets (Rs in lakh) 22.2 NA NA NA Consumption (Units in lakh) Demand (Rs in lakh) per cent Line Loss Note: * Service connections include agriculture, industrial, domestic, commercial, street lights, and miscellaneous. OPERATIONS The ARECS currently provides the 97,107 service connections over an area covering 1115 sq km. The cooperative currently earns monthly revenues of Rs 1.4 crore, and the operations are supported by a staff of 123 employees. The cooperative has realized the right mixture of technical capacity, effective processes for collections and monitoring, customer support, and steady expansion. Customers have access to Consumer Service Centres (CSC) at seven locations across the service area of five mandals. These centres provide operations and maintenance services, problem resolution as well as monitoring and addressing of accumulating arrears and billing conflicts. Assistant Project Engineers oversee the O&M related issues, while the Junior Accounts Officers and support staff focus on revenue collection. In addition to these services, the cooperative conducts regular Member Education Programmes and has two General Body Meetings. These efforts focus largely on membership involvement in the cooperative and the various activities that are undertaken.

178 154 India Infrastructure Report 2007 Strategic decisions over the past three decades have also ensured the health and longevity of the cooperative. As an example, agriculture related consumption (on average over the past 3 decades) is 37 per cent of total consumption and ranks second only to the 42 per cent of domestic consumption. As electricity demand related to agriculture requires reliable supply for specific hours in a day, the cooperative observed its adverse impact on the other types of consumption (domestic, commercial, industrial, street lights and so on) which require an even supply of power during the entire day. To isolate the unique demand requirements for agriculture, Rs 3.5 crore was invested to separate the agriculture related load feeders from the other load feeders. This has ensured better service to the larger customer base while accommodating the needs of agriculture, an important economic activity in the area. FINANCIAL ARRANGEMENTS As a service provider of rural electricity, ARECS enjoys good financial health. The assets, over the past 30 years, have supported the increased demand, and their value has grown from Rs lakh to Rs lakh. The Cooperative s equity stands at Rs lakh, with 90 per cent of the contributions coming from its 96,140 members. With monthly revenue of Rs 1.4 crore, 95 per cent of the revenue is generated on a monthly basis demonstrating successful collections. The Rural Electrification Corporation has lent Rs lakh to ARECS for five separate projects from 1977 to ARECS repaid the entire debt eight years ahead of schedule in 2003 using surplus funds from operations. A majority of the initial equity of Rs 45 lakh contributed by the state of Andhra Pradesh was returned ahead of schedule in 1996 with the State Electricity Board choosing to keep Rs 10 lakh as share capital. Today, a debt free ARECS has cumulative profits of Rs lakh. It is worth noting that despite both, costs (transmission tariffs) and revenue rates (consumer tariffs) being set by the A.P. Regulatory Commission, the Cooperative has demonstrated financial viability. Yearly audits both validate and ensure the financial health of the Cooperative. LESSONS FROM ARECS The operations, growth, and financial health of ARECS shed significant light on the power of user involvement and the impact of community based institutional arrangements on the delivery of infrastructure services and its consumption. The Government played a critical role in providing the necessary start up equity to transfer the distribution infrastructure to the Cooperative. As this equity came in the form of a twenty-five year loan that was eventually repaid by the cooperative, it can be seen as largely catalytic in nature. While the generation and transmission were beyond the scope of ARECS, the Rural Electrification Corporation provided the necessary debt financing to enable the cooperative to meet increasing demand and for strategic projects to improve distribution and customer service. The community investment, in the form of shares in the Cooperative, combined with the start-up contributions from the state government provided sufficient equity to take on these loans. The cooperative society was able to establish a culture of payment for service and responsive customer support. Factors such as a 50 per cent decrease in line loss from inception till today and a substantial increase in user demand, with the change in management from state government to an institution of the people, strongly suggest that the rural customer base responded favourably to customer service and was more willing to pay user fees. This same institution also used loans to fund and implement the successful expansion of distribution infrastructure without any subsidies or financial support from the government. While prompt and complete payment for bulk power purchase provides a sustainable financial relationship with the transmission company, ARECS performance with distribution infrastructure also demonstrates the potential rural demand and its ability to pay, and therefore, the viability for private financing to enter into the distribution, transmission and generation of electricity. ARECS clearly demonstrates and substantiates the importance of user involvement in the rural context. The institutional arrangements do influence the user s demand, participation and contribution to infrastructure. The government is capable of supporting such an arrangement, providing the necessary regulatory framework and filling the financial viability gap. Finally, we have seen the demonstration of success when interests of the service provider and the user merge and as an outcome, create scope for private financing to further the outreach of infrastructure to rural India. Note: Views expressed here are of the authors of the box. with upstream and downstream activities of the business venture. Similarly, a company in a rural area may start with the aim of providing comprehensive rural service to cater to all major needs of rural communities. Such a rural service company (RUSCO) would not only provide the rural services but also promote opportunities for rural community for starting rural industries. The RUSCOs may also provide raw materials for rural industries and buy out the finished products to sell to other market outlets. The reason for thinking in this direction is that for any business to survive and sustain, it must consider the market characteristics where it plans to operate, as well as adjust appropriately and continuously to market developments. In other words, for any rural service company to be successful, it has to be designed in a way that creates the potential for its financial viability. In this context, it has to consider:

179 Electrification and Bio-energy Options in Rural India 155 Box RUSCO A Better Channel for Rural Subsidies Many developing country governments are providing substantial subsidies for agriculture activities and rural services. Subsidies are available for farm/agriculture inputs, such as, fertilizers, electricity, water, and so on. Furthermore, most of transportation facilities and activities are funded by the government without enough revenue to cover costs. While there is a need to rationalize the various types of subsidies, governments may begin thinking about policies and strategies that would promote the establishment of the RUSCO-type organizations as they may fit in their respective rural areas and conditions, as well as develop frameworks on handing over of the existing rural services facilities to this type of institutions. It is important to note that assets would have to be transferred to RUSCOs at a nominal reasonable cost, which may be collected over a long period of time. As RUSCOs ownership structure may vary from rural not-for-profit cooperatives to for-profit private businesses, the subsidization of existing and new physical assets is a delicate policy issue that needs careful attention. Considering the rural development status in many developing countries, it has to be said that subsidies are still a must for the delivery of many rural services. However, they must be judiciously planned and targetted. Subsidies may be channelled through local governments to the RUSCOs. The major advantages of utilizing RUSCOs as the primary channel for subsidies for rural services are the following: 1. Less administrative burden and lower cost results in higher effectiveness. 2. More transparency and accountability results in less corruption and higher efficiency. 3. Better targetted to those eligible and most in need. 4. Clear focus on only some of the services to rural populations. 5. Opportunity to avoid use of subsidy for RUSCOs operation purposes. An important point to be noted in the context of providing subsidies through RUSCOs is that utilizing RUSCOs as a channel for rural subsidies would very well create the potential for achieving more positive impact because of the synergized economic and social effect that various subsidies may bring about when offered as a package for integrated provision of two or more subsidized services. 1. The market segment and economy of scale the minimum number of households to be served in order for the RUSCO to break even. 2. The appropriate ownership structure that fits into local conditions. 3. What subsidies are available (if any), and for how long. 4. The prevailing institutional, regulatory, and legal framework. Furthermore, lack of management resources is another factor that influences the need for integrated services delivery in rural areas by RUSCOs (Box 6.1.6). RURAL ELECTRIFICATION AND PANCHAYATS 10 Role of Gram Panchayats The 11th schedule to the Constitution of India lists rural electrification including distribution of electricity as an activity which can come under the purview of the Panchayati Raj Institutions (PRIs). Though a number of constitutional provisions exist to support these institutions to augment their funds, the financial position is not so good with respect to most of the Gram Panchayats. This is mainly because of poor revenue collection, inadequacy of trained personnel, diversion of funds and misuse of resources, and lack of accountability and transparency 11. The relevant entries relating to electrification in the Eleventh Schedule are Item 14, rural electrification, including distribution of electricity and Item 15, development of non-conventional energy sources. This would mean that in any strategy meant to provide electricity, and particularly household electrification in rural areas, the support and active participation of Panchayats is crucial to the success of rural power sector reforms. Panchayats as Consumer of SEB/ESCOMS The most common form of engagement between the SEB/ ESCOMs and the panchayats is that the latter is the customer of the former the panchayat is supplied power for the running of water supply projects and streetlights. This is the case both, in states where the function of electricity distribution has been devolved to panchayats and those where this has not happened. 10 We are thankful to T.R. Raghunandan for outlining various roles which Panchayats can play with respect to rural electrification within the framework of 73rd CAA and the Electricity Act Role of Local Communities and Institutions in Integrated Rural Development, Asian Productivity Organization, Japan. (

180 156 India Infrastructure Report 2007 Most connections to water supply and streetlights owned and maintained by the Gram Panchayats are not metered. Therefore, billing of these installations is based on assumed consumption or on the capacity of the installation. In both cases, the availability of electricity is assumed for a certain period every day, e.g. an eight-hour supply for streetlights. Considering the fact that in most rural areas the electricity supply is abysmally low, the Gram Panchayats lose out when installations are un-metered. They are often charged for electricity that they have not used. Because gram panchayat installations are more often than not un-metered, bills are also not submitted to the Gram Panchayats. These are submitted directly to the state government, often with usurious levels of interest attached. State governments make bulk deductions from the grants that ought to go to Panchayats such as State Finance Commission funds (in some states, deductions are known to have been made from Central Finance Commission allocations too, inviting criticism from the CAG) and other untied funds, in order to make payments to SEB/ESCOMs. Even in the states that commit to give untied funds to Panchayats, prior deductions totally undermine any such intention. For example, in Karnataka and Tamil Nadu, the at-source deductions on account of electricity bills on unmetered installations have been as large as 50 per cent of the total amount due from the state governments to the Panchayats. The system of bulk deductions on a pro-rata basis is a huge disincentive for reform, for both the SEB/ESCOMs and the Gram Panchayats. SEB/ESCOMs have no incentive to expedite metering or billing of gram panchayat installations because they anyway make a killing through prior deductions. Panchayats are the ultimate soft target, whose funds can be poached upon at the will of the SEB/ESCOMs. In addition, since bills are not submitted, there is absolutely no accountability for the SEB/ESCOMs to improve supply to panchayats. Even if they are billed, gram panchayats have no incentive to pay their bills because those who have done so, continue to suffer as the untied funds due to them are still cut to pay for the dues of another panchayat. Finally, the system of prior deductions has pitted the SEB/ ESCOMs against the panchayats in a deeply adversarial relationship. Both perceive the other with mistrust, which is hardly a conducive climate to start any kind of distribution reform involving collaboration between the two. Therefore, reforming the system of supply of electricity and its billing and payment between the SEB/ESCOMs and the gram panchayats is imperative. Apart from this being an important confidence building measure, this has a larger implication in as much as it would also immensely benefit the panchayats because it would prevent the arbitrary diversion of funds that are meant for them. Panchayats as Franchisees of SEB/ESCOMS Gram panchayats could progressively undertake billing and collection of electricity dues of all consumers within their area. Already several SEB/ESCOMs have proven models of outsourcing of billing and collection to private entrepreneurs, with training and a commission system included as part of the package. These models could be made available to gram panchayats also. Panchayats could also keep track of the complaints and assets of the ESCOMs and inform the technical staff of the SEB/ESCOMs of the complaints for quick redressal. A really difficult problem for SEB/ESCOMs is to persuade consumers such as irrigation pumpset (IP set) owning farmers to permit the fixing of meters on their installations. A gram panchayat, which is treated as an ally would be a great asset for the SEB/ESCOMs in influencing and convincing people about these reform measures. With proper guidance, gram panchayats could identify and report to SEB/ESCOMs cases of unauthorized installations or theft of electricity. It would be open for the SEB/ESCOMs to offer to the gram panchayats incentives for undertaking these activities. These incentives could even be in the form of a set-off against their own electricity dues. Gram Panchayats as Distributors of Electricity Supply As distributors of electricity there would be deepening of the collaborative relationship between the SEB/ESCOMs and gram panchayats because there is part transfer or leasing of distribution assets to gram panchayats, which could, through association with a mutually agreed private entrepreneur, undertake asset maintenance and management and distribution of power, along with the work of billing and collection. (This is similar to a RUSCO except that the distributor of electricity is a gram panchayat). A panchayat may undertake generation of power along with distribution. A relatively simple model for this is to run the entire system of generation and distribution as a local vertically integrated stand-alone system within the framework of the Electricity Act The Act allows rural local bodies to generate and distribute electricity in their area without requiring a licence. Several opportunities exists for panchayats, to tie up with Independent power producers for local area distribution of electricity, with generation being through a host of non-conventional energy sources. This is a good model, especially, where the grid has not reached as yet. The venture of the gram panchayat would be much in the manner of water supply from spot sources at the gram panchayat level. In places where there is already grid penetration the gram panchayats could undertake generation,

181 Electrification and Bio-energy Options in Rural India 157 and distribute the generated power through the existing grid. Business models providing for open access on the SEB/ESCOM grid (again something permitted under the Electricity Act 2003) can be developed. One model could be that such additional investments could be financed with the SEB/ESCOMs supporting the gram panchayat so that the latter is incentivised to substitute SEB/ESCOM power supply (inevitably at a loss), with the power generated locally. Already, in a few states, there have been local initiatives on the part of gram panchayats participating in electricity distribution. For instance, in Tamil Nadu, several gram panchayats have already commenced generation of electricity through Biomass gasification and other renewable sources. 12 The power is being used first for their own streetlights and water supply requirements (Table A6.1.3). Similarly in Karnataka, capacity building of gram panchayats has already been undertaken for the purpose of engaging them in the above process. Again in Karnataka the reconciliation of electricity bills and putting in place a system where there are no prior cuts of financial transfers to panchayats on account of electricity bills, has also been put in place. Nagaland (even though it is a Schedule 6 area) has frameworks where there is active involvement of the local community in local power generation and distribution. Therefore, good practices are emerging, which now need to be scaled up through dissemination and networking of practitioners across states. For revenue sustainability, such models are best developed locally rather than at the national level. A possible revenue model, particularly in those states that are pumping considerable subsidies into providing nearly free power to certain classes of consumers, would be to channel such subsidies into nonconventional energy and local grids. This could be done by the electricity company paying the local grid (operated by a partnership between the Gram Panchayat and a local entrepreneur) a part of the money that it saves by avoiding grid supply to that area. However, this model will only work in those states that have a reasonably good grid supply at present. Also combining services such as water and power, or health service and power, or entertainment and power is a good idea. Generation and power conservation should both carry the same incentive package, so that there is equal incentive to use power well and, hence, there is a need to have grid connectivity to continue to have electricity available when the distributed generation system is down. 12 Tamil Nadu has taken the lead under the remote village electrification programme where grid extension is not feasible or cost ineffective. The state wants to generate 500 MW through wind energy and the rest by means of biomass and solar energy. 94 villages are going to be electrified during FY06 using solar streetlights and solar home lights. So far 154 villages in the state have been electrified using renewable energy sources (The Hindu, August 6, 2006). Gram Panchayats as Facilitators Given the politicization of panchayats, it may be important to consider village cooperatives as commercial entities, with the panchayats functioning as facilitators. The GPs can assist in conflict resolution and put pressure on the local population to follow the ground rules laid down by the village cooperatives. Other PRIs such as panchayat Samitis (at the block level) and zilla parishads/zilla panchayat (at the district levels) can assist in (i) lobbying with the utilities and government, (ii) providing inputs for capacity planning etc. One important matter where PRIs can assist is the selection of 10 per cent households that will be electrified under the RGGVY. CRITICAL ISSUES IN RURAL ELECTRIFICATION Funding The main sources of funding for current rural electrification programmes are: 1. Rural Electrification Corporation; 2. Plan allocation to the states; 3. Funding support from government as loan and grant; 4. Institutional financing bodies like commercial banks; and 5. International financing agencies like OECF. REC was established as a public sector undertaking in July, Initially, the principal objectives of the corporation were to finance rural electrification schemes and promote rural electricity co-operatives for funding rural electrification projects across the country. The tasks assigned to the corporation have occasionally been expanded. The main objects currently are: 1. To subscribe to special rural electrification bonds that may be issued by the SEBs on conditions to be stipulated from time to time. 2. To promote and finance rural electricity co-operatives in the country. 3. To administer the money received from the GoI and other sources such as grants. 4. To promote, organize, or carry on the business of consultancy services and/or project implementation in any field of activity in which it is engaged in India and abroad. 5. To finance and/or execute works on small/mini/microgeneration projects, to promote and develop other energy sources, and to provide financial assistance for leasing out the above sources of energy. 6. To finance survey and investigation of projects. 7. To promote, develop, and finance viable decentralized power system organizations in cooperative, joint, private sector, panchayat, and/or local bodies. The REC is the implementing agency of the RGGVY. The projected cost of rural electrification under the RGGVY is Rs 14,750 crore to meet the targets (Table 6.1.3).

182 158 India Infrastructure Report 2007 Table Cost estimates for Village Electrification under RGGVY S. Particulars Amount: No. Rs in crore 1 Electrification of 125,000 un-electrified vill- 8, ages which includes development of backbone network comprising Rural Electricity Distribution Backbone (REDB) and Village Electrification Infrastructure (VEI) and last mile service connectivity to 10 per cent households in the Rs 6.50 lakh/village 2 Rural Households Electrification (RHE) of 3, population under BPL i.e. 30% of 78 million un-electrified households or 23.4 million Rs 1500 per household as per Kutir Jyoti dispensation 3 Augmentation of backbone network in 4, already electrified villages having un-electrified Rs 1 lakh per village for 462 thousand villages Total (1+2+3) 16, Outlay for the scheme 16, Subsidy 90% for items 1 & 3 14, and 100 per cent for item 2 Component of subsidy to be set aside for enabling activities including technology of outlay Source: REC (2005). The government would provide 90 per cent of the cost through subsidy and the remaining 10 per cent as loan. The figure of Rs 16,255 crore is on the lower side as it is for only 10 per cent of the households the minimum requirement in the RGGVY. What is also not very clear is whether the infrastructure for grid extension being implemented now covers only the minimum standards set by RGGVY, or takes into account 100 per cent electrification. If planning is only for the present, the marginal cost for extending rural electrification beyond the RGGVY stipulations would be exorbitantly high. Hence, it is important that a proper funding plan be put in place, otherwise RGGVY could just end up being a linear extension of the rural electrification schemes of the past. Clearly, the government has to bear the brunt of the infrastructure costs. Tariffs for Rural Electricity The rural population in the country is thinly dispersed and even the electricity requirements for irrigation and rural industries are wide spread. This leads to low energy density and high cost of energy supply. Further, the income level of rural population is very low compared to urban population, which creates a need for subsidy. However, subsidization also has its attendant problems. No state, even with the help of grants from multilateral/bilateral/other private donors, can provide subsidies to all of the rural population for long periods of time. Importance of Cost Recovery Cost recovery is probably the single most important factor determining the long-term effectiveness of rural electrification programmes as with any other rural service such as water. When cost recovery is pursued, most of the other programme elements fall into place. All successful programmes have placed strong emphasis on covering their costs, though there is wide variation in how it can be approached. Energy supply organizations dependent on operational subsidies are critically vulnerable to any downturn in their availability. In most successful programmes, a substantial proportion of the capital has been obtained at concessionary rates or in the form of grants. To ensure long-term sustainability of the programme operating costs must be recovered through revenues, otherwise, the financial condition of the service provider, worsens day by day and the system becomes unsustainable. Charging the Right Price for Electricity There is a widespread belief that electricity tariffs need to be extremely low, often well below true supply costs, if rural electrification is to benefit the rural people. The facts do not support this. Where there is already demand for lighting, television, refrigeration and motive power, in the absence of a grid supply, these services are obtained by spending money on kerosene, LPG, dry-cell batteries, car battery recharging, and small power units, all of which are highly expensive per unit of electricity supplied. Rural electrification tariffs set at realistic levels do not prevent people from making significant savings in their energy costs, as well as obtaining a vastly improved service. Charging the right price allows electricity companies to provide power supply in an effective, reliable, and sustainable manner to an increasing number of satisfied consumers. Building Tariff Structures for Rural Electrification Broadly speaking a tariff structure which can be sustained under political and social considerations would be performancebased tariff, starting from tariff based on cost recovery to cost to serve. This means moving from short-term location marginal tariff to long-term location marginal tariff. This implies that a beginning should be made with recovery of average per unit cost. In the long-term, system cost, cost of expansion, and cost of quantity and quality should be recovered. This also implies minimizing subsidies and cross subsidies. This transition means that tariff would increase over a period of time and may reduce after a few years when

183 Electrification and Bio-energy Options in Rural India 159 the system gains from performance efficiency, both technical and financial. This requires a multi-year tariff policy so that efficient mechanisms can be implemented to restrict accumulated technical and commercial losses to less than 10 per cent. In the short-term, it may make electricity unaffordable in parts of villages. Therefore, rural poor may have to be charged differently. At present most of the rural electricity is being charged at a fixed rate and duration of supply is both limited and of poor quality. The quality issue needs to be addressed from both the demand and supply side. On the demand side single-phase to three-phase conversion and over rated pump sets and money generation from water market are the contributing factors. On the supply side, the frequency and voltages of the three-phases are the culprits. Generally speaking, voltage decreases over long distances, thereby drawing higher currents, leading to higher power losses. The result is an unnecessary increase in power requirement. Under RGGVY, duration and quality of electricity to rural households is aimed to be brought at par with urban areas. This leads to the application of the same criteria for tariff in villages as in urban areas. The cost plus tariff should be eliminated in urban areas and one has to move to cost to serve which includes quantity, quality, reliability, and future strengthening and expansion of the system. Further, building technical efficiencies, creation of mini-grid and other sources of electricity may change the scenario for the better. Presently, reduction in tariff or no increase in tariff can be achieved by creation of slabs in quantity usage of electricity and time of usage. If possible, type of usage can also be built in by accounting for sanction load. Two part tariff may not serve the purpose because it charges for connected load and usage of electricity. The main reason is that duration of electricity supply is so erratic that consumers might be simply paying for fixed charge without electricity being available to them. Hence, the (i) minimum duration and (ii) quality of electricity supply should be assured before the laws about tariff are enforced. Tariff structure in rural areas should account for distributed generation and non-conventional energy sources based electricity generation. These may cost higher than grid supply in the absence of subsidies. Therefore, the promise made may not be realizable because of the nature of supply mix. This means that in villages cost to serve may be higher than urban areas. The population density is sparse in most of the villages therefore, cost to serve plainly from grid may turn out to be higher. Pricing of electricity in villages needs to be related to area of irrigation, type of crop, and cost of pumping water, as well as to types of village industry. At times, serious environmental degradation takes place due to availability of cheap electricity. Government concessions in setting up industry near villages should be abolished and the industry should be charged the same rates as urban electricity. To calculate the cost to serve one needs data like type and time of usage, quality, quantity and duration of supply. Collection and segregation of data is not possible at present but we need to start the process, especially where new projects are being implemented. Tariff structures should reflect the features supporting sustainability and sufficiency of electricity along with competitiveness for economic growth. The tariff policy should also allow for factors such as fuel prices, variation in foreign exchange rate, and gap in demand and supply. In short, as we move in the direction of cost to serve, tariff should gradually change from fixed cost to cost recovery based on quantity and quality, and ultimately, to performance-based tariff. Renewable and distributed generation should have a different kind of tariff structure reflecting consumer category, voltage levels, producer category, population density, and local fuel availabilities. Green electricity should either be provided tax exemptions for a limited period, or other fiscal incentives to offset initial high investments, after which a single-tariff regime should prevail in the interests of economic efficiency. Capacity Additions Planning new capacity additions should be viewed in a longterm perspective. Starting afresh every time there is an increase in load has negative cost implications. Consequently, accurate load forecasting, for both, industrial and household loads in rural areas, is a must. Normally, the advent of electricity in a village is bound to have a multiplier effect, both in terms of economic activity and in quality of life. For example, the advent of agro-industries would lead to the proliferation of cold storages. In fact, load forecasting should draw from the economic development plan of the state/region. Consequently, a modular approach to capacity addition is desirable. To check the robustness of the planned rural electrification, simulation of various scenarios must be carried out to evaluate its performance. These simulations may include steady state and transient conditions so that influence of starting or shutting of DGs, short circuit currents flow under different faults, small disturbance, load change, and stability can be analysed and compared with standards. Prioritization The sequencing of electrification of rural areas is important. Although this decision may largely be political, socio-economic factors must be built into the decision-making process. For example, rural areas with greater potential for economic activity must be given priority. Operations and Maintenance Minimizing the lead time for identifying and repairing faults is the key to success, particularly of the grid extension model.

184 160 India Infrastructure Report 2007 Box Meters for Recording bi-directional flow of Electricity Net purchase and sale: In this arrangement, two unidirectional meters are installed. One records electricity taken from the grid and the other records excess electricity generated and fed back into the grid. Here, different tariffs may be applicable to both incoming and outgoing electrical flows. There will be a possibility that because of the differential tariffs, a rural consumer may end up paying the utility even though it has injected more electricity in the grid than it has drawn from it. Net metering: This is the most advantageous arrangement for the owner of a distributed energy system. A single, bidirectional meter is used to record both electricity drawn from the grid and the excess electricity the distributed energy system feeds back into the grid. The meter spins forward when electricity is drawn from the grid, and it spins backward as electricity is fed into the grid. Since the net amount of electricity drawn from the grid is only priced, the advantage with respect to the net purchase and sale meters becomes obvious. However, it must be pointed out that in the near-future, given the demand-supply gap, reverse flow into the grid is not a major possibility except from some commercial units such as sugar plants. Even under the RGGVY if the BPL families have their houses electrically connected, they may not have the financial means to pay their electricity bills. One option is subsidy by the government, which is impractical considering the numbers and the obvious leakages that would occur. Here, the Gram Panchayats may play a proactive role by setting up a scheme whereby, the bills of the rural poor may be waived in lieu of services rendered to community welfare through manual labour and so on. Long lead times would literally restore status-quo-ante, thereby negating the benefits of rural electrification. The use of IT to identify, and even predict faults, is an essential ingredient for success. Benchmarking Benchmarking is essential to monitor the quality of supply and can identify potential areas where performance is lacking. Typical benchmarking parameters are as follows. Area Performance Measure Effect Measured Operational SAIFI Frequency of outages Performance CAIDI Duration of outages Aggregate technical & Effectiveness in commercial losses minimizing unrecoverable energy cost Technical losses Efficiency of distribution infrastructure Unplanned outages/ Relative impact of outages total outages on customers and system Service restoration Responsiveness of time distribution maintenance Annual replacement Role of transformer rate of distribution failures in maintenance transformers (%) effort Load Planning Because of the demand-supply gap, adequate power may not be available in rural areas. Some of the measures to address this issue could be: 1. Load reduction or shedding with pre-announced hours in the short term. 2. Increase in the capacity of network with ancillary services. 3. Adding to generation capacity in the long term. The demand side measures should be worked out for different types of customers like domestic, commercial, and industrial. For example, if the domestic grid is separated, domestic load on daily basis and total energy on a monthly basis may be fixed towards demand side management. Some innovations are required in implementing demand side management because in rural areas demand will be seasonal, even for industrial units. Hence, for load planning, the need for both continuous and limited hours power supply must be ascertained. This, in turn, will reduce the cost of power supply and minimize the frequency of unscheduled shutdowns. Tariff models to encourage load planning are discussed in the section on pricing. Metering In order to arrive at tariffs and pricing structures, the type of metering arrangement plays a very important role. One possible scheme would be to install meters (i) in each household and commercial/agricultural unit and (ii) in a distribution transformer. The advantage of this scheme would be that thefts and technical losses could be monitored. In situations where the distributed generation is connected to the grid, and where there is a possibility of bi-directional flow of electricity, either two uni-directional meters or single bi-directional meters could be used. While extensive installation of meters may appear prohibitively expensive initially, it is important from the long-term planning perspective, accounting for future scenarios. Therefore, to make full and efficient use of technology

185 Electrification and Bio-energy Options in Rural India 161 and financial support available one may consider the best specifications for metering, SCADA, and call centres. Collection of Electricity Bills Pre-paid meters, just like pre-paid cell phones, is possibly the best way to ensure that customers pay their electricity dues. However, installing such meters in each customer s premises may not be financially viable. One viable solution is to have regular meters in each customer s premise, along with a centralized pre-paid meter. It will now be the responsibility of the village co-op to buy the pre-paid card, in the absence of which electricity in the concerned rural areas will be cutoff. A major advantage of the suggested measure will be to ensure compliance and minimize thefts, primarily due to public pressure. WAY FORWARD Implementation of the Electricity Act 2003 to pave the path for sustained district and state level planning, with emphasis on monitoring and decentralized accountability will encourage the private sector to participate in the power sector and take on a profitable role as a franchisee for installation and/or distribution of power in rural areas. This will also encourage formation of RUSCOs, independent franchises, and village panchayat owned franchises. With the RGGVY, universal access to power in villages is on the horizon. Perhaps recognizing the capacity constraint, the REC and MoP are encouraging franchisee development for the maintenance of distribution systems and for the collection of tariffs at the village level. The SEBs have to redefine their role to focus on increasingly managing and supervising contracts between public and other (NGO, co-operatives, and private) providers as well as with users and ensuring the legal rights and obligations of parties in terms of service and tariffs. Managerial and technical capacity to engage with franchisees, inspection of installation, verification of delivery of service to standards, performance monitoring, and establishing bulk power purchase agreements with generators can be developed as the BESCOM example illustrates. As the franchisee and co-operative models develop, a subtle approach to reforming agriculture pumping tariffs would come into play. A move towards greater cost recovery must be accompanied by reliable service that meets the needs of agriculture. A two-step approach which can bring sustainability to village electrification and reduction of AT&C losses is needed. The first step is to separate the three-phase supply from household single-phase supply and then energize the agriculture pump load in accordance with the local agriculture needs and during off-peak hours to reduce costs. This will allow the system to better meet the needs of agriculture, even while, reducing the supply of electricity to agriculture. This would, in effect, reduce wasteful use of energy and groundwater (Shah et al. 2003). The next step would be to move towards agricultural subsidies that are provided directly to the consumer in the form of a smart card that incorporates low tariffs for the first block of lifeline consumption. Smart-card metering technology makes it possible to provide the subsidy directly to the consumer as opposed to the service provider. Metering technologies using smart cards are already used in South Africa. Higher cost recovery would pave the way for facilitating greater generation capacity as well as reducing the adverse impact on industry of higher tariffs and poor quality supply (Modi, 2005). Service providers should promote the use of smart prepaid card based electric meters. This technology makes it possible to implement lifeline tariffs for the poor (ensuring a social safety net). Along with the safety net, government should emphasize energy-efficient lighting, such as compact fluorescent lamps, as experimented in Orissa. For domestic supply in rural areas, the RGGVY scheme has set an ambitious challenge. For this to succeed, a political climate will need to be created that empowers the regulators to enforce the rules of the EA2003. This will ensure that rural household connections receive reliable service, at least during evening hours when domestic rural supply is most needed. One way to carry out this tricky balancing act, while generation capacity constraints and AT&C (aggregate technical and commercial) loss reduction requirements are met, is to supplement timed evening hour supply. Reliable 24 7 supply to schools, clinics, hospitals, water schemes (where needed), telecom facilities, government offices, rural markets, and small businesses (such as grinding and agro-processing) is essential. Many of these institutions are public facilities and a close dialogue with the district officers and the representative local bodies is needed to ensure that the supply to these institutions is reliable, and that costs of supply are accounted for through transparent subsidies or funds transferred between the appropriate government body and the service provider. Rural electrification is the key that unlocks the vast economic potential of rural India. However, rural electrification is truly a task of mammoth proportions. Consequently, there is need to efficiently plan, manage, and implement the rural electrification programme. It requires learning from international experiences, but adapting our solutions to the ground realities of rural India. This ambitious programme strengthened by the EA2003 framework can be implemented and can meet its demanding targets. We would like to stick our neck out and say that the lynchpin to maintaining the 8 per cent growth target and accelerating it to 10 per cent p.a. in near future lynchpin is achievable if the RGGVY targets are met; this will also meet the aspirations of millions of rural folks and improve their quality of life.

186 162 India Infrastructure Report 2007 ANNEXE Table A6.1.1 Comparison of Distributed Generation Technologies Technology Applications Pros Cons Scale Diesel Engines Mills Pumps Refrigeration Easy maintenance High fuel costs Millions of households Lighting, electronics, Continuous operation CO 2 emissions and communication Small Biomass Mills Pumps Refrigeration Continuous operation Lighting, electronics, possible Noxious emissions 10 million households and communication No fuel cost Mini-Hydro Mills Lighting, electronics, Long life, reliability Site-specific 50 million households and communication No fuel cost Intermittent Wind Mills Site-specific Pumps Intermittent Lighting, electronics, No fuel cost High cost of batteries Less than 10,000 communication households Solar (PV) Basic lighting and No fuel cost High cost of batteries 1.1 million households electronic equipment Little maintenance required Batteries Basic lighting and Small initial investment High cost of batteries Millions of Households electronic equipment Cost of battery charging Table A6.1.2 Cost and Efficiency for Distributed Generation Technologies Engine Gas Turbine Micro turbine Generator Generator Generator Photo-voltaic Wind Turbine Fuel Cells Despatchable Yes Yes Yes Yes Fuel Diesel or Gas Gas Multiple Gas Sun Wind Gas or Liquids Efficiency, % (1) Energy Density, kw/m Capital Cost, $/kw (1000 (500 in 2001) expected when fully commercialized) O&M Cost, $/kwh (2) Electrical Energy Cost, $/kwh (3) Energy storage Required No No No Yes Yes No NOx (lb/btu) Nat Gas N/A N/A Oil N/A N/A Heat Rates, Mills N/A N/A 5 10 BTU/kWh (contd)

187 Electrification and Bio-energy Options in Rural India 163 Table A6.1.1 (continued) Engine Gas Turbine Micro turbine Generator Generator Generator Photo-voltaic Wind Turbine Fuel Cells Expected Operating 40,000 40,000 40,000 10,000 40,000 Life, Hrs. Technology Status Commercial Commercial Commercial Commercial Commercial Commercial in 2001 Notes: 1. Efficiencies of renewable energy technologies should not be compared directly with those of fossil fuel technologies since the fuel is limited. 2. O&M costs exclude cost of fuel. There are no fuel costs for wind systems or photovoltaic. 3. Natural gas fuel is used for calculating energy costs except for wind and solar power. Source: Cooperative Research Network, Summer Table A6.1.3 Remote Villages Electrification by MNES during S. No. State Villages electrified during Arunachal Pradesh 40 2 Jharkhand 29 3 Manipur 3 4 Meghalaya 1 5 Mizoram 7 6 Uttaranchal West Bengal 49 Total 293 Source: MNES (2006). Table A6.1.5 Villages Electrified During Last Ten Years Year No. of villages electrified Total Table A6.1.4 Status of Installation of Franchisee (As in July 2006) NIT Issued Operational S. No. State RGGVY Villages Other Villages RGGVY Villages Other Villages 1 Assam Bihar Chhattisgarh Karnataka Nagaland Punjab Rajasthan Uttar Pradesh Uttaranchal Madhya Pradesh Andhra Pradesh 5 12 West Bengal Haryana* 1 district Total Note: * No. of villages for the district for which NIT issued in Haryana is not available. NIT is Notice Invitation for Tender.

188 164 India Infrastructure Report 2007 REFERENCES Banerjee R. (2006) Comparison of options for Distributed Generation in India, Energy Policy 34(1), pp , Census (2002) Primary census of various states, Registress General of India, New Delhi. Dubash, N.K. (2004). Electrifying Rural India: The Search for a Viable and Sustainable Approach, Silver Jubilee Symposium on Governance in Development, Institute of Rural Management, Anand, Dec , Duffie John A., and William A. Beckman (2006). Solar Engineering of Thermal Process, John Wiley and Sons. Kishore, A. (2003). Development through Self-reliance, Reviving Hope and Prosperity through Traditional Harvesting Systems: Alternative to Big Dams, UNEP, Geneva, ( dams/files/isses-basedworkshops/oacasestudies.pdf) Linden H.R. (1999). Let s Focus on Sustainability, Not Kyoto, The Electricity Journal, 12(2), Elsevier. Malengret Michel, Garth Naldrett, Johan Enslin (1995). Applying Parks Transformation to a Single to a Three-Phase Converter, Power Electronics Specialist Conference, 1995, IEEE, Volume 2 (June 1995). Manikutty S. (2002). Gujarat Co-Operative Milk Marketing Federation (GCMMF) Asian Case Reserve Journal, Singapore MNES (2006) Annual Report , Ministry of nonconventional Energy sources, New Delhi. Modi, Vijay (2005). Improving Electricity Services in Rural India, CGSD Working paper No. 30, Centre for Globalization and Sustainable Development, Columbia University, New York. NRECA (2002). Experiences in Cooperative Rural Electrification and Implications for India, NRECA International Ltd., Rao, V.R. (2006). Brief Presentation of Sri Raghava Rao, Managing Director. The Anakapalli Rural Electric Co-op Society Ltd; Kasim Kota: Visakhapatnam District: Andhra Pradesh: India, mimeo, The Anakapalle Rural Electric Coop Society Ltd., Anand. REC (2005). Powering Rural India, Speech of the chairman of REC at the 36th Annual General Meeting held on September 22, 2005, Rural Electricity Corporation, New Delhi. Shah, Tushaar, Christopher Scott, Avinash Kishore, and Abhishek Sharma (2003). Energy, Irrigation Nexus in South Asia: Improving Groundwater Conservation and Power Sector Viability, Research Paper #70. International Water Management Institute: Battaramulla, Sri Lanka. World Bank (2003). Why are Power Sector Reforms Important for the Poor?, The World Bank, New Delhi

189 Electrification and Bio-energy Options in Rural India 165 PART II BIO-ENERGY OPTIONS AND RURAL INDIA Avinash Kumar Agarwal GLOBAL ENERGY SCENARIO The world s increasing dependence on foreign oil poses problems for the economy that go far beyond those associated with oil deficits, oil prices, and volatility. Tenuous links to geopolitics have been made in the debate about our ability to quench our thirst for oil. The world is facing an energy crisis of immense proportions as availability of cheap oil comes to an end. Petroleum resources of most of the non-opec countries have already peaked or are going to peak in the near future (Figure 6.2.1). Figure suggests that oil production from Indian facilities has already peaked in 1995 and at production will be lower while India witnesses steep increases in demand. Oil production from the non-opec countries is going to decline from now onwards, and as a result, the world will be entering a regime dominated by OPEC countries, as most of the oil available in future will be from them (Figure 6.2.2). Global oil production on a per capita basis has been consistently declining at a rate of 1.20 per cent per year since 1979 (Figure 6.2.3). This rate is bound to dip steeply in view of peaking oil resources around the world and soon the world may face a grim energy challenge as far as petroleum resources are concerned (Figure 6.2.4). These trends emphasize that the energy resources based on petroleum are rather limited and it is high time for us in India to brace for the oil shocks in the coming years. One of the ways to ensure energy security is to invest in developing renewable sources of energy. RENEWABLE ENERGY IN INDIA Renewable energy sources offer viable options to address the energy security concerns in a country, especially in rural areas. There is significant potential in India for generation of power from renewable energy sources, such as wind, small hydro, biomass, and solar energy. Therefore, special emphasis has been laid on the generation of grid quality power from renewable sources of energy. In the past ten to twelve years, the capacity of small hydro projects up to 3 MW (megawatt) has increased fourfold from 63 MW to 240 MW. There exists an established potential of 19,500 MW, including 3500 MW of exportable surplus power from bagasse-based cogeneration in sugar mills and 16,000 MW of grid quality power from other biomass Non-OPEC, non-fsu Oil Production Has Peaked and is declining MMBbl/D History Norway Argentina 98 Australia 2000 United Kingdom 99 Ecuador 99 Coloumbia 99 China 98 Malaysia Jordon 97 Syria India 95 Egypt 93 Indonesia Romania 76 NGL Alaska Canada (conv) Rest USA 5000 Germany 67 Austria 55 Texas Yeman Oman Neutral Zone Mexico Brazil Angola GCM Fig Oil Production of most of Non-OPEC and Non-FSU countries Source: ASPO (2006).

190 166 India Infrastructure Report History 1979 Growth = 0.75%/year Peak World Oil Forecast Production [Gb/year] Non-OPEC OPEC/non-OPEC Crossover event: OPEC OPEC Non-OPEC OPEC 3 dominance Source: ASPO(2006). Fig Global Oil Production of Most of Non-OPEC and OPEC Countries 6.00 Peak 1979 Decline = 1.20%/year Production per capita (b/c/year) 3.00 Oil Production Per Capita (o) History Years Fig Global Oil Production Per Capita Per Year Source: ASPO (2006).

191 Electrification and Bio-energy Options in Rural India 167 History Peak Slope Slide BLACKOUTS Production per capita (boe/c/year) Energy Production Per Capita WW II Great Depression Cliff 1930 Industrial Civilization 100 years Years Fig Global Oil Production Per Capita Per Year and Future Projections Source: ASPO (2006). resources. Grid-interactive solar photovoltaic power projects aggregating to 2.49 MW have so far been installed and other projects of 0.8 MW capacity are under installation. Wind power development in the country has been spurred by a mix of fiscal incentives and promotional measures. Consequently, generation from wind power projects has been increasing overtime from 0.03 BkWh (billion kilowatt hour) in 1970 to 2.2 BkWh in 2002 (Reddy, 2003). Potential of Biomass for Rural Energy Worldwide photosynthesis activities are estimated to store seventeen times as much energy as is consumed annually by all nations of the world. Even if the energy required for collection, processing, and conversion into other useful forms is taken into account, biomass still holds the promise to meet the complete energy needs of the world, if managed and used effectively in a sustainable way. Biomass can be classified into two types: woody and non-woody. Non-woody biomass comprises agro-crops and agro-industrial processes residue. Municipal solid waste or MSW, and animal and poultry wastes are also referred to as biomass as they are biodegradable in nature. The main biomass sources are: 1. Wood and saw dust. 2. Agriculture residues: rice husk, bagasse, groundnut shells, coffee husk, straws, coconut shells, coconut husk, arhar stalks, jute sticks, and so on. 3. Aquatic and marine biomass: Algae, water hyacinth, aquatic weeds and plants, sea grass beds, kelp, coral reef, and so on. 4. Wastes: MSW, municipal sewage sludge, animal waste, industrial waste, and so on. Due to the variety and diversity of biomass, sufficient data and documentation regarding availability and consumption/ utilization patterns is not easily available. Although biomass meets a major part of the total energy requirement, it does not find an appropriate place in the overall energy balance of India. Availability of Agro-Residues Agricultural residues can be divided into two groups, namely, crop residues and agro-industrial residues. Crop residues are plant materials left behind in the farm after removal of the main crop produces. The remaining materials could be of different sizes, shapes, forms, and densities like straw, stalks, sticks, leaves, haulms, fibrous materials, roots, branches, and twigs. The agro-industrial residues are by-products of the postharvest processes of crops such as cleaning, threshing, linting,

192 168 India Infrastructure Report 2007 sieving, and crushing. These could be in the form of husk, dust, straws, and so on. The major crop residues produced in India are straws of paddy, wheat, millet, sorghum, pulses, oilseed crops; maize stalks and cobs; cotton stalks; jute sticks; sugar cane trash; mustard stalks. The agro-industrial residues are groundnut shells, rice husk, bagasse, and cotton waste and coconut shells. The quantity of agricultural residues produced differs from crop to crop and is affected by seasons, soil types, and irrigation conditions. Production of agricultural residues is directly related to the corresponding crop production and the ratio between the main crop product and residues varies from crop to crop, and at times, even with the variety of the seeds in one crop itself. Thus, for known amount of crop production, it may be possible to estimate the amounts of agricultural residues produced using the residue-to-crop ratio. It may be noted that with improved agricultural farming techniques, production of crops increasing consistently in the past three decades. Correspondingly, the availability of agricultural residues has also been changing with time. Some past and future projected data for various agro-residues at the national level are given in Table However, most agricultural residues are not found throughout the year but are available only at the time of harvest. This makes collection easy, but creates storage problems if the residues have to be saved for use during lean period, especially due to its low bulk density. The amount available depends upon the harvesting time, storage-related characteristics, storage facility, and so on. The broad periods of availability of some important agricultural residues are given in Table In India, normally two crops kharif and rabi are taken into consideration. Therefore, availability of crop residues is expected to be spread evenly over the year. As a result, crop residues of one kind or the other are available throughout the year. Since crop production depends upon the agro-climatic conditions, all agro-residues are not available in all parts of the country (Table 6.2.3). Agro-residues, however, do suffer from two major constraints: high moisture content and relatively low bulk density. These constraints inhibit their economical transportation over long distances, thereby necessitating their utilization near the sources Table Agricultural Crop Residue Production in India Production (million tonnes) Crop residue (Projected) Field-based residues Rice straw Wheat straw Millet stalks Maize stalks Cassava stalks Cotton stalks Soybeans (straw + pods) Jute stalks Sugar cane tops Cocoa pods Groundnut straw Sub-total Processing-based residues Rice husk Rice bran Maize cob Maize husks Coconut shells Coconut husks Groundnut husks Sugarcane bagasse Coffee husk Sub-total Total Source: Iyer et al. (2002). Table Seasonal Availability of Agricultural Residues Availability period Residue January February March April May June July August September October November December Arhar stalk Maize stalk Maize cobs Cotton stalk Mustard husk. Jute sticks Rice husk Groundnut shell Source: Iyer et al. (2002).

193 Electrification and Bio-energy Options in Rural India 169 Table Region-wise Availability of Various Crop Residues in India Region North (Punjab) North-east (Assam) West (Gujarat) Central (Maharashtra) South (Tamil Nadu) South (Karnataka) Source: Mande (2005). Crop residues available Sawdust rice husks, rice straw, and mustard stalks. Jute and mesta sticks and rice husks Cotton stalks, arhar stalks, castor waste, groundnut shells, maize stalks, and maize cobs Sawdust, groundnut shells, arhar stalks, cotton stalks, sugarcane waste, and maize waste. Rice husks, sawdust, groundnut shells, tamarind shells, coir pith, sugarcane waste, and coffee husks Rice husks, sawdust, groundnut shells, coffee waste, coir pith, and sugarcane waste. of production. Unlike fossil fuels, which are concentrated sources of energy and chemicals, the management strategy for utilization of agro-residues has to be different. These are, therefore, most appropriate for decentralized technological applications in rural environments. The processing of the agricultural produce and utilization of agro-residues, therefore, can contribute their maximum share to rural development. With worldwide shortage of wood, especially in the developing countries, and the need for afforestation to maintain the global ecological balance, there is an increasing demand for proper utilization of agro and forestry residues to replace wood. At present these residues are either grossly underutilized or completely unutilized due to in-situ burning in fields as a means of disposal. Development of technologies to utilize this major resource and its management need to be emphasized to meet the growing energy demands at the domestic level as well as of rural small-scale/cottage industrial sectors. MONETARY VALUE OF BIOMASS Biomass, both woody as well as agricultural, has acquired considerable importance as a biofuel, used directly in several applications such as domestic cooking, industrial process heating, electrical power generation, and also in briquetted form. In order to formulate and implement long-term strategies for efficient and economic utilization of biofuel as the energy source for energy conversion and utilization, it is important to estimate its monetary value for the end user. The following two approaches can be used for determining the monetary value of biofuel: 1. Supply-side approach or production cost method, and 2. Demand-side approach or an opportunity cost estimation. In the supply-side approach, the contribution of the costs of production, harvesting, collection, transportation, and storage are taken into account to arrive at a reasonable estimate of the minimum monetary value of agro-residue. This method does not take into account the quality of the agro-residue such as its energy content (calorific value) and the effect on efficiency for its utilization, during energy conversion to meet the energy requirements. Against this in the demand-side approach, the maximum affordable cost (monetary value of opportunity cost) of agro-residue as biofuel for a given energy application is calculated based on the amount and the cost of fuel(s) that is likely to be substituted by biofuels. This MAC (maximum affordable cost) of the agro-residue is essentially the monetary value of an equivalent amount of fossil fuel that can be replaced by the use of agro-residue as biofuel. It is: 1. a measure of equivalent monetary worth of agro-residues, 2. a basis for the comparison of the prices of two or more agricultural residues for a given application, and 3. an upper limit to the price of agro-residues beyond which the use of fossil fuel may be a better economical/financial option. A rough calculation suggests that it makes a financially attractive proposition to use agro-residue by transporting it to a longer distance (say, 50 km) rather than transporting coal from 300 km for use as fuel. Similarly, if coal were to be transported over a distance of 1500 km for use, then it would be economical to transport agro-residue over a distance of 300 km distance by tractor trolley (Table 6.2.4). Table Comparison of Agro-residue Cost Estimation (Supply and Demand Side Approaches) Cost of agro-residue as biofuels (rupees/tonnes) Production cost Maximum affordable method cost method km 300 km km km On from from At from from Agro-residue farm farm farm pithead pithead pithead Arhar Stalks Cotton Stalks Groundnut Shells Jute Sticks Maize cobs Maize Stalks Mustard Stalks Rice husk Source: Tripathi et al. (1998).

194 170 India Infrastructure Report 2007 ELECTRICITY FROM BIOMASS TECHNOLOGIES The technologies used for producing power from biomass, range from the conventional to the cutting edge of research. The choice of technology can drastically affect the economics of biomass electricity and limit the size of the plant producing it. Table summarizes various technological options available for biomass-based electricity generation. Decentralized Biomass-based Power Generation Conventional biomass-based thermal power plants are normally suitable for large megawatt-level capacity. However, as biomass generally has low energy density, it favours small, dispersed plants for converting biomass into other energy carriers. Thus, a modern megawatt/gigawatt capacity conventional steamturbine electricity plant is unlikely to be fuelled by biomass since it would draw its fuel from an enormous area, incurring prohibitive transportation costs. It is also clear from Table that for decentralized, small-capacity power generation using biomass, Otto or Diesel cycle IC (internal combustion) engines and Sterling cycle systems are more suitable. Biomass gasifier based system converts solid biomass into the more user-friendly gaseous form, which can be used directly in IC engines to generate power. Table compares biomass combustion with the gasification system for power generation, giving their advantages and disadvantages. It is seen that though biomass gasification is not right for grid interaction, it is more suitable for decentralized, small-capacity biomassbased power generation due to its many advantages over the combustion-based system such as low capital investment, higher operational process efficiency at smaller capacities and less power consumption. Biomass Gasification In a gasifier, a solid fuel is converted into gaseous fuel (producer gas) by a series of thermo-chemical processes such as drying, pyrolysis, oxidation, and reduction. If atmospheric air is used as the gasification agent, which is the normal practice, the producer gas will consist mainly of carbon monoxide, hydrogen, and nitrogen. The calorific value of the producer gas is about kcal/nm 3 (kilocalories per normalized cubic meter). Approximately, 2.5 Nm 3 of producer gas is obtained from the gasification of one kg (kilogram) of biomass. This gas can be used for the generation of motive power, either in dual fuel engines or in diesel engines, with some modifications. Engines operating on a spark-ignition system (such as petrol engine) can be made to run entirely on producer gas, whereas those using CI (compression ignition) systems (such as diesel engine) can be made to operate with about 60 per cent-80 per cent diesel replacement by gas. Normally, for producing one kwh (kilowatt hour) unit of electricity, using the gasifier based system, about kg of biomass is required in the dual-fuel-mode operation and about kg biomass is required in 100 per cent gas engine operation. The gas can also be burnt directly for applications such as cooking in hotels, Table Comparison of Biomass Electricity Generation Systems Rankine cycle Otto/Diesel cycle Sterling cycle Wood Briquetted H 2 / Alternative Technology Steam Organic based Biomass Air He Acceptability of different biomass Yes Yes No Yes Yes Yes Constraints related to installed capacity Heavy Moderate Moderate Moderate Heavy Moderate Cost Constraints Moderate Heavy Moderate Moderate Moderate Heavy Constraints related to collection of biomass Heavy Not severe Not severe Not severe Not severe Not severe Level of development within the country Very little Very little High Fair Fair Indigenous development Good Poor Good Good Good Very poor Amenability for decentralized use Poor Good Good Good Good Good Cost of maintenance High High Moderate Moderate Moderate High Energy requirement for pre-processing Low Low Moderate High Low Low Space requirement High High Low Moderate Low Low Water requirement High High Low Low Low Low Source: Mande (2005).

195 Electrification and Bio-energy Options in Rural India 171 Table Comparison between Biomass Combustion versus Gasification-based Power Generation Technologies Suitability parameter Gasification Combustion Plant capacity Economical at small scale levels (up to Economical only at large-scale levels 500 kw) (1 MW upwards) Biomass Single biomass with less material handling Multi raw material with expensive raw material system and quite efficient with wood chips handling systems Absence of deposition of metal vapours, oxides, Deposition of metal vapours, oxides, etc., in etc., in case of pulverized fuels. case of pulverized fuels. Investment cost Higher on retrofit and low otherwise (average High (average million rupees per MW) 25 million rupees per MW) Process and overall efficiency High for small scale system High for large-scale system Maintenance More Less with standard Practices Infrastructure Small Huge Power consumption Less More Emission control (NOx, SOx) Superior Possible Grid interaction Not recommended Very good Labour force Small Huge Skilled personnel Not very much Required Captive plant feature Highly suitable for small-scale level Suitable for large-scale level Remote and rural application Very well adapted Not recommended Operational experience in India Quite common in India for rural electrification Quite common in India on the large scale purposes on a small scale Inadequate experience for large-scale, grid- Adequate experience for large-scale, grid connected systems connected systems Technology status Developing, near commercialization Well developed, advanced, and commercialized Source: Mande (2005). production of hot water and steam in small industries, and drying of a variety of agricultural and industrial products. BIOFUELS Biodiesel is a renewable fuel, and technically speaking, biodiesel is vegetable oil-methyl/ethyl ester. Biodiesel molecules are very simple hydrocarbons containing no sulphur, ring molecules, or aromatics associated with fossil fuels. Advantages of using biodiesel can be divided into technical and socio-economic categories. Technical advantages of using biodiesel are very low sulphur content, no aromatics, no net carbon dioxide addition to the environment, and about 99.6 per cent biodegradability within twenty-one days. It is also a renewable source of transportation energy. Socio-economic advantages of using biodiesel are energy security, economic and social cohesion, healthy environment, upliftment of the rural communities, employment generation, rejuvenation of wasteland, and so on. Although biodiesel offers several advantages, technical, environmental, and socio economic, it has some disadvantages such as slightly lower energy content (5 7 per cent less than the distillate fuel), slightly adverse effects on engine components (due to olefins, traces of glycerides), relatively faster engine oil degradation and marginal increase (1 6 per cent) in NO x (oxides of nitrogen) emissions from conventional compression ignition engines. The economics and the price of biodiesel based on the long run marginal-cost principle are dependent on and sensitive to many factors like land area of seed production, per-hectare seed yield, by-product generation from the process, sale price of by-products, etc. Any policy directive should consider the proper channeling and marketability of the byproducts for a viable cost of production of biodiesel to make it competitive to other fuels for the benefit of end-users of this alternative fuel. The mandatory blending requirement and assurance of buy-back of biodiesel from the end-users can be a policy measure to support the economical and financial viability of biodiesel production. This has to be done through defining the role of each player in various segments of biodiesel production by addressing tax and import duty concessions, if necessary, to make the production of biodiesel sustainable, considering the future energy security needs of the country.

196 172 India Infrastructure Report 2007 Development of Jatropha as Biodiesel Crop Jatropha curcas has been identified for India, by many experts, as the most suitable TBO (tree-borne oilseed) for the production of biodiesel, in view of the non-edible oil available from it, shorter gestation period, hardy nature, high seed/oil yields, and the possibility of its plantation throughout the country. However, as Jatropha is not a native species of India, no systematic studies were undertaken earlier regarding tree improvement. Initiatives have been taken during the last two years to increase the compact area under genetically improved Jatropha species, which can produce better quality and quantity of oil besides being high-yielding. But these initiatives have to be more result-oriented and should focus on state-wise survey and collection of Jatropha seeds, tree improvement/variety diversification for desirable characteristics, multi-location trials for agronomical studies in rain-fed, irrigated, alkaline soils, standardization of agro-forestry models to make Jatropha plantation economically viable, disease and pest management, and intercropping with other value-added crops, that is, medicinal plants, fruits, and so on. Recognizing access to energy by the poor as a major barrier to the rapid growth prospects of India as well as its vulnerability to volatile international oil prices, the Government of India has, in recent times, laid major emphasis on biofuels, in particular, Jatropha-derived biodiesel. Public sector oil companies have offered an assured buy-back price for biodiesel at 25 rupees per litre. A detailed project report, recently prepared under the Ministry of Rural Development (MoRD), identified various end-uses for non-edible straight vegetable oils (SVOs) produced from plants, such as Jatropha, including their direct use for transport applications and power generation on a decentralized basis apart, from conversion of the SVOs to biodiesel for purposes of blending with petro-diesel. Large tracts of wasteland can be placed under such plantations for production of biodiesel. Under alternate assumptions of productivity of such plantations and efficiency with which oil could be extracted, biodiesel could meet as much as 40 per cent of India s diesel requirements by the year As such, prima facie, biodiesel seems to have the potential to contribute significantly to India s energy security. However, a clear choice needs to be made on the priorities of use of the SVOs produced from plants such as Jatropha. The use of SVO for decentralized applications, with R&D (research and development), could go a long way in securing access to energy in the remote rural areas, either in the form of a fuel providing motive power or for conversion into electricity to feed into local mini-grids. Alternately, the SVO could be converted into biodiesel for purposes of blending into petro-diesel, thereby saving foreign exchange. Irrespective of the end-use application, there is an urgent need for the government to support a targeted R&D programme that should address plantation models, enhancing plant productivity and resilience of oil extraction, environmental and social impact assessments, and institutional models, to maximize local socio-economic benefits. The National Mission on Biodiesel (NMB) The report of the Planning Commission (2003) highlighted the increased acceptance and usage of biodiesel worldwide as a solution to the problem of environmental pollution and energy security, reducing imports of petroleum, rural unemployment, and the demands of an agricultural economy. A number of new initiatives have been taken up by many corporate organizations, NGOs, and individuals for the promotion of biodiesel. However, in the absence of a national policy on biodiesel, these efforts have not yielded tangible results. The MoRD has been designated as the nodal ministry for implementation of the recommendations of the Committee, especially for launching the NMB to look into Jatropha plantation throughout the country. As part of the demonstration project under the NMB, Jatropha plantations are to be raised on 0.4 million hectares of land in various states across the country with funding from the GOI as against a target of million hectares of land required for achieving 20 per cent biodiesel blending with diesel. Seed-collection centres/oil expellers are required to be established to procure seed and extract oil. The oil produced in these centres will be transferred to transesterification plants to produce biodiesel. Thereafter, the biodiesel will be blended with petrodiesel by oil companies and marketed through their retail outlets. The demonstration project is planned to be implemented by involving various stakeholder ministries of the government, dealing with agriculture, rural development, environment and forests, petroleum and natural gas, and so on. Phase II of the mission may consist of self-sustaining expansion of the programmes, and is, thus, proposed to be people-driven, with the government playing the role of a facilitator. All stakeholders in the mission, including private entrepreneurs, are aggressively preparing themselves to strengthen the important links in the biodiesel manufacturing chain, that is plantation sector, oil expelling, transesterification, marketing and distribution, R&D, capacity building, and education and awareness. Current Status of Biodiesel in the Country The Ministry of Petroleum and Natural Gas (MoPNG) announced a biodiesel purchase policy in October It prescribes that companies shall purchase biodiesel of standard quality through its notified centers at Rs 25 per litre. Depending upon the market conditions, the oil companies will be free to review the price every six months. The policy recognizes the vital role that PRIs can play in the promotion of biodiesel.

197 Electrification and Bio-energy Options in Rural India 173 The Petroleum Conservation Research Association (PCRA) has opened the National Biofuel Centre (NBC) at its headquarters in New Delhi that has root-to-canopy information to educate the masses. The PCRA has also introduced a biodiesel bank that recognizes the efforts of various bodies in promoting biodiesel. The bank awards credit points for work done on propagation, promotion, R&D (research and development) efforts, imparting training, and developing plants and machinery to promote biodiesel. Uttaranchal has constituted the Uttaranchal Biofuel Board for the promotion of biodiesel in the state. Chhattisgarh has formed the Chhattisgarh Biofuel Development Authority, and the Andhra Pradesh government has set up a task force for the same (Box 6.2.1). Several other states have either formed task forces or promoted NGOs to take up plantation. The National Oilseeds and Vegetable Oils Development Board has implemented an R&D network programme in the country to develop practices for cultivation in nearly 1800 hectares in the country. The Department of Biotechnology has initiated the Biofuel Mission and the Jatropha Mini Mission to select good germplasm, develop quality planting material, and standardize agro techniques. The Council of Scientific and Industrial Research has initiated a network programme for genetic enhancement in association with the industry under its prestigious New Millennium Technology Leadership Initiative programme. The National Botanical Research Institute, Lucknow, in association with Biotech Park, Lucknow has initiated efforts to educate farmers, industry, and entrepreneurs to develop a model nursery, and model plantation; and to effect certification of seeds for their oil. It has also entered into partnership with the Indian Institute of Petroleum, Dehradun, for providing end-to-end technology to industry. TERI, New Delhi has been involved with the cultivation of Jatropha on degraded sites, and the promotion of Jatropha for biodiesel on an industrial scale. lit Kanpur is involved in testing engine efficiency, longterm durability test, vehicular field trials, particulate, and pollution issues related to biodiesel while lit Delhi is working on the protocols of machines for various operations involved in producing biodiesel. Several NGOs and the industry have plunged into the biodiesel programme and are cultivating Jatropha for seed production. The country has nearly 63 million hectares of wasteland, out of which 33 million hectares has been allotted for tree plantation. The collective efforts of farmers, NGOs, contract farming, industry, and international promoters can produce sufficient feedstock to achieve a biodiesel mix of five per cent in conventional diesel. This is a sustainable development process leading to large-scale employment of rural human power. Also, it will reduce the foreign exchange outflow for importing crude oil, the cost of which is continuously rising in the international market. Issues in Large-Scale Plantation Many government departments, multinational oil companies, NGOs, rural communities, and large and small farmers have undertaken large scale plantation in the last decade. The government sector has started many initiatives to encourage and support such plantations by different stakeholders on private, community, and government wastelands. Subsidies CHHATTISGARH Box Biofuels in Chhattisgarh, Uttaranchal and Andhra Pradesh In line with the National Mission on Biodiesel the Chhattisgarh state government took up an exhaustive programme for planting Jatropha on almost one million hectares of fallow land available in the state by This includes the land lying unused for want of desired soil character or irrigation. To start with, the Government of Chhattisgarh set up a Chhattisgarh Biofuels Development Authority, in January 2005 for the promotion of biofuels programme in the state. The state has about 44 per cent forest cover, which produces numerous types of underutilized TBOs (Tree Borne Oilseeds) such as Jatropha, karanja, mahua, and kusum in abundant quantities. This provides ample opportunities for the promotion of the biofuels programme in the state. It is projected that by undertaking the plantation of Jatropha/karanja on one million hectares of fallow land in Chhattisgarh, the following production will accrue. 1. Jatropha seed: 10 million tonnes 2. Biodiesel: three million tonnes 3. De-oiled cake (bio-manure): seven million tonnes 4. Glycerol: 0.5 million tonnes 5. Biogas: 3500 million cubic metres 6. Electricity: 700 MW (megawatt) Though the above are only estimated figures, they reflect the huge potential available in Chhattisgarh for setting up biofuel projects through private investments.

198 174 India Infrastructure Report 2007 Policy Initiatives of Chhattisgarh Government The Government of Chhattisgarh is targeting fallow land as well as barren/unused land belonging to farmers for the plantation of TBOs so that the set objectives are achieved in the minimum possible time. The various policy initiatives taken by the state government included supply of Jatropha saplings to farmers, land allotment policy for investors and support price for purchase of TBOs. To ensure that the farmers planting Jatropha on fallow land get proper price for their TBO produce, the state government has declared a support price for procurement of the same. The support prices are fixed for Jatropha seed (Rs 550 per quintal), karanja seed (Rs 450 per quintal) and Jatropha/karanja oil (Rs 18 per kilo). Once the targeted area of one million hectares is brought under Jatropha plantation by the year 2012, various socioeconomic benefits accruing out of biofuel programme to the state will witness improvement of the environment, improved soil fertility of barren land, achievement of energy security goals locally, and saving of the appreciable costs being incurred on transportation of fuel at present. Besides, it will also generate employment at the village level through extensive installation of oil expeller/ transesterification units. UTTARANCHAL Of the total geographical area of the Uttaranchal state, 65 per cent is forest land. Of this, approximately per cent is under forest cover and the remaining per cent, including that of Van Panchayats, is partly degraded. The degraded forests are leading to massive soil erosion and ecological imbalances. Thus, there is a need to implement the biofuel programme in totality. The state has undertaken an ambitious scheme of biofuel species plantation in an area of 200,000 hectares. For managing the biofuel species plantation, the state has constituted the Uttaranchal Biofuel Board on public-private partnership basis. The biofuel programme has been divided into two phases. The first phase starting from will cover 100,000 hectares of Jatropha (Jatropha curcas) plantation. The second phase, in which another 100,000 hectares of Jatropha plantation will begin from , will be completed in the next four years. It is estimated that one rural family with two hectares of Jatropha plantation can generate Rs 28,000 per year (after five years of plantation), which is sufficient to run the household. Unlike diesel and kerosene subsidies running into several hundred crore rupees, biodiesel is not subsidized and it is one of the best fuels for remote villages. Jatropha plantation provides a net annual energy yield that is equivalent to about one tonne per hectare of crude oil imports and 2000 units of electricity generation through gasification of oil cakes. Jatropha plantation will impact positively 100,000 rural families, revitalize unproductive land, and generate carbon credits in the Uttaranchal state and other significant revenues by offsetting the social costs of fossil fuels. It also has a potential of providing employment in the far flung areas of the state. ANDHRA PRADESH In Andhra Pradesh, the plan of action for biofuel programme started with identification of areas, which have not received rainfall beyond 600 mm during nine of the last eighteen years. The government has listed out ten such districts namely Anantpur, Chittor, Kurnool, Mahbubnagar, Medak, Nalgonda, Nellore, Ongole, and Ranga Reddy. The share of wasteland here is about 53 per cent. The required oil-expelling and transesterification capacity is 9600 TPD (tonnes per day) and 3000 TPD, respectively. The state has a total of about 15,714 hectares of land earmarked for plantation purpose, and the total cost for the programme is about Rs 45 crore. Of the 15,714 ha earmarked, irrigated land comprises 7400 ha and rain-fed area extends up to 8,000 ha. Seedlings are being supplied to the farmer free of cost. In addition, the government is also providing adequate land preparation facilities. AP has enabled seed procurement by adopting a committee approach involving the best institutes in the country. About 37 tonnes of good quality seed from across sixteen sites have been collected. About 178,000 seedlings in the ten districts have been raised, which go directly to the farmers from the nurseries of the research institutes. Research and development is under the auspices of premier research institutions like Central Research Institute for Dryland Agriculture, International Crops Research Institute for the Semi-Arid Tropics, Hyderabad, Directorate of Oilseed Research, Hyderabad, National Bureau of Plant Genetic Resources, New Delhi, Indian Institute of Chemical Technology, Hyderabad, and Acharya N G Ranga Agriculture University, Hyderabad. The institutes are involved in the collection of high-quality germplasm and carrying out other necessary experiments within a mandate period of three years to bring out the best plant material and also the best agricultural practices. As Jatropha is a cash crop, failure can have a devastating effect on farmers. A step forward in providing safeguards has been taken by involving ICICI Lombard, which has already covered about 2800 farmers with weather insurance. A risk fund is proposed to guarantee minimum income to Jatropha growers in case of yield loss. Guaranteed buy-back price (with an adjustment clause) for farmers through tripartite agreements to cover income/market risks is also proposed to be drawn between growers, industry, and biodiesel board.

199 Electrification and Bio-energy Options in Rural India 175 for purchase of seeds, planting stock, planting operations, and a buy-back policy for biodiesel are some of the incentives to support a successful biodiesel mission. However, initial efforts produced mixed results due to lack of information and systematic research, as also knowledge gaps. Subsequently, many research organizations have undertaken programmes to standardize technical and biological aspects such as nursery techniques, planting models, cultural operations, harvest methods, and genetic improvement programmes to identify superior genetic material to maximize yield. These research findings and on-hand field experiences have resulted in significant improvements in knowledge related to commercial production from large-scale plantations. For example, the myths on irrigation requirements, and their correlations with seed yield have been cleared. Bio-fertilization with the use of mycorrhiza and protection from pests and diseases also enhance yield even on marginal and highly degraded soils. However, more efforts are required to answer questions related to variation in yields, and refinement of plantation models and cultural operations. Limitation of Vegetable Oils as Diesel Fuel Vegetable oils when used as diesel fuel have various technical limitations such as high viscosity, poor atomization, poor volatility, thermal cracking in diesel engines, poor oxidation stability, polymerization in combustion chamber leading to deposits, injection fouling by deposits, fuel line and filter clogging, polymerization of triglycerides in lube oil, and so on. Hence, modification of vegetable oils is necessary for efficient and trouble-free engine operation. One way to modify vegetable oils to produce diesel is to transesterify them. BIO-ETHANOL PROGRAMME Society as a whole will benefit from an ambitious, global ethanol introduction as a renewable alternative to diesel. However, many myths such as lower calorific value, cetane number, production potential of ethanol, associated with sugarcane ethanol are impossible to ignore. Predictably, staunch opposition comes from fossil fuel industry. Ethanol fuel is an option which can cohabit with traditional fossil fuels, improving long-term security of supply. Although the US Environment Protection Agency declares that temporary use of such fuels will not cause major damage to engines, the same cannot be said regarding tailpipe emission control systems as ethanol fuelled vehicles emit significantly large quantities of unregulated pollutants such as aldehydes. Biofuel programmes in developed countries are very often treated as a domestic issue: a deficient strategy that provides ammunition for the defenders of fossil fuels in terms of reliability and potential. The real issue is that there are import barriers in developed countries to introducing biofuels, as with many other agricultural products. Biofuels such as alcohol are energy sources produced in rural areas to primarily service the energy needs of cities that can afford to pay. Often, biomass programmes are established to produce energy for the poor living in rural areas. These programmes have their merits but are limited economically because of size, given that the buyers have little purchasing power or are not even involved in the commercial market. Although incentives to domestic production act in the learning curve effect, there is also a need to counteract the pressure from inefficient suppliers and to increase production efficiency worldwide, including progressive trade liberalization. This will allow developing countries to produce biofuels not only for domestic consumption, but also for obtaining revenues from biofuel exports. WAY FORWARD Biomass gasification is one of the upcoming renewable energy technologies in India and its contribution to overall energy supply is likely to increase rapidly in future. Though biomass can offer a decentralized and environment-friendly (with net zero carbon-di-oxide emissions) energy option, biomass gasification is still perceived as a cumbersome and unreliable technology for decentralized power generation. Therefore, in spite of the government s programme for its promotion, since 1984, vast potential still lies untapped. The major problem faced in the acceptability of the biomass gasifier as a decentralized power plant is due to its cumbersome and unreliable long-duration operation, the main reasons being fuel bridging and clinker formation within the gasifier and the hampering of smooth fuel movement calling for constant attention of the operator. Also, ineffective cooling of gas results in lower efficiency and the presence of high tar and particulate content in gas calls for frequent shutdowns for maintenance. Therefore, there is a need to develop low-tar gasifier designs and gas cleaning-cooling systems with minimal waste water generation. Unfortunately, there is no organized market for biomass trading and this is a major barrier in developing biomass-based energy systems on a large scale. A key factor that can influence the future of biomass energy is the development of a market for biomass energy resources and services. Long-term penetration of biomass energy in the industrial and power sector depends on the cost of delivered energy as well as reliability of technologies. The future of biomass energy lies in its use with modern technologies. India needs to take separate approaches for successful implementation of biofuels programme in the country s different segments. Vegetable oils can be utilized as they are or by

200 176 India Infrastructure Report 2007 converting them to methyl/ethyl esters i.e. biodiesel. Agricultural engines like pump-sets and farm machinery engines are simpler engines in terms of construction and they can be very well maintained by villagers. Hence, they may use SVOs with a modified maintenance schedule, whereas more sophisticated engines like transportation engines need to use more refined fuel such as biodiesel. Transportation engines are expensive engines and affect the urban air-quality. Their population is quite large and concentrated in urban areas, hence, they should use biodiesel, which is a more refined and standardized fuel. For production of biodiesel, a multi-pronged approach seems more practical, where transesterification may be carried out by oil refineries in an organized manner and the biodiesel premixed with diesel at the refinery before distribution. The process of transesterification can also be carried out by cooperatives at the district headquarters level, which will cater to the district, thus generating employment in rural areas and avoiding the fuel transportation related costs. This will also reduce the energy dependence of rural areas. SVO can, however, be used in villages for decentralized power generation as well as agriculture farm machinery in remote areas and rural areas. Bio-mass based energy options have the potential to change rural areas, especially, those having large tracts of fallow and barren land.

201 Electrification and Bio-energy Options in Rural India 177 REFERENCES ASPO (2006). The Fifth International Conference of the Association for the Study of Peak Oil and Gas (ASPO-5), San Rossore (near Pisa), Italy, July Census of India. (2001). Provisional Population Totals, Paper I of 2001, Government of India, New Delhi. Iyer, P.V.R., T.R. Rao and P.D. Grover (eds) (2002). Biomass: Thermo-Chemical Characterization, I.I.T., Delhi. Mande, Sanjay (2005). Biomass Gasifier-based Power Plants: Potential, Problems and Research for Decentralized Rural Electrification in Lal Banwari and MRVP Reddy (eds), Waste to Wealth, TERI, New Delhi. Planning Commission (2003). National Mission on Bodiesel, The Planning commission, New Delhi. Reddy, B.S. (2003), Overcoming the Energy Efficiency Gap in India s Household Sector, Energy Policy (31), Tripathi, A.K., P.V.R. Iyer, T.C. Kandpal and K.K. Singh (1998). Assessment of Availability and Costs of Some Agricultural Residues used as Feedstocks for Biomass Gassification and Brignetting in India, Energy Conversion and Management, Vol. 39, No. 15.

202 178 India Infrastructure Report IRRIGATION AND WATER RESOURCES PART I IRRIGATION: ACHIEVEMENTS AND CHALLENGES Apoorva Oza WHAT IS IRRIGATION? Irrigation is the artificial application of water for the cultivation of crops, trees, grasses and so on. For the urban Indian, the word irrigation conjures up images of the first Prime Minister of India, Jawaharlal Nehru, and the Bhakra Nangal Dam (Temples of Modern India) and images of Medha Patkar, Aamir Khan, and the tribal oustees of the Narmada dam. These are diverse perspectives on the story of large irrigation infrastructure in India. In fact, in popular public perception, irrigation connotes large irrigation infrastructure rather than provision of irrigation services. For a typical Indian farmer, looking up to the skies to see whether the rain gods will favour him this time, irrigation means a wide range of interventions at the farm level, ranging from a couple of support watering(s) (or life saving watering) during the kharif (monsoon) season from a small check dam/ pond/tank/dry well to assured year-round water supply from canals or tube wells to farmers cultivating three crops a year. The method of application has also evolved, from traditional gravity flow and farm flooding to micro-irrigation where water is applied close to the root zone of the plant. Indian farmers gain access to irrigation from two sources surface water (that is, water from surface flows or water storage reservoirs) and groundwater (that is, water extracted by pumps from the groundwater aquifers through wells, tube wells and so on). Surface irrigation is largely provided through large and small dams and canal networks, run-off from river lift irrigation schemes and small tanks and ponds. Canal networks are largely gravity-fed while lift irrigation schemes require electrical power. Groundwater irrigation is accessed by dug wells, bore wells, tube wells and is powered by electric pumps or diesel engines. To meet the growing needs of irrigation, the government and farmers have largely focused on a supply side approach rather than improve the efficiency of existing irrigation systems. Irrigation Sector Terminology The terms used by the Ministry of Water Resources (MoWR), Ministry of Rural Development (MoRD), and the Ministry of Agriculture (MoA), the three ministries within the government responsible for irrigation are as follows: 1. Major irrigation (cultivable command area above 10,000 ha). 2. Medium irrigation (cultivable command area between 2000 ha to 10,000 ha). 3. Minor irrigation (cultivable command area less than 2000 ha) a. Surface irrigation b. Groundwater irrigation This classification belongs to an era when all irrigation was largely surface irrigation, promoted and supported by the government. Hence, groundwater irrigation, which was in its infancy till the 1960s, is slotted into minor irrigation as

203 Irrigation and Water Resources 179 each scheme (or well/bore well) in its individual capacity irrigates 1 to 5 ha of land. Minor irrigation also includes a large number of small surface irrigation schemes such as village tanks, and ponds, including many which were constructed pre-independence and managed by the local community and have been now handed over to the panchayat administration. Two other terms which are critical to our understanding of irrigation sector are watershed and micro-irrigation. Watershed may be defined as an area from where rainwater is drained through a common outlet (lake/river/rivulet) and therefore, can range in size from a few states to a few ha. It is a hydrologic unit which is useful for natural resource planning and management. The watershed programme, funded by the Ministry of Rural Development (MoRD) and Ministry of Agriculture (MoA), focuses on a range of multi-disciplinary interventions (afforestation, soil and water conservation measures, water harvesting and so on) in a watershed which is demarcated so as to be as contiguous to the village boundary as possible. The watershed programme is a key programme of the MoRD and MoA to increase agriculture productivity in areas which are rainfed and cannot access any surface irrigation scheme (the watershed programme guidelines specifically prohibit work on villages which have more than 30 per cent area already under irrigation). Micro-irrigation encompasses drip and sprinkler technologies. Traditionally, irrigation is provided to crops by flooding the entire farm, largely through gravity-based flow. To get more crop per drop two major technologies of drip and sprinkler irrigation have been developed. In both these technologies, water is available in quantities and location more suitable to the plant growth and near the root zone. Use of these technologies improves the efficiency of irrigation. Application of microirrigation devices leads to per cent water savings relative to flood irrigation. Irrigation and Water Resources in India: Competition for Scarce Resources The world over, the irrigation sector is the largest user of water almost 80 per cent of the water in the world is taken up by irrigation (in India, the irrigation sector uses ~85 per cent of its available water resources). The average rainfall in India is 1170 mm and given the geographical area of 3.3 million km, gives India 4000 cu km of water. Almost 50 per cent of this water is lost to evaporation, percolation, sub-surface flows to oceans and only 1953 bcm is accounted for. Because of spatial and temporal variation in the availability of water, only 1086 bcm is utilizable* (Phansalker and Verma, 2005). An availability of 1700 cubic meters of water per capita annual water resource (AWR) is safe (Falkenmark et al. 1976). India s *Small variation from utilizable surface water given in Part II is due to different sources of data. AWR was 2214 cum in 1996 but is estimated to go down to 1496 cum by Also, while the AWR is high now, the real availability of water is based on the developed water resource (DWR) which is only 25 per cent of the AWR (Gulati et al. 2005). Also, the national averages do not tell the whole story as water is a local issue and there are many regions in India where water availability per capita is below the safe level. The other main users of water, (urban and rural drinking water), industry and environment, show an increase in demand. As urbanization increases in India, demand for water from the urban sector will increase. Already water conflicts are rising with irrigation water being diverted for urban drinking water supplies in times of scarcity. Farmers in Rajasthan have not allowed dam waters to be drained to the Bharatpur Sanctuary. With an increasing population and growing needs, the gap between the demand and availability will only widen with time. Hence, irrigation as a sector will be under increasing pressure from other sectors to share scarce water. The irrigation sector will be compelled to introduce reform towards better water management and minimization of wastage to be able to meet its growing demands from progressively less water availability per capita. STATUS OF IRRIGATION In India, the irrigated area is 34 per cent of the net area sown. The gross irrigated area is 80 million ha which gets India the prize for the largest amount of irrigated agriculture in the world. The break-up is given in Table The so termed minor irrigation is now the major source as groundwater provides 50 per cent of the gross area under irrigation (in fact recent data shows that in terms of net sown area, groundwater provides 60 per cent of the net irrigated Table Irrigated Area in India Ultimate irrigation Utilization Capacity potential 1 (in million ha) (in mha) (in mha) Major & Medium Minor: Groundwater Surface Total Total Source: Gulati et al. (2005). 1 The Ultimate Irrigation Potential (UIP) is an estimate prepared by the Ministry of Water Resources of the overall potential for irrigation in the country.

204 180 India Infrastructure Report 2007 million hectares irrigated Fig The Evolution of Forms of Irrigation in India Source: Bhatia (2005). area (Shah and Deb, 2004). As can be seen, the potential created so far (till 1997) is only 64 per cent of the UIP. Thus, groundwater is a critical element in filling the need gap for the rural farmers, as it has provided irrigation in areas where the public irrigation systems have not reached or where the service delivery has been poor. In the last two decades, 84 per cent of the addition to net irrigated area has come from groundwater. Major and Medium Irrigation In terms of investment by the government, major and medium irrigation sector accounts for 57 per cent of investment in the irrigation sector which serves only 35 per cent of the total area irrigated (Gulati et al. 2005). The infrastructure is ageing; there is an increased siltation of large dams, time and cost over-runs, and tail-ender deprivation. Ageing of the infrastructure Almost 60 per cent of the total dams of the country are more than two decades old (Figure 7.1.2). Canal networks also need annual maintenance. Besides regular maintenance, many older structures need replenishment for which funds are a constraint. Number of Dams Fig Age of Major Water Infrastructure in India Source: Tyagi (1987). Wells Canal Tanks > <10 Under Year Construction Increased Siltation of Large Dams The Inter-Ministry Task Force on large reservoirs maintains that one third of their storage capacity has been affected by siltation, resulting in reduced area under irrigation and lowering the life of the dam. In most cases the rate of siltation is far in excess of the rate assumed during construction (Planning Commission, 2002). Time and Cost Over-runs Another issue related to most large dams is that they are not completed within the scheduled period or budget and spill over from one 5-year plan to another. When the Tenth Plan began, there were 410 on-going projects, some of them started in the Fifth Five-Year Plan. The spillover costs from previous projects to the Tenth Plan are Rs 17,700 crore which is more than the allocated amount (MoRD, 2006). These delays have not only led to escalated costs but also to delays in returns from the investment and lower the viability of these projects. Tail-ender Deprivation Farmers who have land at the end of the canal system are called tail-enders. They include farmers in the tail reach as well as those at the end of the upper and middle reaches of the canal system. It has been known that many get neither enough nor timely water. A national research study undertaken by the Development Support Centre shows that tail-ender deprivation is far more than assumed thus far. In Gujarat, in a major water deficient project Dharoi with 45,000 ha of command area, the tail-enders problem was found in 37 per cent of the command area. Even in the areas with warabandi system in Punjab and Haryana, 70 per cent of the tail-end farmers got 54 per cent to 70 per cent less water than they were entitled to. A good example of how this is hidden from the existing monitoring system is the large Tungabhadra system in Karnataka where farmers in the last reach got 91 per cent less water than they were entitled to even though the project performance was claimed as 90 per cent (DSC, 2003). A major impact of this was the lower agricultural productivity of tailend farmers, movement to low-value crops or practice of leaving land fallow. The causes of tail-ender deprivation are excessive use by head-reach farmers, poor maintenance, less funds allotted to tail regions for maintenance, poor construction, and design fault. Minor Irrigation Minor irrigation currently covers million ha of land. The third minor irrigation census carried out in covered

205 Irrigation and Water Resources lakh villages in 586 districts. It showed 19.7 million ha of irrigation of which 18.5 million are groundwater schemes and 1.2 million are surface water irrigation. The 18.5 million groundwater schemes have created an irrigation potential of 62.4 million ha (3.37 ha per schemes) while the 1.2 million surface irrigation schemes have created an irrigation potential of 11.9 million ha (9.9 ha per scheme). The surface and groundwater schemes are very different in nature and we analyse concerns and potential later. Surface Water Schemes in Minor Irrigation The average command area of the surface water schemes is about 10 ha (Census, 2001). This adequately covers the range of schemes included in this category from small ponds with a command area of 2 to 5 ha to large flow irrigation systems with a capacity of 5200 ha and more. Administratively, in most states minor irrigation schemes are managed by the Panchayat irrigation department. Since there are a large number of schemes with low command area and are dispersed over many villages, existing panchayat irrigation staff for managing these schemes is much less. In most cases, village panchayats do not have the resources to maintain these schemes on their own leading to shrinkage in use of this potential to only 58 per cent i.e. 6.9 million ha only. The major structures under surface irrigation schemes are tanks and water harvesting structures which amount to 0.55 million structures out of the 1.2 million schemes. In drought prone areas where rainfall is uncertain, like Rajasthan, the tanks have fallen into disuse. Out of the 0.55 million tanks only 0.47 million tanks are in use. About 3 million ha potential irrigation is lost because of non-use or under-utilization of these tanks. The major issues concerning minor irrigation are: 1. lack of attention by the irrigation institutions; 2. siltation and non-availability of power; 3. though technically they belong to the panchayat, they are neither managed by them nor are the funds routed through them. Hence, the community ownership of many of these panchayats is very low; 4. Traditional institutions community-based organizations (CBO) which used to manage these tanks, do not exist now and new institutions at the village level to address the changing needs of the villagers have not yet evolved. Groundwater Irrigation Groundwater now contributes to 60 per cent of the area irrigated in India. India also has the highest annual groundwater extraction in the world. Since 1970, it has been contributing more to agricultural wealth than surface irrigation. The contribution of groundwater increased from Rs 22 billion in 1970 to 132 billion in 1993 while surface water increased from 77 billion to 115 billion (Shah and Deb, 2004). Tube wells are now the largest source of irrigation in the country and their share has increased from 1 per cent in to 37 per cent in (MoRD, 2006). Since this sector has almost no dependence on the government, it is growing at a rapid rate and it is estimated that one million wells are added every year (Shah and Deb, 2004). Being an individually managed source, ground water irrigation is also a more efficient form of irrigation, with crop yields per cubic meter of water being 1.2 to 3 times higher than surface irrigation. However, since this sector has grown through investment by individual farmers, with little state involvement compared to canal irrigation, government support for understanding this sector and improving its performance is negligible. The major issues for the future growth of groundwater irrigation are declining resource base, demand driven growth, and a lack of policy and regulatory framework. DECLINING RESOURCE BASE While on the average out of the 430 bcm available, only 160 bcm is withdrawn, this average hides the localized stress on the resource of large regions currently dependent on groundwater. The number of blocks which have more than 90 per cent groundwater development (GWD) is increasing. In Punjab, Haryana, and Rajasthan more than 40 per cent of the blocks are over-exploited and for the country as a whole, 14 per cent of the blocks are over-exploited. This is expected to increase to 60 per cent in the next 25 years (MoRD, 2006). DEMAND DRIVEN GROWTH There are many regions of India with hard rock geology which have lower groundwater potential than the alluvial plains. Since groundwater extraction is primarily driven by the needs of the population and the density of farmer population and not the quality of resource, groundwater irrigation is scaling up even in such hard rock areas causing irreversible depletion of the resource base (Shah and Deb, 2004). A POLICY VACUUM Currently there is no policy framework governing the use of groundwater. In 1974, the central government had introduced the Groundwater Act which was not adopted by any state. In any case, most policy makers feel that regulating thousands of wells is operationally not possible. However, the first requirement for evolving effective policies is to shift from water resource development to water resource management as in many areas, development has already taken place and if not managed, will lead to collapse of the groundwater resource. Options which can be considered are a combination of legal measures with indirect regulation through power supply.

206 182 India Infrastructure Report 2007 THE IMPORTANCE OF IRRIGATION IN THE INDIAN ECONOMY Till the 1990s, Finance Ministers used to say that Every budget is a gamble on the monsoon. For the more than 70 per cent of the Indian population, living in rural India and dependent on agriculture directly or indirectly, the monsoon controlled their purchasing power year after year. Even now, when agriculture contributes less than 20 per cent to the national economy, more than 600 million people are dependent on agriculture for their livelihood. Therefore, irrigation infrastructure, which has the potential to insure the farmer against the vagaries of the monsoon and increase his income from a small (and diminishing) land holding is the most critical infrastructure for rural India. There have been several studies which have established immense benefits of irrigation. The increased food security of the country, increased agriculture incomes in irrigated areas, the success of the green revolution, are all linked to timely availability of water for crops not dependent on rainfall alone. In addition to the direct benefits there are indirect benefits emanating from forward and backward integration. Studies both at the village level and regional level have shown these indirect impacts. For every Rs 100 of direct benefits the Bhakra dam generated 90 rupees of indirect benefits for the regional economy and had an impact in areas even beyond the region (World Bank, 2005). Similarly, the impact of the green revolution in the North Arcot region of Tamil Nadu proved that each rupee spent on irrigation led to an additional value generation in the non-farm economy (IFPRI, 1985). About 50 per cent of the growth in the non-farm economy was due to agricultural demand for inputs and marketing services and the remaining 50 per cent was because farmers as consumers had higher purchasing power to buy more consumer and other goods (Chambers, 1988). In fact, the provision of irrigation improved the returns on social sector investment as well. Returns to five years of education were 32 per cent in irrigated districts and nil in un-irrigated districts (Pritchett, 2002). Chambers (1988) mentions that impact of irrigation on the livelihoods of the rural poor comes about through employment incomes, security against impoverishment, non-compulsive migration, and improvement in the quality of life. In terms of food security in India, the 35 per cent irrigated area provides more than 60 per cent of the food production. Studies show that at the village level irrigation provides higher and more stable employment and the poor are the major beneficiaries. In fact, the contribution of irrigation to employment is greater than even high yielding varieties. Studies show that there is an increase in number of days work required per ha with irrigation compared with rainfed condition ranging from 60 per cent (Datiwada canal) to more than 150 per cent (Ferozpur, Punjab) (World Bank, 2005). The increase in value and incomes which irrigation provides can also be judged by two other indicators: (a) increase in land prices after a rainfed area got access to irrigation and (b) the large private investments made by individual farmers in ground water irrigation. Irrigation Multiplier The Irrigation multiplier is estimated to be 4.5 (returns per ha per season) and 3.15 (returns per ha per year). In either case the farmers share of the total marginal benefits of irrigation to the society is between 22 to 32 per cent. This means that the economy-wide benefits of irrigation are much higher than what a farmer gets in terms of increased crop output in a crop season or year. However, it should be noted that while there is strong correlation between increased irrigation and reduction in poverty in India, the ultimate impact of irrigation on reduction in poverty depends on other factors such as the structures of agriculture production, rural institution, the consumption feed back and labour mobility. In fact, there are states in India like Bihar, UP, and Tamil Nadu which have high irrigation and yet high rates of poverty (Bhattarai, 2004b). The marginal impact of irrigation on poverty has also declined over time. Responsiveness of poverty reduction which used to be 0.4 to 0.5 with respect to 1 per cent increase in irrigated area has reduced to 0.2 in (World Bank, 2005). Beneficiaries of Irrigation A major concern regarding the irrigation systems, especially, that provided by large dams is that it benefits only large farmers. Data, however, show that 40 per cent of the beneficiaries of major irrigation systems are small and marginal farmers. Large farmers form only 12 per cent of the command area of the major irrigation schemes (Joshi, 1997). In addition the increased income of labourers who are not direct beneficiaries of the irrigation system is substantial. Besides, with the increased number of working days, the wage rate is also likely to increase when there is provision of irrigation. These are great benefits, especially, for the landless who have to migrate every year to urban areas to get employment during the nonmonsoon period leading to fragmentation of families. Studies show that villages with intensive year-round irrigation attract landless population from the surrounding villages who then settle down permanently (Chambers, 1988). Distressed and seasonal migration has a negative effect on education as parents do not lead a stable life. Studies show that after irrigation when people stay in one village, they start sending their children to school. Groundwater-based irrigation largely has the same benefits as surface irrigation. However, groundwater brings greater benefits for small and marginal farmers. But, there is a downside for small and marginal farmers who own dug wells at the village level. As large and well-resourced farmers can dig deeper and invest in bore wells their extraction from the bore wells renders

207 Irrigation and Water Resources 183 many shallow dug wells nearby inoperative. This means that farmers who are getting irrigation from dug wells now do not reap the benefit in the longer run as their groundwater source is extracted by larger bore well farmers. Gender Issues While irrigation largely benefits the farming community, within a typical farming household men and women have different roles and responsibilities. While in groundwater irrigation, the entire decision-making is at the farm level since most farmers have private wells, in canal irrigation systems decision-making is through irrigation institutions. Membership to irrigation institutions is based on ownership of agricultural land and because hardly 3 5 per cent of rural women own land, women are largely absent in most irrigation cooperative societies. Studies show that 65 per cent of agricultural activity in most part of the country is done by women farmers (Douglas and Bavisker, 1997). Increased migration to cities in many areas by men has also led to an increase in women headed rural households wherein women bear almost total responsibility for the agriculture operations. Shilpa Vasavada, in her study of women irrigators of canal irrigation systems in South Gujarat, has shown that while women farmers contribute substantial labour in agricultural operations and in the maintenance of canal, their involvement in the decision making for access of canal instituitions is marginal (Vasavada, 2000). Therefore, institutions which exclude women from the decision-making-process do not really represent the ground reality and consequently, they do not run systems efficiently or equitably. This lack of participation from women farmers in irrigation institutions is not only detrimental to the efficiency of the system but also affects the workload on women farmers. Advaita Marathe s study points out that when women are involved in decision-making roles, there is better conflict management and timely recovery of dues (Marathe, 2003). Therefore, policy action must target proactive involvement of women farmers in all decisions related to irrigation water management at the village level. Participatory Irrigation Management Act needs to incorporate clauses which ensure that women and men are both members of Water User s Associations even if they do not own the land. WHO LOSES OUT TO THE PREVAILING IRRIGATION POLICY IMPERATIVES? While much has been written about the benefits of irrigation, there is a downside to both surface and groundwater irrigation methods. Over the years, the negative effects of irrigation (both surface and groundwater) are becoming apparent and irrigation projects are no longer perceived as temples of modern India. The major problems caused by irrigation are submergence of land, displacement of people, and overextraction of ground water. Submergence of Land due to Surface Reservoirs Submergence of land for reservoirs leads to displacement of people and also causes extensive environmental damage as stretches of forest and traditional eco-systems are also submerged. Fish population in rivers is also affected, negatively affecting the livelihoods of downstream villages. Estimates on the number of people displaced so far as a consequence of surface reservoir systems vary widely from 21 million to 40 million with per cent of those displaced belonging to scheduled tribes (D Mello, 2002). The fact that the country has no systematic rehabilitation and resettlement policy for this large group of people is a matter of serious concern. 2 Displacement leads to fragmentation of communities, loss of livelihoods, and a pitiable migratory existence in search of labour in urban and semi-urban areas. While the rehabilitation policy has changed from cash compensation to land-for-land, the government has still not developed a system to ensure that farmers, whose only livelihood skills are related to farming, are supported towards developing new livelihood skills after displacement. Rehabilitation, therefore, suffers from the following policy infirmities. 1. The definition of project-affected people is not adequate, with villagers displaced partially or those displaced by irrigation department housing colonies being treated differently from dam displacement. 2. Rehabilitation procedures are time-consuming, cumbersome, and have a history of instances of rent-seeking behaviour. 3. The land allotted is scattered and not with similar livelihood options (tribals, for example, who were earlier near forests depended on forests for part of their incomes). 4. Cash compensation is given without proper advice or livelihood training with the result that money is spent without a new long-term livelihood option, leading to increase in the numbers of unskilled labour force. Tribals and Displacement A large number of people displaced are from tribal communities, because large dam sites submerge hilly areas where most tribals live. Tribal areas are among the poorest in the country 3. It is estimated that till 1990, 8.5 million tribals have been displaced, out of which per cent are yet to be rehabilitated (Fernandes, 1994). 2 National Policy on Resettlement and Rehabilitation for Project Affected Families-2003 by the Ministry of Rural Development is not comprehensive enough to deal with resettlement and rehabilitation issues. 3 About 30 of the poorest 69 districts in the country have a tribal population of more than 30 per cent (Debroy & Bhandari, 2003).

208 184 India Infrastructure Report 2007 Scheduled tribes are the most deprived sections of the Indian society, even when compared to scheduled castes. With 8.4 per cent population, scheduled tribes have a poverty incidence of 49.2 per cent and form 15.7 per cent of the total poor. This compares unfavourably with scheduled castes, who form 21.3 per cent of the population and have incidence ratio of 42 per cent and other communities, who have poverty incidence ratio of only 28 per cent. While tribals are displaced so that the country gets irrigation, the area under irrigation in tribal areas is much less (less than half!) than the national average. Tribal districts have only per cent of irrigated area as percentage of net sown area as against per cent for the country as a whole. Only 3.66 per cent of the irrigated area in tribal districts is served by major irrigation schemes compared to 9.9 per cent for the country (Phansalker and Verma, 2005b). Hence, there should be a comprehensive approach to addressing the issue of displacement. Otherwise large projects will never be feasible in this country. There is also a need to address the irrigation needs of tribals so that irrigation is not merely a curse for the poorest in the country. Groundwater Over-extraction Affecting Quality of Water The unregulated growth of groundwater irrigation, while providing irrigation access to millions of small farmers, has led to mining of groundwater aquifers and affected the quality of groundwater. Since groundwater is a common source for domestic water supply in addition to irrigation, the drinking water quality of a large number of villages and urban settlements has been affected. Field-level studies show how excessive exploitation by a few farmers has rendered entire villages dependent on external sources for drinking water. Since women are traditionally responsible for fetching drinking water there has been increased drudgery for women in many such areas. This, in turn, causes health problems for all such drinking water users. The major water quality problems are: 1. Salinity in coastal areas: Over-extraction has led to intrusion of sea-water along the coast. Four coastal states, namely, Andhra Pradesh, Orissa, West Bengal, and Gujarat suffer from coastal salinity. Gujarat alone has set up a separate Salinity Ingress Prevention Circle as part of its Irrigation Department to address this problem. The Gujarat government records show that 950 villages suffer from coastal salinity ingress. 2. Excessive fluoride causing fluorisis: Thirteen states in India have evidence of fluorisis and it is reported that about half a million people in India suffer largely due to excessive fluoride. 3. Nitrates: Excessive nitrate is a problem in twelve states, though in some cases it is not only caused by excessive groundwater withdrawal for irrigation but because of high mineral content in the aquifers as a natural condition. 4. Arsenic: This is found in West Bengal and is also caused by extraction of deeper aquifers. Water-logging Affecting Quality of Land The water-logging of areas because of excessive irrigation and, consequently, rendered saline and alkaline, is a major problem. The Ministry of Water Resources shows total area waterlogged, saline and alkaline, as 6 million ha. Considering the fact that surface irrigation projects have only irrigated 38 million ha so far, this is a considerable loss of cultivated area (Vaidyanathan, 1994 and MoRD, 2006). The other negative effects relate to increase in malaria and water-borne diseases because of increased waterbodies. FINANCING OF THE IRRIGATION SECTOR The country spent Rs 920 billion (at historical prices) till 1997 on the irrigation sector. Fifty-seven per cent of this expenditure has been for major and medium irrigation, 32 per cent for minor irrigation, 6 per cent for command area development and 5 per cent for flood control. It may be noted that the expenditure on minor irrigation only includes the State expenditure and it does not include the money spent by farmers themselves. Tushaar Shah estimates the total private investment in the groundwater irrigation to be Rs 480 billion (Shah and Deb, 2004). Financing of Surface Irrigation While in absolute terms, state investment in the irrigation sector has increased, and recently the government announced a range of schemes like the Accelerated Irrigation Development Programme (AIDP), the Bharat Nirman and so on, the irrigation sector s outlay, as a percentage of the total plan outlay, is now less than 10 per cent. The irrigation sector needs funds for maintenance and replacement of the existing canal irrigation infrastructure, developing new infrastructure in areas which have had no access to irrigation so far, and funding the power infrastructure which makes groundwater irrigation possible. The international norm for replenishment and repair costs as a percentage of the value of the capital stock 4 is about 3 per cent which translates to Rs 60 billion for maintenance which is much more than the annual plan outlay. Hence, meeting this norm does not seem feasible and therefore, the quality of the infrastructure is bound to decline over time if not maintained properly. The Irrigation Commission appointed by the Government of India in 1972 recommended that the maintenance cost should be covered by the water charges. However, in India 4 In India the current value of the infrastructure of major, medium, and minor irrigation is about Rs 2000 billion.

209 Irrigation and Water Resources 185 this is not the case as water rates are decided on political considerations and have remained stagnant in most states for the last twenty years. In 1960s, the receipts could cover the O&M expenses, but since then the ratio of receipts/working expenses has steadily declined and is currently about 40 per cent. The O&M budget of the Government of India includes administration costs, extension and maintenance and repairs. With increased staff costs, a larger proportion of the O&M budget has gone towards administrative costs, leaving fewer funds for actual repairs and maintenance. Overall, only 27.5 per cent of the total O&M funds are available for repairs and maintenance (Gulati et al. 2005). Therefore, a combination of low water rates, poor recoveries, and increased allocation of O&M expenses to administrative costs have led to a situation where there is hardly any money for maintenance and replenishment. Since O&M budgets are at the discretion of the state governments, in a scenario of increasing state deficits, it gets less priority. This scenario has meant that the quality of infrastructure has declined rapidly. Many states have accessed international funding to restore infrastructure rather than build new infrastructure. Funding New Infrastructure The capital cost of canal irrigation has gone up steadily over the years. Some economists put the capital cost of irrigation potential created during the Eighth Plan at Rs 1.9 lakh per ha (Gulati et al. 2005). The CWC on the other hand, using a simplistic formula of dividing the cumulative costs by the cumulative potential, arrives at a figure of Rs 68,000 per ha. As per the Planning Commission (2002), the cost of creating additional potential from major and medium projects is Rs 1.43 lakh per ha at the end of the Ninth Five-Year Plan (MoRD, 2006). The gap between potential created and actual irrigation potential of surface irrigation schemes (major, medium) is about 25.2 million ha. Assuming Rs 1.42 lakh per ha, the funds required are a staggering Rs 350,000 crore, making the task look improbable with only government funding. Alternate Financing Options The future for financing the new irrigation sector looks bleak unless other options are explored. Several states (Karnataka, Gujarat, and Maharashtra) have explored the option of raising funds from the market to finance irrigation infrastructure. However, as Phansalkar points out in his study, these efforts have slim chances of success unless there is a comprehensive reengineering of the irrigation institutions, their performance incentives and accountability (Phansalkar, 2004). Participatory Irrigation Management pilot studies show that cost-recovery does improve and farmers do take up canal repairs on their own, at much lower unit costs than the irrigation department, if they have management responsibility for the canal irrigation system. In groundwater irrigation and small water harvesting structures, where individual or groups of farmers feel that they can exercise greater control over the management and use of the resource, there is substantial private investment. Applying the same principle, if the irrigation institutions allow a greater role to farmers and political populism does not propagate free water assets, farmers will invest in the major and medium irrigation sector, as they do in groundwater and minor irrigation schemes. IRRIGATION POWER NEXUS Groundwater now covers 70 per cent of the total irrigated area in the country and 70 per cent of the irrigated households. Almost 1 million wells are added every year. A large number of wells are funded by farmers or entrepreneurs. However, as the contrast between the costs of canal irrigation (where the government pays for the entire infrastructure of delivering water to the field and charges a low water rate which amounts to 3 per cent of the cost of cultivation) and groundwater irrigation (almost 10 time more) increased, there was a demand for subsidizing the electricity used for groundwater extraction. As irrigated areas increasingly moved to groundwater irrigation, the free or subsidized electricity developed great value as a populist tool, with the result that many states declared free power for farmers. The Planning Commission says that 30 per cent of the sales of the State Electricity Board go to the agriculture sector which provides only 3 per cent of the revenue. However, others differ World Bank estimates that farm subsidies amount to 10 per cent of the total supply cost or about Rs 240 billion a year. This is about 2.5 times the annual expenditure of canal irrigation. In seven states, the electricity subsidy to agriculture is more than 40 per cent of the gross fiscal deficit ( ) (World Bank, 2005). The irrigation power nexus has also led to large amount of water wastage: 1. Since power is subsidized, and for a long time there was a fixed annual tariff 5 based on the horsepower of the motor, there was no incentive for the farmer to save water. Irrigation is a low priority sector and often receives electricity at night. Farmers generally leave the motors switched on and sleep while the waters flood their fields and drain away. 2. Increased subsidies make groundwater extraction cheap, hence, there is no incentive to make irrigation more efficient (explaining the poor growth of the micro-irrigation sector) Cheap irrigation provides an incentive for a high level of 5 The fixed tariff was tried to make it cheap for farmers to pump out water in waterlogged areas and also because the cost of collecting metered rates was greater than the value of the bill in many areas.

210 186 India Infrastructure Report 2007 groundwater extraction, making the source unsustainable. The greater the depth of extraction (in the north Gujarat region, bore wells have reached 1000 feet depth!) the greater the pumping costs and the higher the level of energy subsidy. This has become a vicious cycle and abrupt subsidy reduction is not feasible, especially as the power supply is unreliable and irregular and farmers would not agree to pay for what is renowned to be poor service (Box 7.1.1). Recent Initiatives by the Government The Accelerated Irrigation Development Programme (AIDP) has provided central loan assistance to states since The rate of creation of irrigation potential per year has increased to 0.92 Mha during the period from the earlier 0.51 Mha during the period This scheme has supported 173 major and medium, 4169 minor, and 21 Box Water and Energy Use in Groundwater Irrigated Agriculture: Case Study of the BESCOM Doddaballapur Substation Feeder Line DF 12 and DF 13 Service Area BACKGROUND The objective of the Water and Energy Nexus (WENEXA) Project is to identify measures for reducing adverse impacts of inadequate power pricing and distribution on use of water in the agricultural, municipal, and industrial sectors. The Project is a four-year initiative financed by the United States Agency for International Development/India (USAID/India), implemented under contract by PA Government Services, Inc. Under the auspices of the USAID and the Ministry of Power, GoI, the WENEXA Project selected Doddaballapur Taluk of Bangalore Rural District, Karnataka, for a site-base activity in groundwater irrigated agriculture. The area is defined as the Bangalore Energy Supply Company (BESCOM), Doddaballapur Subdivision, Feeder Lines DF 12 and 13 service area. The Doddaballapur Subdivision 11 kv Feeder lines, DF 12 and DF 13, originate from the 66/11 kv D-Cross Substation. They serve 26 revenue villages and fall within the jurisdictions of five Gram Panchayats: Melekote, Heggedehalli, Rajagatta, Konagatta and Tubagere. The area is located in the upper catchments of the Arkavathy River of the Kundanvathy watershed, although little of the stream flows provide irrigation water to the farms in this region. Between 1971 and 2004, the average groundwater depth declined from 64.5m to 184m. The Department of Mines and Geology recently classified this area as an overexploited groundwater region. The area includes 3500 households and a population of approximately 17,000 people. Almost all households rely on agriculture as a source of livelihood. The reported annual average income here is Rs 29, Six hundred and fifty-three borewell farms fall within the DF 12 and DF 13 service area, where forty crops are cultivated on a net sown area of 2500 acres. 50 per cent of the area is rainfed and the rest irrigated. 7 Groundwater is the primary source of irrigation water 8 with an estimated total annual water use of 5.8 million cum. Two crops, mulberry and grapes, account for 66 per cent of the total use. Subsidized power is a key issue for the electric distribution company struggling to meet demand for electricity to pump water in this highly subsidized loss sector. Improvements in energy efficiency could reduce utility losses, but upgrading the distribution system to provide consistent, high-quality electric service is a necessary pre-condition. However, distribution investments have not yet been made and voltage fluctuations of this area commonly lead to pumpset motor burnout. Electricity tariffs for irrigation pumpsets in Karnataka are flat HP-linked, supplied to farmers at zero-marginal cost, and do not cover the cost of supply. Furthermore, the bill payment rate in this area is quite low. Thus, energy efficiency is rarely a factor in pumpset purchases. Three-phase power is typically supplied for only eight hours a day. Use of converters to run three-phase pumpsets on single-phase power for longer hours is not uncommon. Poor quality of service and highly subsidized power tariffs lead farmers of this area to pump when power is available rather than applying water according to crop water needs. As a result, over-watering takes place. In some cases, twice the amount of water than is necessary is used to optimize crop yields. 9 Farmers naturally behave in an economically rational manner in response to the realities created by well-meaning but dysfunctional policies. Since electricity is cheap, they use large amounts of it. And since poor quality power ruins high efficiency pumps, they use rugged, low cost but very inefficient pumps. The perverse result is a system that induces the wasteful consumption of two precious resources: water and energy. 6 Institute for Youth and Development. WENEXA Secondary Data Collection for Doddaballapur Subdivision Feeder Lines DF 12 and DF Institute for Youth and Development. WENEXA Water and Energy User Survey for Doddaballapur Subdivision Feeder Lines DF 12 and DF Although tank-fed irrigation constituted 15 per cent of the irrigation water use in past years, with the onset of a multi-year drought, tank-fed irrigation is rarely practised. 9 University of Agricultural Sciences, Bangalore. WENEXA Technical Report No. 7. Detailed Project Report: Irrigation Efficiency in Groundwater Irrigated Agricultural for the BESCOM Doddaballapur Subdivision Feeder Line DF 12 and 13 Service Area

211 Irrigation and Water Resources 187 INVESTMENTS IN ENERGY AND IRRIGATION WATER USE EFFICIENCY The WENEXA Project conducted studies to identify investments for improving energy and water use efficiency. A GIS-based pumpset inventory identified 950 irrigation pumpsets connected to the feeder lines, of which only 663 are operational. Borewell failure is the primary reason for the non-operation of the remaining 287 pumpsets. Because groundwater depths here average 150 m, all of the pumpsets in use are submersible. The average pumpset capacity is 9 HP, and ranges from 3 15 HP. The average pumpset operates for 2000 hours per year. An energy audit of a 10 per cent sample of the functioning pumpsets showed that 91 per cent operate with efficiency of less than 30 per cent. A network survey determined the voltage profile on both feeder lines which was found to be, in most areas, inadequate to support the quality of power needed for the operation of pumpsets meeting Bureau of Indian Standards (BIS) specifications. A groundwater availability map was developed to predict borewell failure risks. Replacing inefficient pumpsets with efficient pumpsets has the potential for reducing electricity consumption along the two feeders by an estimated 45 per cent. Based on the data, it was determined that the current annual power consumption of irrigation pumpsets connected to DF 12 and DF 13 is estimated at 9.7 million kilowatt hours (kwh). With replacement of 601 pumpsets operating at less than 30 per cent efficiency 10 the annual power consumption is estimated at 5.3 million kwh, resulting in an annual energy savings of 4.9 million kwh. The monetized value of the savings based on the raw purchase price of Rs 2.5/kWh is Rs 110 lakh. The investment cost for replacement of approximately 601 pumpsets at Rs 40,000 per pump is approximately Rs 286 lakh, assuming a 10-year pumpset life expectancy and a 10 per cent interest rate. The payback period based on energy saving benefits that accrue to the power sector is roughly 2.6 years. 11 The payback period for pumpset replacement based on savings to farmers on pumpset repair and maintenance resulting from necessary power system upgrades, is estimated at 14 years not a bankable investment for farmers in this highly subsidized sector. Shifting from flood to drip irrigation has the potential for reducing total annual groundwater use by 42 per cent and for further reducing annual power consumption by an additional 20 per cent. The findings indicate that drip technologies are suitable for 53 per cent of the total net sown area currently under flood irrigation. This investment would result in an estimated annual water savings of approximately 2.2 million cubic metres of water and 2.0 million kwh of electricity per year. The estimated amortized cost of drip irrigation is Rs 150 lakh, assuming a 10 per cent interest rate. The annual on-farm gains due to yield increases are estimated at Rs 250 lakh per year. The value of the energy savings based on the raw tariff of Rs 2.5 is Rs 50 lakh annually. The payback period for the drip investment is 0.6 years for mulberry, 1.2 years for grapes, and 0.6 years for other horticultural crops. 12 Shifting from rainfed irrigation to drip irrigation should be discouraged to ensure that benefits resulting from a shift from flood to drip irrigation are not lost through a net expansion in irrigated area. The findings above indicate that an overall investment of Rs 43.6 million for energy efficient pumping systems and drip irrigation technologies within the DF 12 and DF 13 service area could result in annual benefits of approximately Rs 410 lakh per year. Rs 250 lakh in benefits would accrue to farmers as increased farm incomes, and Rs 160 lakh could accrue to the power sector as loss reduction resulting from energy savings. This is in addition to an un-quantified benefit due to water savings of 2.2 million cubic meters per year that could improve village water supplies and ensure water availability for future use. PUMPSET REPLACEMENT PILOT STUDY The WENEXA Project conducted a controlled pilot to pre-test various aspects of investments in energy efficient pumpsets and drip irrigation systems. The pilot was designed to explore the following parameters: The impact of installation of energy efficient pumpsets in the absence of improved network voltage; 1. Responsiveness of farmers to energy efficient pumps; 2. Potential reduction in energy consumption; 3. Responsiveness of farmers to drip irrigation technologies; and, 4. Potential reduction in water consumption. Fifteen farm households from the DF 12 and DF 13 service area agreed to participate in the WENEXA pilot programme where a new energy efficient pumpset was installed in exchange for each farm shifting at least one acre of flood irrigated area into drip irrigation. All of the original fifteen pumps were oversized pumps and only three met BIS specifications. The average age of the pumpsets was two years. Pump motors were generally repaired at least once a year because of severe fluctuations in voltage. All fifteen farms used flood irrigation and planned to shift grapes, mulberry, and sapota into drip irrigation. 10 Pumpset retrofication was considered as an option. However, because of the depth to groundwater in this area, this option is at least as expensive as pumpset replacement. Furthermore, there is no way to control rates of discharge which could exacerbate the groundwater overexploitation. 11 International Institute for Energy Conservation (IIEC). WENEXA Technical Report No. 4. Detailed Project Report for Pumpset Efficiency for the BESCOM Doddaballapur Subdivision Feeder Line DF 12 and DF 13 Service Area University of Agricultural Sciences, Bangalore. WENEXA Technical Report No. 7. Detailed Project Report: Irrigation Efficiency in Groundwater Irrigated Agricultural for the BESCOM Doddaballapur Subdivision Feeder Line DF 12 and 13 Service Area

212 188 India Infrastructure Report 2007 With pumpset replacement, the average pumpset capacity was reduced by 2 HP, the average number of pumpset stages was increased from 18 to 21, and the average depth where pumps were seated in the wells declined from 156.3m to 152.1m all factors contributing to improved energy efficiency. Power consumption and water discharge measurements were taken prior to de-installation of the old pumpsets, at installation of the new pumpsets, and six-months after operation of the new pumpsets. The combined total power demand of the old pumps was measured at 71,782 watts. The combined total power demand of the 15 replacement pumps at installation was measured at 51,559 watts, and was measured at 55,334 watts after six-months of operation. Water discharge rates of the new pumpsets remained essentially unchanged from that of the old pumpsets. Within six months after installation, two of the new pumpsets were returned for repair as a result of frequent voltage fluctuations. Within nine-months of installation six farms were reporting pump burnout. 13 The use of energy efficient, right-sized pumpsets, in conjunction with drip irrigation systems resulted in an overall 70 per cent reduction in energy consumption and a 60 per cent reduction in water consumption, as compared to that of the inefficient, oversized pumpsets used with flood irrigation. These estimates were calculated using measurements of pumpset consumption and water discharge discussed above, and self-reporting data from farmers on the number of pumping hours per week with the old and new pumps. Findings indicate that on average, annual energy consumption using inefficient pumpsets with flood irrigation practice is 16,500 kwh/pump/year, with an average of 3446 pumping hours/pump/year. Energy efficient pumpsets used with drip irrigation systems consume on average 4740 kwh/pump/year with an average of 1269 pumping hours/pump/year. The annual overall water consumption for all fifteen farms using flood irrigation was estimated at 332,782 cubic metres per year. Water consumption using drip irrigation is estimated at 130,439 cubic metres per year. All of the participating farm households express a high level of satisfaction with the drip irrigation systems, two-thirds report satisfaction with the replacement pumpsets, and all express dissatisfaction with the network voltage and hours of supply. Some report use of single phase converters as a coping strategy to address inadequate power supply. 14 SUMMARY AND CONCLUSIONS The WENEXA Project proposes investments in energy efficient pumpsets and drip irrigation systems that have the potential for reducing power consumption of the Doddaballapur Subdivision Feeder Lines DF 12 and 13 service area by as much as 65 per cent, and reducing water use by 42 per cent. The pumpset replacement pilot confirms these findings and empirically demonstrates that shifting to energy efficient pumping systems in conjunction with use of drip irrigation systems can reduce energy use by 70 per cent and water use by 60 per cent. The proposed investments are highly-bankable. The payback period to the energy sector for the pumpset replacement investment is 2.5 years based on the value of energy savings. The payback period among farm households that invest in drip irrigation is 1.2 years or less, based on increased incomes due to improved crop yields. With six of the fifteen newly installed energy efficient pumpsets burning out within a nine-month period, it is clear that without simultaneous investments in network system upgrades, voltage fluctuations will reduce pumpset life expectancy well below the ten years that the analysis assumes. This would increase the payback period for pumpset investments and affect project bankability. Therefore, investments in network system improvements that provide adequate quality of power are a necessary condition for water and energy demand side management programmes for groundwater irrigated agriculture. Extension, Renovation and Modernization (ERM) projects till As a response to the gap between the existing irrigation and ultimate irrigation potential the government has proposed a time bound plan for rural infrastructure for the year under Bharat Nirman. 15 The Ministry of Water Resources in collaboration with state governments is responsible for the creation of additional 10 million ha of irrigation capacity by the year 2009 through major, medium and minor irrigation projects complemented by groundwater development. 13 Institute for Youth and Development. WENEXA Quarterly Report. June PA Government Services, Inc. WENEXA Technical Report No. 8. Case Study on Pumpset and Irrigation Efficiency in Groundwater Irrigated Agriculture BESCOM s Doddaballapur Subdivision Feeder Line DF 12 and DF 13 Service Area Of these 10 million ha, 4.2 million ha is through completion of major and medium irrigation projects and 2 million is through enhanced utilization of completed projects. So more than 60 per cent of additional potential is gained through improved efficiency of on-going and completed works. New projects would, therefore, account for only 3.8 million ha out of which 2.8 million comprise groundwater irrigation. The groundwater irrigation will largely be concentrated in the eastern regions of the country. In addition to the Bharat Nirman the Ministry of Water Resources has also launched a national project for Repair, Renovation and Restoration of waterbodies directly linked to agriculture. 16 This scheme, started in , a pilot scheme in sixteen districts of the country, will now be expanded to other districts. 16

213 Irrigation and Water Resources 189 In addition, there are many projects funded by the World Bank, Asian Development Bank, European Commission, Overseas Economic Cooperation, Japanese, French, Dutch, Canadian and German assistance in many states like Andhra Pradesh, Madhya Pradesh, Orissa, Rajasthan, Haryana, Tamil Nadu, Kerala, and Maharashtra. These schemes largely focus on increasing efficiency and utilization of existing projects through repairs and replacements of existing irrigation schemes, rather than creating new irrigation potential. SURFACE IRRIGATION: IS MORE MONEY THE ANSWER? Need for Institutional Reform The poor performance of the irrigation system and poor quality of infrastructure is assumed to be the result of inadequate funding. It is assumed that because rates are low, there are inadequate funds for Operations and Maintenance (O&M) which cause poor quality of services leading to farmer dissatisfaction and consequently, poor recoveries. This vicious cycle is not broken in most states 17 and, therefore, the irrigation infrastructure and services are of a poor quality. Therefore, there is an assumption that increasing water rates would be the single step leading to improvement in the irrigation system performance. But the problem is more complex than that. Irrigation sector performance is largely linked to the quality of services provided by the irrigation institutions, 18 and since there is no incentive to improve performance (or disincentive against poor performance) irrigation departments are not affected by the increased water rate. Therefore, merely increased water rates would not substantially change the performance. The decision on water rates is not merely based on the O&M costs but is largely a political decision. There are only a few states which have increased their water rates, and in some states like Punjab, the rates were revised downwards after the change in government. However, there are many reformoriented state governments like Andhra Pradesh, Maharashtra, and Gujarat which have increased their water rates annually to reach the stage wherein they can cover their costs. There is also no structured link between water recovery and O&M costs. In most states, water rate recovery is done by the Revenue Department and goes straight to the treasury, while O&M costs are part of the budget allocation. Since each system is not treated as a cost centre, the irrigation staff has little incentive to improve water rate recovery and farmers also consider the water rate as a tax rather than a user charge which is linked to the maintenance of their system. 17 Water rates for surface irrigation systems are decided by the state government. 18 Most states have an Irrigation or Water Resource Department. The irrigation departments have little accountability to the farmers they serve. Farmers have little say over the works carried out on their irrigation system and cannot influence the quality of the work and therefore, the system performance. Because of these weak institutional linkages, merely increasing water rates will do little to improve O&M rates. Increased O&M rates do not necessarily mean a proportionate improvement in quality of work and system performance. Besides, since O&M budgets are largely spent on staff costs in the irrigation institutions, it would be difficult for the farmers to understand why they should pay more even if water rate recovery was linked to the O&M costs budgeted by the irrigation institutions. All this has led to lack of funds for repairs and maintenance, leading to a decline in the quality of infrastructure and poor irrigation service to the farmer. Therefore, the story of the surface irrigation sector has largely been Build-Neglect-Rebuild and pouring more funds will improve things only partially. Figure describes the political economy analysis of the irrigation system and recommends that only a comprehensive reform process will help to improve the performance of the irrigation sector. Agency incentives Underfunding O&M Fiscal crisis of the state Increasing irrigation costs Poor system performance Low cost recovery Farmer dissatisfaction Low fee payment Low irrigation rates Fig Political Economy of Irrigation System Source: Gulati et al. (2005). Reforms Agenda Participatory Irrigation Management(PIM) Direct Link Weak Link No Link Farmer political lobby Participatory Irrigation Management (PIM) or Irrigation Management Transfer (IMT) is an approach of surface irrigation management wherein the management of the canal system is gradually handed over to the farmers in the command area. This approach is based on the belief that farmers have most to gain from improved irrigation services and hence,

214 190 India Infrastructure Report 2007 if they govern the irrigation systems, then the irrigation institutions would be more accountable. Water user associations are promoted and facilitated to take over the management of canal systems. Notable success has been achieved in many places (Joshi, 1997). However, many researchers feel that despite being tried out for so long, the results are not substantial. In India, Andhra Pradesh was the first state to pass a PIM Act, i.e. an Act by which all irrigation systems were to shift to a PIM approach. Rajasthan and Madhya Pradesh are among the other states which have also passed an Act, while Gujarat and Maharashtra are two states where the Irrigation Departments and NGOs have demonstrated successful pilot projects and scaled up PIM through a number of government resolutions. What PIM does is to try and empower the users to take decisions on the management of their system. Since this requires the irrigation bureaucracy to hand over some of these powers to the farmers (of whom earlier they were patrons), progress has been painstakingly slow and, more the result of rare initiatives of individual officers or a few Water Users Associations (WUAs) than a policy shift across the board. However, wherever there is political will behind this paradigm shift, as was the case in Andhra Pradesh, results have been apparent. PIM is as much a process of empowerment of farmers and letting go of state power as a means of irrigation management, and therefore, suffers from all the delays of empowering processes. While PIM alone may not be the magic pill which works fast, in the absence of a comprehensive reform of the irrigation institutions, it is a small step towards liberalizing the irrigation sector from the irrigation bureaucracy. For PIM to work, it has to be a part of the overall reform which includes water entitlements and accountable irrigation service agencies. Just like other sectors the irrigation sector also suffers from the lack of an independent regulatory authority. In surface irrigation systems, the government is the service agency and the regulator. This leaves the farmers with limited options to demand better services. Unfortunately, there is a vicious cycle here; since services are subsidized, farmer users do not demand better services and since the services are poor, there is resistance when user charges are raised and subsidy reduced. Maharashtra has recently taken a bold step in resolving this by setting up the Maharashtra Water Regulatory Authority (Rastogi, 2006). The Irrigation reforms, because they involve decisions on substantial resources, will have to be led by the political leadership. In states like Andhra Pradesh and Madhya Pradesh, the then Chief Ministers led the reform agenda. A similar political will is required at the national and state level if the irrigation sector has to be improved. COMMUNITY-BASED WATERSHED PROGRAMME Irrigation has been the engine of economic growth in most rural areas and hence, ground water irrigation, largely financed by farmers, has been growing at a rapid rate in the country. India has the highest annual extraction, 150 million cubic metres, in the world. However, the surface irrigation (major and medium) and groundwater irrigation have left out many regions of the country where there is no irrigation. Two-third of the unutilized irrigation potential is in the eastern part of the country Jharkhand, Orissa, Chhattisgarh, Eastern UP, and West Bengal which also happen to be the poorest regions of the country. With declining growth of agriculture and food grain production which is not keeping pace with population growth rate, enhancing agricultural productivity in these areas is of critical importance. Increased agriculture productivity requires increase in water and land productivity. While the irrigation sector provides water, the watershed programme focuses largely on land productivity and soil erosion. Increasingly, it also leads to development of small irrigation infrastructure. The watershed approach originates from the earlier efforts to reduce soil erosion and increase land productivity undertaken by the Ministry of Agriculture. In the early 1980s, experiences of community involvement for treating watersheds showed success (Sukhomajri in Haryana, Ralegaon Sidhi in Maharashtra) and an Integrated Watershed Development approach was taken up under the Ministry of Agriculture and Ministry of Rural Development. Besides this, many NGOs had piloted successful models of community-based watershed development in the country. The major advantages of the watershed approach are reducing soil erosion, in-situ moisture conservation, generation of biomass, and increased groundwater recharge as well as low costs of irrigation. For the irrigation sector, the watershed programme provides three major advantages: 1. It reduces siltation of the large dams by soil conservation in the upper catchments. For surface storage dams, siltation is a key problem as it reduces the storage capacity and hence, life of the dam (MoRD, 2006). The Inter Ministry Task Force on large reservoirs has pointed out that large reservoirs have lost over 33 per cent of their storage capacity due to siltation. This reduces the area under irrigation over time. The life of many large dams has decreased as actual siltation rates are much more than estimated. Hirakud Dam has siltation 2.5 times the rate assumed, reducing the expected life by half (Planning Commission, 2002). 2. Watershed treatment helps in recharging the local aquifers and makes investments in groundwater irrigation by farmers more viable.

215 Irrigation and Water Resources Watershed treatment provides a low cost decentralized option to rainfed remote villagers that are not part of any irrigation schemes and do not have access to power and capital to scale up groundwater irrigation. A large number of small water harvesting structures (check dams, gabions, farm ponds, village tanks) are constructed or rehabilitated under the watershed programmes which provide much needed life-support irrigation to kharif crops. The International Crop Research Institute for Semi-Arid Tropics (ICRISAT) analysis of 311 watershed programmes finds that soil loss reduced by 0.82 tonnes/ha/year, irrigated area increased by 34 per cent, cropping intensity increased by 64 per cent, there was additional employment of 182 person days/ha/year, and the benefit to cost ratio was 2.14 (MoRD, 2006). There are individual studies which show that water levels have risen by 10 per cent in Andhra Pradesh. Watershed programme is also an effective drought coping intervention, as the study done by Development Support Centre shows that villages which have had watershed treatment have more food and water security during drought years than villages without watershed treatment (MoRD, 2006). Reforms in the Watershed Sector Learning from the success of community-based watershed projects, the MoRD launched the common guidelines, bringing together five different programmes of the Ministry of Rural Development, namely, Drought Prone Area Programme, Desert Development Programme, Integrated Wasteland Development Programme, Jawahar Rozgar Yojana, and Employment Assurance Scheme in These common guidelines were unique in many ways with assured funding for four-five years directly at the village level, involvement of NGOs, and a high emphasis on capacity building of the community. These guidelines have been modified in 2003 and issued as Guidelines of Hariyali with a greater involvement of village panchayats. Recently, the Government of India appointed a Technical Committee on Watershed Programmes and its latest report provides new directions to the watershed programme. This report, titled From Hariyali to Neeranchal, argues the case for a greater investment and scaling up of the watershed programme and a comprehensive instituitional reform to enable the government to operationalize the participatory guidelines (MoRD, 2006). Financing the Watersheds In terms of costs, while there is community contribution in terms of labour and supervision (in most projects the users themselves are involved in the implementation of the programme), the government investment till date has been Rs 4000 per ha. Till date the area covered under watershed programme (under Ministry of Rural Development, Ministry of Agriculture, externally aided projects and so on) has been million ha at a cost of Rs 17, crore. However, the recent report of the Technical Committee on Watershed Programmes in India feels that the unit cost is inadequate and recommends an investment of Rs 12,000 per ha so that there is substantial increase in the water harvested and the area irrigated (MoRD, 2006). The Committee recommends an outlay of Rs 150,000 crore to treat 125 million ha at a unit cost of Rs 12,000 per ha. Since the annual outlay is hardly Rs 2300 crore, it is suggested that by diverting funds from the National Rural Employment Guarantee Scheme, where focus and coverage area is the same as that for watershed programme planning, the current programme outlay can be doubled to Rs 5000 crore and the watershed work on 125 million ha can be accomplished by THE RAIN WATER HARVESTING MOVEMENT The success of the decentralized water harvesting structures in the watershed programme has led to increased focus on water harvesting in all the states. While Gujarat state has a high profile Sardar Patel Jal Sanchay Yojana, Madhya Pradesh has a Jalabhishek Yojana and Rajasthan has a Jalbiradari scheme. In all these states (water scarce regions) the Chief Ministers personally spearhead the programmes. There is a huge publicity campaign and mass awareness campaign approaches (padayatra and so on) are used as a means of communication. All the political leaders in these states give priority to these programmes, and the schemes are part of the election manifestos and selfpromotions campaigns of all political parties. What appeals to the political leaders is the relatively low cost, widespread appeal, the speed of implementation (relative to the huge time and cost-over-runs of the major and medium irrigation schemes) and the fact that community participation is relatively easy and visible. These small water harvesting structures are largely win-win, that is, with no problems of land acquisition, submergence and so on. Being small and technically simple, village communities also feel confident about implementing such schemes with little external support (Box 7.1.2). In many other states (such as Andhra Pradesh, Karnataka, and Uttaranachal) there is a special, high profile water harvesting movement which has been launched and prioritized by the incumbent Chief Minister. If there is one rural irrigation programme which has caught the imagination of the current political leaders, it is this approach of a large number of small water harvesting structures (as opposed to a few large dams of the 1960s). For modern India, a large number of small check dams is definitely a better option of delivering results

216 192 India Infrastructure Report 2007 Box Check Dam Programme of Gujarat Gujarat has one of the largest community based check-dam programmes in the country. After the drought of 1999, young men of Khopala, a village in water scarce Saurashtra, grew tired of the poor agriculture productivity due to water shortage and decided to try and solve their problem themselves instead of waiting for a government scheme. They collected money from within the village and from those who had migrated to urban areas (many of whom were diamond merchants in Surat). With community labour and native intelligence, they constructed 200 check dams, small and large, in a six month period before the monsoons. The water harvested during monsoon transformed the village economy, increasing the area under irrigation and improving the availability of drinking water. Other nearby villages emulated the example, and village and local leaders spread the message of self-reliance and water harvesting through water-walks (jal yatra) in nearby blocks and districts. NGOs working in the region sent thousands of villagers for an exposure visit and the message spread quickly. Religious leaders, regional media also took up the campaign. Soon this became a mass movement which attracted thousands of villagers to the simple idea of becoming self-reliant by harvesting water. The Government in tandem with the mood of the masses developed an easy-to-access scheme called the Sardar Patel Participatory Water Conservation Scheme. In this scheme, the government funded 60 per cent of the cost while the community contributed 40 per cent through labour, material, and cash (it was changed to 80:20 scheme in 2005). In a display of rare political will, the irrigation department was restructured to support this scheme which had very simple design parameters for the dams which could be replicated by the community. Application procedure was simplified and approvals given with basic technical guidance. In Gujarat, since January 2000 which is when the Sardar Patel Participatory Water Conservation programme was launched, about 30,000 check dams have been built up to 2003 (conversation with senior staff reveals that till 2006, almost one lakh check dams would have been constructed). The average cost is about Rs 5 lakh and storage varies between 0.15 Mm 3 to 0.35 Mm 3. within a five year term rather than the slow-moving, expensive and controversial temples of the 1960s! Though it is difficult to get a consolidated idea of the amounts invested by various states, Gujarat alone has invested Rs 2 thousand crore in the Sardar Patel Participatory Check Dam Scheme and the Sujalam Sufalam schemes over the last five years. MICRO-IRRIGATION Much of the debate and discussion in the irrigation sector has been on increasing the supply of water to agriculture and this has led to bringing of more area under surface and groundwater irrigation. However, little attention has been paid to improving the efficiency of irrigation, i.e., ensuring that there is more crop per drop of water. Agriculture data still measure productivity in kilos per ha even though in many areas the scarce resource is water, not land. It is in this context that microirrigation emerges as a potential answer to the problem of increasing irrigated area with limited water resources available. As noted earlier, micro-irrigation comprises two technologies drip and sprinkler irrigation. Both of them save conveyance losses and improve water application efficiency by applying water near the root-zone of the plant. Drip systems convey water in small quantities through drippers/micro-tubes while sprinklers are pressurized systems where a fountain or spray of water is released by the sprinkler connected by pipes, resulting in foliar irrigation. Benefits of Micro-irrigation 1. The increase in yield for different crops ranges from 27 per cent to 88 per cent and water saving ranges from 36 per cent to 68 per cent vis-à-vis conventional flow irrigation systems (Phansalker and Verma, 2005). 2. It enables farmers to grow crops which would not be possible under conventional systems since it can irrigate adequately with lower water quantities (Box 7.1.2). 3. It saves costs of hired labour and other inputs like fertilizer. 4. It reduces the energy needs for pumping, thus reducing energy per ha of irrigation because of its reduced water needs. However, overall energy needs of the agriculture sector may not get reduced because most farmers use the increased water efficiency to bring more area under irrigation. Conventional drip systems, which have been subsidized by the government, use drippers and have pressurized flow. Their cost ranges from Rs 40,000 to Rs 60,000 per ha and the government subsidy (given to the drip company) ranges from 30 per cent to 80 per cent.these systems have been subsidized over the last two decades. Because of the high costs and complex subsidy procedures, most farmers, especially the poor, have not been able to access this technology even though they, with their insecure water sources, stand to gain most from these. Hence an NGO, the International Development Enterprise India (IDEI) has developed a low-cost drip irrigation technology which costs much less than the conventional drip,

217 Irrigation and Water Resources 193 Table Yields and Water Use for Selected Crops under Conventional and Drip Irrigation Systems in India Yield (Quintal/Ha) Water Supplied (cm) Crop Conventional Drip Increase Conventional Drip Saving Banana % % Grapes % % Sugarcane % % Tomato % % Watermelon % % Cotton % % Chillies % % Papaya % % Source: Verma, Box Transformation of Tippehalli In Tippehalli of Sangola block in Solapur district, from where the current phase of dramatic growth of low cost micro-irrigation has begun, farmers had long given up cultivation of their own lands. The village is located at a relatively higher altitude on hard basalt. Their wells have water that lasts barely 30 minutes of pumping for some eight months of the year, soils are gravel and thin. Farmers had given up cultivation and had taken to migration for cane cutting as their principal source of livelihood. With the advent of micro-irrigation and pomegranate cultivation, the village has seen the end of misery, forced migration and hunger. The crop can manage with little water during prolonged summer months and the low cost drips help farmers stretch their limited water sources to save their plantations. Source: Raina (2004). Box When do Subsidies lead to Market Creation? We have mentioned earlier that sprinklers have followed a somewhat different trajectory compared to drip irrigation though only in a few pockets of the country. Narsinghpur has seen a huge spread of sprinklers. Here the landscape is undulating, soils are alluvial and dominant crops grown are leguminous pulse crops which cannot stand excessive flooding or waterlogging. Undulating farms make gravity flow difficult while sprinklers have proved to be a boon. It should be noted that this ground situation enhancing suitability of sprinklers in Narsinghpur district enabled the subsidy, initially offered on sprinklers, to kindle a huge interest in farmers and that led to expansion of volume of sales of sprinklers. Thus, even after the subsidy amounts were reduced, the market took off on its own. The rise in volumes meant competition grew and product prices dipped bringing the technology within reach of a large number of farmers. Even some poor tribal farmers adopted the technology. Source: Rahul (2004). is a divisible technology (the conventional drip has the major disadvantage of being available in large units, which are expensive, unsuitable for small farmers and cannot be adopted on an incremental basis by farmers who first want to try out a new technology and then scale up). IDEI has three models which it has been promoting in the market for the last five to seven years, largely through a non-subsidized approach using the market-based system of incentives and awareness. With all these efforts by the government and social innovators like IDEI, there are still only 3 lakh users of drip in the country (covering about 250,000 ha of land) and the area under sprinklers is also only 700,000 ha. Considering

218 194 India Infrastructure Report 2007 that there are almost 20 million well owners, the potential of micro-irrigation is huge. The potential for drip ranges from 10 million ha to 16 million ha (Phansalkar, 2004). Overall, drip systems cover 1.5 per cent of potential. The potential for sprinkler irrigation is about the same. Scaling up of Micro-irrigation If the micro-irrigation devices achieve their potential of about 20 to 30 million ha, and even if water savings are on an average of 30 per cent, then an area of almost 6 million ha can come under irrigation with almost no additional irrigation infrastructure. Considering the huge subsidies required, both under surface irrigation and groundwater irrigation for bringing an additional ha under irrigation, investing in microirrigation is probably the most economical and environment friendly option. If scaled up, this may prove to be the technological breakthrough to address growing irrigation needs in a period of scarce resources. But there are many reasons why drip is not expanding despite its many benefits. It is obvious that unless the government, financial institutions and NGOs devote quality human and financial resources, scaling up may not occur (Phansalkar, 2004). WAY FORWARD The major challenge for the irrigation sector is to provide irrigation to rainfed areas, improve the quality of irrigation to existing irrigated areas, and achieve both of these objectives without incurring the large human, financial, and environmental costs of the past. The displacement costs to rural livelihoods, especially tribal livelihoods, because of large surface irrigation infrastructure have been huge and before new projects are initiated, the country needs mechanisms to redress the sufferings of those affected by the large irrigation projects. These projects have high costs, both in terms of capital investments as well as repairs and replacements, and existing budgetary outlays do not match the needs. Operational costs are largely subsidized, and the irrigation institutions are in a poor condition with few linkages between water rates, recoveries, and system performance. Therefore, major and medium surface irrigation systems have become increasingly unviable as capital, operational, and management costs rise with low contribution from users. To look at the brighter side, many state governments have increased their water rates, increased the role of farmers in surface irrigation management through PIM and stopped recruitment to the irrigation departments. Groundwater irrigation has proved the largest source of irrigation in the last two decades. Since the capital cost is mainly funded by the farmers themselves, its rate of growth and spread has been determined by demand for water rather than availability of water resources or government funds. However, the operational costs of pumping out water have been subsidized through power subsidies, and these are substantial. The source is being over-exploited and many aquifers may not last unless there is focus on management and regulation of use by the irrigation sector. Watershed development, which enhances agricultural productivity in rainfed regions through soil and water conservation, has done much to alleviate the problems in nonirrigated regions. Watershed treatment recharges the groundwater and reduces siltation of large dams. It is not possible to meet the challenge without substantial reforms in the irrigation institutions. The lessons of the last thirty years show that farmers increasingly want to manage the irrigation services they avail of. The high private investment in groundwater irrigation and substantial community contribution in small water harvesting structures indicate the farmers willingness to invest in reliable, self-managed irrigation. If they can get timely and reliable irrigation water and if there is transparency in the allocation and use of funds, they do not mind investing their money and time in managing and maintaining the irrigation systems. The irrigation institutions and policy-makers also need to reduce their obsession with the supply side approach and give attention to improving irrigation efficiency. Irrigation departments in many states are over-staffed and despite the increased role of minor irrigation, have a larger share of staff for major and medium irrigation projects. Irrigation itself requires an understanding of agriculture, sociology, agriculture economics, and agriculture engineering. Most irrigation departments are overwhelmingly staffed by civil engineers whose core competence is in constructing large dams and canals. Therefore, there is a need for a major shift in the existing staffing profile of water resource development departments so that their skill sets are relevant to the changing needs. Institutional reforms are a must and the revised guidelines 19 for the AIDP make reforms a pre-condition for funding irrigation projects. The time is ripe for most institutional reforms, such that 1. Irrigation institutions reflect changing approaches and technologies. 2. Institutions focus not only on increasing the amount of water available but improving the irrigation efficiency of the farmer so there is more crop per drop. 3. Irrigation institutions are so structured and incentives evolved such that there is a link between water rate, water recovery, and irrigation system performance. Only when this is done can irrigation systems recover their operational costs. 19

219 Irrigation and Water Resources The irrigation department, reduces its role in existing irrigation substantially and hands over powers to farmers associations or any other alternative institutions (farmers, entrepreneur and so on) which can take over the role of water distribution and management (after making sure that the physical system is in a shape which needs management and not extensive repairs!). 5. Groundwater irrigation and other minor irrigation get the attention they deserve and water management rather than development becomes the focus. 6. Tribal and other non-irrigated areas are served with irrigation technologies appropriate to their context. No single approach to irrigation surface irrigation, groundwater, or watershed can be applied to the diverse socio-geographical regions of the country. The government and all other agencies will have to evolve the best fit of technology and in the institutional arrangements for the different regions of India. This is the key learning of all these years, and therefore, to a large extent, the debate of choosing one approach to the exclusion of the others is irrelevant. In India, there are many areas where reforms and innovations have been tried out successfully; Participatory Irrigation Management in Andhra Pradesh, the participatory check dam scheme in Gujarat, the work done by NGOs in droughtprone and tribal areas in promoting water-harvesting, lowcost irrigation, and watershed treatment as well as low-cost, easy-to-use micro-irrigation devices, all offer lessons which can be scaled up.

220 196 India Infrastructure Report 2007 REFERENCES Bhatia, Ramesh (2005). Water and Growth, Background Paper for Water Economy of India, World Bank, Washington. Bhattarai, Madhusudan, Randolph Barker and A. Narayanamoorthy (2004a). Implication of Irrigation Multipliers for Cost recovery and Irrigation Finanacing, IWMI-TATA water Policy Programme. Bhattarai, Madhusudan and A. Narayanamoorthy (2004b). Dynamic of Irrigation Impacts on Rural Poverty in India: Changes over time and across the States, IWMI-TATA Water Policy Programme. Chambers, Robert (1988). Managing Canal Irrigation, Oxford and IBH, New Delhi. D Mello, Bernard (2002). Environment Impacts of Large Dams in 3iNetwork, India Infrastructure Report 2002: Governance issues for Commercialization, Oxford University Press, New Delhi. Debroy, Bibek and Laveesh Bhandari (2003). District Level Deprivation in the New Millenium, Konark Publishers, Delhi Dougles, Merrey and Shrirish Banisker, (eds) (1997). Gender Analysis and Reforms in Irrigation concepts, cases and gaps in Knowledge, International Water Management Institute, Sri Lanka. DSC (2003). Proceedings of the National Workshop on Tail-enders and other Deprived, Development Support Centre, Ahmedabad. (2005). Papers of regional workshop on Participatory Irrigation Management, Development Support Centre, Ahmedabad. Falkenmark, M and G. Lindh (1974). Impact of Water Resources on Population, submitted by the Swedish delegation to the UN World Population Conference, Bucharest, August. Fernandes (1994). Development, Displacement and Rehabilitation in the Tribal Areas of Orissa, Indian Social Institute, New Delhi. Gulati, Ashok, Ruth Meinzen-Dick and K.V. Raju (2005). Institutional reforms in Indian Irrigation, Sage Publications, New Delhi. IFPRI (1985). The IFPRI Annual Report 1985, International Ford Policy Research Institute, Washington. Joshi L. K., (1997). Irrigation and its Management in India: Need for a paradigm Shift, mimeo, National Workshop on Participatory Irrigations. Lant, Pritchett, (2002). Where has all the Education gone? The World Bank Economic Review, Vol 15, No 3, World Bank, Washington. Marathe, Advaita,(2003). Gender and Participatory Irrigation Management:The AKRSP(I) Experience,mimeo,The Aga Khan Rural Support Programme (India). MoRD (2006). From Hariyali to Neeranchal:Report of the Technical Committee on watershed Programmes in India, Department of Land Resources, Ministry of Rural Development,Government of India,New Delhi. Phansalkar, Sanjiv (2004). Private sector participation in Financing and Managing Surface Irrigation: Chasing a Mirage? Mimeo, International Water Management Institute. Phansalkar, Sanjiv and Shilp Verma (2005). Mainstreaming the Margins: Water-centric Livelihood Strategies for Revitalizing Tribal Agriculture in Central India, Angus & Grapher, New Delhi. (2005). Silver Bullets for the Poor: Off the Business Mark? mimeo, International Water Management Institute. Planning Commission (2002). Tenth Five Year Plan, Planning Commission, New Delhi. Rahul, P.S. (2004). Adoption of Sprinklers by Tribal Farmers in Narsinghpur district, MP, paper prepared for Central India Initiative, ITP, Anand. Raina, R. (2004). Technological and Institutional Innovations: A Case Study of Pommegranate Production and Marketing Report 021, IDE India, New Delhi. Rastogi, Anupam (2006). The Infrastructure Sector in India 2005 in 3iNetwork, India Infrastructure Report 2006: Urban Infrastructure, Oxford University Press, New Delhi. Shah, Tushaar and Aditi Deb (2004). The Socio-ecology of Groundwater in India, International Water Management Institute, Sri Lanka. Tyagi, N.K. (1987). Managing Salinity through Conjunctive use of Water Resources, Ecological Modelling, 40: Vaidyanathan, A. (1994). Food, Agriculture and Water: Second India Revisited, Institute of Development Studies, Madras. Vasavada, Shilpa, (2000). Women Irrigators and Participatory Irrigation Management Policy and Approaches to Mainstream Gender Concerns: Lessons from the Aga Khan Rural Support Programme (India), mimeo, Aga Khan Rural Support Programme (India). Verma S., S. Techpal and T. Jose (2004). Pep see System: Grassroot Innovation Underground water, Water Policy, IWA Publishing, London. World Bank (2005). India s Water Economy:Bracing for a Turbulent Future, World Bank, Washington.

221 PART II INTER-BASIN WATER TRANSFER N.K. Bhandari and N.S.R.K. Reddy Irrigation and Water Resources 197 INTRODUCTION The water resources projects are the closest to the hearts of rural people. They are usually located/proposed in the gorge portions of river systems which are normally remote rural areas inhabited by tribal and other backward classes. These projects transform regions, ushering in socio-economic development for the people. Interlinking of river projects is no different in this regard. Rather, it can be visualized as conventional water resources project, extended in scope for development/benefit of not only the surplus in-basin but also neighbouring watershort basins. Even today, the success of India s agriculture is mostly dependent on rainfall, the prediction of timing and intensity of which has become an onerous task. Much of the rainfall pours in a few intense spells only during the four monsoon months from June to September. Even this is not evenly distributed across the country. The basic philosophy of the inter-basin water transfer is thus to correct the natural imbalances in the availability of water in different seasons and across different regions of the country. In this part, the National Perspective Plan for Water Resources Development being pursued by the GoI is discussed in the context of its likely impact on India s rural development. NEED FOR INTER-BASIN WATER TRANSFER India receives on an average about 4000 billion cubic metres (bcm) of precipitation every year. More than half of this quantity is lost to the atmosphere or through deep percolation and only about 1869 bcm flow in the rivers as surface flow. This is estimated to be the water resources potential of the country. Approximately 690 bcm of surface water and 432 bcm of groundwater are available for use per year through conventional water resources development strategies. Nearly 60 per cent of the potential lies in the Ganga Brahmaputra Meghna system in the North. Another 11 per cent in the high rainfall region of the Western Ghats flows through the small west-bound rivers draining into the Arabian Sea. Apart from sundry sources, this leaves barely 19 per cent from all the other rivers put together including mighty rivers like Mahanadi, Godavari, Krishna, and Cauvery which flow east through peninsular India towards the Bay of Bengal. These large variations in water availability are the basis for the flood drought flood syndrome afflicting India with some areas suffering from flood damages, while some others battle acute long-run water shortage situations. Planners have long considered the merits of water transfer mechanisms draining water from surplus areas to areas of shortfall to redress the imbalance to an extent. The population of the country in AD 2050 will be around 1593 million for middle variant growth, as projected by United Nations (2004 Revision) and corresponding foodgrain requirement will be about 450 million tonnes. Development of irrigation coupled with high yielding varieties of crops and increased use of fertilizers may possibly be the only strategy available to achieve the required level of production. Availability of water for irrigation is thus critical to self-sufficiency in food. In-basin water resources development alone cannot increase the irrigated area beyond certain limits. The ultimate irrigation potential that can be achieved from in-basin development is estimated to be around 140 million hectares. But, for achieving the food production level of about million tonnes, it is imperative that an irrigation potential of at least 130 million hectares for food crops alone and 160 million hectares for all crops is created. One of the major strategies for achieving such a massive increase in irrigation potential could be inter-basin transfer of water. Many large towns and mega cities, particularly those situated in water deficit river basins, are already facing shortages in domestic and industrial water supply. In 1901, the urban population was about 26 million which was less than 11 per cent of the total population. By 2001, the urban population increased to 285 millions (28 per cent of the total population) with 35 urban agglomerations/cities having a population of more than one million. It has been projected that by the year 2050, urban population in India of 820 million would constitute nearly 50 per cent of the total population. As the economic condition of the people improves, the per capita water demand will also grow. Meeting the water requirement of large cities will be a challenging task. Traditional local sources of water supply will no longer be sufficient to meet the water needs of large cities. In many large cities like Mumbai, Delhi, Hyderabad, and Chennai water demands are already being met through inter-basin transfer of water. For meeting the domestic water requirements for the ever-increasing population in the urban areas, long distance inter-basin transfers on large scales may have to be resorted to in the future. Apart from large cities and towns, rural areas are also facing problems with regard to domestic water supply, particularly during years of less than normal rainfall. During such years, the groundwater recharge is reduced, and the traditional groundwater

222 198 India Infrastructure Report 2007 source for meeting domestic water requirements are also exhausted well before the onset of the next monsoon resulting in acute shortage of water, even for drinking purposes. A lasting solution to meet the water requirements of such chronically watershort rural areas, towns and cities lying in water deficit river basins, is perhaps long distance inter-basin transfer of water. An important advantage of inter-basin water transfer technology may lie in its applicability to the power sector. The demand for power is growing at the rate of 9 per cent annually. The projected demand by the year AD 2050 would be 8.3 million MW. Bulk of this power is expected to be sourced from coal-based thermal plants and the peaking power from hydel sources. The peaking power requirement from hydel sources will be around 3.3 million MW against just 84,000 MW estimated hydro power potential of the country. It may, therefore, be essential to develop the large power potential available in Nepal and Bhutan as part of the Himalayan rivers development component of the river linking project. Different water demand scenarios up to the year AD 2050 as enumerated by Central Water Commission have been presented in Table There will be a gap between the water availability and requirement by AD 2050 which cannot possibly be met through conventional in-basin development because of likely environmental, social, legal, or technoeconomic constraints. Therefore, in order to bridge the gap, interbasin water transfer is being viewed as a viable alternative which would also take care of water-short areas including drought-prone areas. The overall water resources situation in India is summarized in Table Table Sector-wise Demand Scenarios of Water in India Water Demand (bcm) in the year Sector Irrigation Drinking (including livestock) Industrial Energy Others (Forestry, Pisciculture, Tourism, Navigation and so on) Total NATIONAL PERSPECTIVE PLAN With a national objective of Water Resources Development in view, the then Ministry of Irrigation (now Water Resources) formulated a National Perspective Plan (NPP) in August The National Perspective Plan comprises two components, namely (i) Peninsular Rivers Development and (ii) Himalayan Rivers Development. Table Water Resources Scenario in India 1. Average annual precipitation 4000 bcm (3000 bcm during June Sep) 2. Average runoff in all the rivers 1869 bcm 3. Utilizable surface water 1122 bcm (i) By conventional means 690 bcm (ii) Replenishable groundwater 432 bcm 4. Present utilization 605 bcm 5. Future demand by AD bcm AD bcm 6. Possible additional water utilization bcm through Inter Basin Water Transfer Scheme of GOI Source: MoWR (2003). LUNI SABARMATI ARABIAN SEA LAKSHDWEEP TAPI CHAMBAL Source: Peninsular Component 12 PAR GODAVARI KRISHNA MANER NARMADA PENGANGA PALAR CAUVERY VAIPPAR GANGA PENNAR VAIGAI 1. Mahanadi (manibhadra) Godavari (Dowlaiswaram)* 9. Cauvery (Kattalai) Vaigai Gundar* 2. Godavari (Inchampalli) Krishna (Nagarjunasagar)* 10. Ken Betwa* 3. Godavari (Inchampalli) Krishna (Pulichintala)* 11. Parbati Kalisindh Chambal* 4. Godavari (Polavaram) Krishna (Vijayawada)* 12. Par Tapi Narmada* 5. Krishna (Almatti) Pennar* 13. Damanganga Pinjal* 6. Krishna (Srisailam) Pennar* 14. Bedti Varda 7. Krishna (Nagarjunasagar) Pennar (Somasila)* 15. Netravati Hemavati 8. Pennar (Somasila) Palar Cauvery (Grand Anicut)* 16. Pamba Achankovil Vaippar* * FR Completed Fig Proposed Inter Basin Water Transfer Links Peninsular Rivers Component PARBATI KALISINDH 11 KEN BETWA 16 9 The scheme is divided into four major parts: 10 WAINGANGA GANGA GHAGRA GOMTI SONE GODAVARI INDIAN OCEAN 8 MAHANADI BAY OF BENGAL DAMODAR SUBERNAREKHA BRAHMAPUTRA 1. Interlinking of Mahanadi Godavari Krishna Pennar Cauvery rivers and building storages at potential sites in these basins. This involves interlinking of the major river systems where surpluses from the Mahanadi and the Godavari are intended BARAK ANDAMAN & NICOBAR

223 Irrigation and Water Resources 199 to be transferred to Krishna, Pennar, and Cauvery rivers to cater to the needs of the deficit areas in the south. 2. Interlinking of west-flowing rivers, north of Bombay and south of Tapi This scheme envisages construction of as much optimal storage as possible on these streams and interlinking these storage facilities to make available appreciable quantum of water for transfer to areas where additional water is needed. The scheme also provides for taking water supply canal to the metropolitan areas of Mumbai. 3. Interlinking of Ken Chambal The scheme provides for a water grid for Madhya Pradesh, Rajasthan, and Uttar Pradesh and an interlinking canal backed by as many storage facilities as possible. 4. Diversion of other west flowing rivers The high rainfall on the western side of the Western Ghats runs down into numerous streams which discharge into the Arabian Sea. The construction of an interlinking canal system backed by adequate storages could be planned to meet all requirements of Kerala as also for transfer of some water towards the east to drought affected areas. Himalayan Component The Peninsular rivers development is expected to provide additional irrigation of about 13 million hectare and generate about 4 million kw of hydropower. Himalayan Rivers Component The Himalayan Rivers Component envisages construction of storages on the principal tributaries of the Ganga and the Brahmaputra in India and Nepal, along with interlinking canal systems to transfer surplus flows of the eastern tributaries of the Ganga to the West, apart from linking main Brahmaputra and its tributaries with the Ganga and Ganga with Mahanadi. This component will provide additional irrigation of about 22 million ha and generation of about 30 million kw of hydropower, besides providing incidental flood control on account of the storages proposed in the Ganga Brahmaputra basin. It will also provide the necessary discharge for the augmentation of flows at Farakka required interalia to flush Kolkata Port and the inland navigation facilities across the country. Benefits The National Perspective Plan in totality is planned to give additional benefits of 25 million ha of irrigation from surface waters, 10 million ha by increased use of ground waters, to raise the ultimate irrigation potential from 140 million ha (expected through conventional means of development) to 175 million ha and generation of 34 million kw of power, apart from the benefits of flood control, navigation, water supply, fisheries, salinity and pollution control and so on. NATIONAL WATER DEVELOPMENT AGENCY 7 LUNI SABARMATI TAPI PARBATI KEN BETWA KALISINDH CHAMBAL NARMADA 1. Kosi Mechi 8. Chunar Sone Barrage 2. Kosi Ghagra 9. Sone Dam Southern Tributaries of Ganga 3. Gandak Ganga 10. Manas Sankosh Tista Ganga 4. Ghagra Yamuna* 11. Jogighopa Tista Farakka (Alternate) to MSTG 5. Sarda Yamuna* 12. Farakka Sunderbans 6. Yamuna Rajasthan 13. Ganga (Farakka) Damodar Subernarekha 7. Rajasthan Sabarmati 14. Subernarekha Mahanadi * FR Completed Fig Proposed Inter Basin Water Transfer Links Source: 6 YAMUNA 5 4 SARDA GANGA GHAGRA SONE 3 2 GHAGRA GOMTI 8 MAHANADI 9 KOSI MECHI GANGA TISTA SANKOSH DAMODAR BARAK 12 SUBERNAREKHA MANAS 11 BRAHMAPUTRA The National Perspective Plan was discussed with state governments and the initiative taken by the Central Government for optimal development of water resources in the country was welcomed. A National Water Development Agency (NWDA) was set up in 1982 under the Ministry of Water Resources as an Autonomous Society to study the feasibility of the Peninsular Component of National Perspective Plan. Subsequently, as the studies progressed, in , NWDA was entrusted with the studies of Himalayan Component as well. Over the years, NWDA has carried out extensive desktop studies that are required in sequence to establish the feasibility of the Interlinking of Rivers (ILR) programme viz. water balance studies of basins/sub-basins and at diversion points, toposheet and storage capacity studies of reservoirs, toposheet and prefeasibility studies of links and finally came out with thirty proposals (16 Peninsular presented in Figure and 14 Himalayan presented in Figure 7.2.2) for proceeding to establish their feasibility on ground. The feasibility reports of

224 200 India Infrastructure Report 2007 fourteen Peninsular links out of the sixteen identified have been completed so far. All these studies are available on NWDA s website, The feasibility studies of the Himalayan links are currently underway on Indian territory. BENEFITS OF INTERLINKING OF RIVERS PROGRAMME: RURAL PERSPECTIVE It is expected that the ILR programme will have a major impact on rural India in general, and agriculture-dependent households in particular. As the programme is still at a conceptual stage, these aspects are elucidated only at macro level considering mainly its quantifiable benefits in the form of increased irrigation, improved drinking and industrial water supply, and enhanced electricity generation. The overall effect of the project can be expected to be much wider and more diverse, when all the tangible and intangible benefits are duly assessed through micro level studies and realized. The Interlinking of Rivers Programme will have both short and long-term impact on the economy. The short-term impact of the link canal will be in the form of increased employment opportunities and the growth of the services sector. Sectors supplying crucial inputs to the construction sector, such as cement, iron, and steel will also grow. In the medium to long term, a major impact will be in terms of increased and assured irrigation, power generation, domestic and industrial water supply and associated development. Irrigation The National Perspective Plan will provide irrigation benefits of 35 m ha in rural areas. The envisaged annual irrigation by the ILR project will be nearly per cent of current irrigated area in the country and one can visualize the agro-economic and socio-economic benefits that could be derived. Rainfed and water stressed lands can be assured irrigation and increased yields. About 2.5 m ha of drought-prone lands spread across several states are expected to be benefited from ILR Project. According to a study carried out by National Council of Applied Economic Research (NCAER), the expected foodgrain production in the year will be about 394 million tonnes subject to the implementation of ILR programme (Table 7.2.3). The foodgrain productivity growth is not expected to vary far from the levels attained by conventional irrigation methods that is, 2.46 per cent after (postimplementation of ILR programme). The country s foodgrain production can be expected to reach about 500 million tonnes by AD This will be sufficient to meet the foodgrain requirement of the country s population and India will be able to maintain its self-sufficiency with respect to food. A network of thousands of kilometres of link canals will provide life lines for rural development. Besides food Table Foodgrain Production as per NCAER study (million tonnes) Baseline With ILR programme Expected % Expected % Year Production increase Production increase Average Growth ( to ) Average Growth ( to production, the fertility of the lands may improve with irrigation development using surface water as well as recharged groundwater. Thus, the possibility of waterlogging which affects land productivity would be eliminated. Rural Water Supply The water supply situation is grim in rural areas. Womenfolk have to walk for miles in search of drinking water, which is often of poor quality. Link canals are so planned as to provide water to both urban centres and rural areas in the command with special emphasis on rural drinking water provisioning. Right of access to clean water is linked with fundamental right to life which the ILR aims to provide to common man both in the cities as well as in the villages. In the inter-basin water transfer schemes, domestic and industrial water supply will account for nearly 12 bcm. About 101 districts and Greater Mumbai, NCR of Delhi, Chennai, Kanpur, Lucknow, and other cities will benefit from the project. The intake structures, treatment plants, supply, and service lines will come up as part of infrastructure development in rural areas for assured potable water supply (Box 7.2.1). Rural Electrification Rural India suffers from power nonavailability, unreliability, as well as quality issues. The total hydel power potential of

225 Irrigation and Water Resources 201 Box Drinking Water from Sardar Sarovar Project The Government of Gujarat has developed a drinking water supply scheme based on Sardar Sarovar Project and it is the largest engineering intervention in India s rural water supply sector. The pipeline scheme, which is to cover 8215 villages when completed, will cost Rs 8096 crore at 2001 price level. Rural water supply was first started in Gujarat with Saurashtra in 2001, while in Kachchh it started in March The primary survey shows that 6 per cent of the villages of Gujarat (498 villages) included in the plan have already started receiving water, of which 180 receive water regularly. The Sardar Sarovar Narmada Nigam Limited (SSNNL) is the bulk supplier of Narmada water for drinking water supply. It supplies water to Mahi Right Bank Canal (MRBC) Authority, Gujarat Water Infrastructure Limited (GWIL) and directly to industries and municipal authorities. MRBC authority also supplies water to municipal bodies and industries. GWIL is the bulk carrier of drinking water. GWIL and Gujarat Water Supply and Sewerage Board (GWSSB) purchase bulk water from SSNNL. GWSSB is responsible for implementation of the group distribution projects which connect to the bulk water pipeline projects for supplying water up to the village level distribution systems. It is the distributor of the drinking water supply. It looks after O&M of main pipelines with pumping stations including filtration plants simultaneously with the execution of bulk water pipelines. It is also responsible for the O&M of the head works and distribution networks. Pani Panchayats are being created at village level for O&M of village level facilities with technical assistance from GWSSB. The lowest level GWSSB functionary (line man/woman) is made a member of Pani Panchayat to share the O&M responsibility. These Pani Panchayats have to generate funds to meet part of the O&M cost. Apart from that, creating awareness about the installation of water meters to measure and control water use and water loss is one of the supportive roles envisaged to enhance water use efficiency at the village level. This is a very important role that Pani Panchayats have to play. In addition to that, they have to undertake many other functions such as creating awareness about health and hygiene among the villagers; keeping water structures, their distribution network, and their surroundings clean; adopting waste water management practices; taking up environmental sanitation programmes, and so on. Talati cum Mantri, a village level revenue officer cum secretary of Gram Panchayat will be the secretary of Pani Panchayat. The secretary will have to work under the administration of Taluka Development Officer of the state government. Water and Sanitation Management Organisation (WASMO) is envisaged as a catalyst organization for implementation and maintenance of village level drinking water distribution with active participation of village communities. NGOs are being involved to facilitate the process of creating Pani Panchayats at the village level under the guidance of WASMO. Ultimately, Pani Panchayats are responsible for supplying drinking water to individual households in project villages. Pani Panchayats also have to collect the water charges from beneficiary households and have to pay their share of water charges to GWSSB on volumetric basis. NGOs are also educating rural people on revenue generation at village level to compensate a part of the O&M cost. Despite all these efforts villages are reluctant to adopt volumetric water supply. Water allocation norms are well defined. Though the pricing policy is still evolving, there are clear indications that the water will be charged on volumetric basis and the rates will be far above the rates prevailing in rural drinking water supply schemes. The proposed new rates almost double the existing rate in cities. Given the fact that the economic cost of supplying water to these water starved regions is prohibitive, efforts to recover the cost, so as to make such projects financially viable, are inevitable. The capital expenditure for piped water supply is of the order of Rs 2.88 per thousand litre. Generally, urban water supply project costs Rs per thousand litre. Operational Expenditure (O & M Costs) are generally Rs 5 to 6 per thousand litre and in the present case, it is about Rs.8.6 per thousand litre. The rural water supply projects are costlier than urban water supply projects because rural population is more dispersed. As water has started reaching villages, people in coastal villages of Saurashtra region have started growing trees using Narmada waters with immense positive outcomes. These examples indicate that Narmada water supply has really become a lifeline for the people of Gujarat. Source: Talati et al. (2004). the interlinking system will be 34,000 MW. Obviously, this will help in the electrification of nearby villages. The hydropower establishment in rural areas like power stations, sub-stations, supply, and distribution lines will be developed for power distribution through grids. Further, power transmission losses will also be minimized when rural areas receive power from proximate power stations. Rural Industries Adequate provision has been made towards meeting the projected requirements of industries in the region from link canals. Many agro-based and other industries may come up due to reliable supplies of water from link canals and increased agricultural activities in the region. Further, the ILR programme

226 202 India Infrastructure Report 2007 involves huge construction activity, which would include construction of dams/reservoirs, canals, control structures, road/rail bridges, and cross-drainage structures. This will have an impact on the industries supplying inputs for construction. There will also be an increase in employment and thus on demand for goods and services. The growth of the other sectors will depend on the strength of the backward linkages (sectors supplying inputs to construction sector) and forward linkages (sectors which are using output of construction sector as input) of the construction sector with the rest of the economy. This would certainly have a triggering/multiplier effect on the economy (Box 7.2.2). Rural Employment The interlinking of rivers is a mega project involving construction activity for years. The local population is likely to get employment as skilled and unskilled labour in these activities. Further, avenues of employment will be there for the poor people due to the increased agricultural activities and ancillary industries in the regions. This may help in socio economic upliftment of the project hinterland to a greater extent. More people will also be involved on a long term basis in the operation and maintenance of the link projects. Direct employment in the construction sector will grow by per cent. Sectors such as coal tar products, cement and electricity, gas and water supply will experience higher growth of employment than the construction sector (NCAER, 2004). Total employment in economy would increase by nearly 4 per cent. Agricultural labourers are generally under-employed and they too have an opportunity to engage themselves in production activities during the lean season. Rural Tourism There are innumerable examples in India, like Krishnarajasagar, Nagarjunasagar and so on where a dam/reservoir has become a recreation spot promoting tourism, water sports and the like in the region. The Interlinking of Rivers Project has the potential to promote tourism on a large scale at its dam/reservoir sites, along canals and their confluence points which will yield revenue for the country. As a corollary, this will also lead to a spurt of guest houses, hotels, restaurants, and entertainment Box Bhakra Dam The Bhakra Dam is a majestic monument across River Sutlej. Its construction was taken up first after independence, for the welfare of the people of Northern India. The construction of this project was started in the year 1948 and completed in The water stored at Bhakra has a tremendous potential of generating hydroelectric power. There are two power houses, namely, Left Bank Power Plant and Right Bank Power Plant. When Bhakra power houses were commissioned in 1969, total installed capacity in the entire country was 14,102 MW and the hydro capacity was 6,135 MW. To this, one single project, Bhakra, added 1050 MW (only dam for power houses) thus adding 7.5 per cent to the total capacity and 17 per cent to peak power capacity. The present installed capacity of the Bhakra-Nangal system, including the Beas-Sutlej link is a mammoth 2267 MW. Hydro-electricity by itself is sufficient justification of the project. Further, before Bhakra, the flood plains of Sutlej used to be 3 to 4 km wide. After Bhakra, the actual flood control offered by the dam, even though not planned, resulted in people occupying the flood plains up to a km or so. The project is a vital component in Beas Sutlej link in combination with Indira Gandhi Nahar Project which is an outstanding example of how the large inter-basin transfers brought about all round socio-economic growth with overall enhancement in the ecology and environment of the region. Under the Indus Water Treaty, the water of three eastern rivers viz. Sutlej, Beas, and Ravi were allocated to India. As the land to be benefitted in India lies mostly to the east and south of these rivers, the rivers had to be interlinked and the water conveyed through canal systems for serving vast tracts of land. The main storage on Sutlej is at Bhakra, while that on Beas is at Pong. Bhakra system provides irrigation to 26.3 lakh ha. of new area besides stabilization of existing irrigation of 9 lakh ha. A diversion dam, Pondoh, 140 km upstream of Pong on the Beas, enables diversion of water from the Beas to the Bhakra reservoir and generates 165 MW of power. Another dam on the Ravi namely, Ranjit Sagar dam will provide additional water to the Beas and will generate power. Subsequently, it was decided to link the Indira Gandhi Nahar Project with the river systems to provide 9.36 bcm of water to Rajasthan Canal for irrigating the areas of Thar Desert. Transfer of surplus waters of Ravi, Beas and Sutlej to Rajasthan right up to Jaisalmer and Barmer through Indira Gandhi Nahar Pariyojana has eliminated drought conditions, provided power benefits, transformed desert waste land into an agriculturally productive area by bringing irrigation and vegetation to about 2 million hectare area. Contribution in agricultural production due to implementation of the project is worth Rs 1,750 crores annually. The Indian military at the western boundary receive water from this canal. The project has changed the living standard and socio-economic conditions of the people in the area beyond imagination. Source: IWRS (2005).

227 Irrigation and Water Resources 203 parks in the region. A list of proposed dams in the ILR Project is given in Table A7.2.1 and Table A Rural Services Sector Once the project is in place, the services sector will flourish to meet the needs and demands of the people in the region. Establishment of health centres, schools, colleges, markets, community centres will take place. Rural health care, education, and family welfare are bound to improve. Rural Forestry The ILR programme involves construction of about thirtythree major dams. The programme, therefore, proposes afforestation as per GoI norms in lieu of the forest land that may get submerged under these dams/reservoirs. But, contrary to the opinion by many, all these dams are not exclusively proposed for the ILR programme. A number of these dams are already proposed by States and are likely to come up, even without the component of ILR. Only a few dams, not very huge, are specifically proposed where absolutely necessary and where there is no scope of integration of existing/proposed projects in the scheme. Nevertheless, in the long term, the rural forestry will improve on account of proposed afforestation in double the likely submerged forest area. Also, plantations proposed along the sides of the link canals would be both, aesthetic as well as valuable for rural forestry. Rural Economy Table Comparative Growth Scenario (Average Growth during to , percentage) With assured water supply for irrigation, domestic, and industrial use coupled with hydro power availability as well as access to basic amenities, services, employment avenues, and infrastructural facilities, the rural economy is certain to grow. The household per capita income in rural areas is expected to grow faster than urban areas to reduce rural poverty rapidly. Overall infrastructural development can be expected to escalate rural land and property prices boosting the economy further. The local administration can generate additional revenue by way of property and land registration, mandi tax and so on. The Comparative Growth Scenario of the country s economy with and without ILR programme as per the study of NCAER is presented in Table An attempt has been made to quantify and aggregate the various aspects of the Interlinking of Rivers Project based on very rough calculations using the information compiled based on pre-feasibility/feasibility studies of various link proposals carried out by NWDA which are given in Table The above table just gives an idea of the extent to which the ILR project can impact the rural economy and transform the rural livelihoods upon implementation. The list of link- With ILR Baseline Progr- Variables Scenario amme Real GDP from Agriculture Real GDP from Mining and Manufacturing Real GDP from Electricity, Gas, and Water Supply Real GDP from Construction Real GDP from Transport, Storage, and Communication Real GDP from Services Real GDP at Factor Cost Fiscal Deficit of Central Government WPI of Foodgrains WPI of Non-foodgrains WPI of Agricultural Commodities WPI Manufactured Products WPI all Commodities CPI (Agricultural Labourers) CPI (Industrial Workers) Production of Foodgrains Production of Non-foodgrains Source: NCAER (2004). Table Various aspects/parameters of ILR project Sl. No. Item Size/Quantity 1. No. of Dams to be constructed Length of the link canals (lined) 9,629 km 3. Length of distribution network 12,468 km up to minors (lined) 4. Size of link canals Width varying from 3 m to 155 m and depth varying from 1.5 m to 10 m 5. Lining involved 737 million square meters 6. No. of canal structures 4, Cement required 56 million tonnes 8. Steel required 2 million tonnes 9. Drinking water supply 101 districts and Greater Mumbai, NCR of Delhi, Chennai, Kanpur, Lucknow, and other cities 10. Employment generation 58 lakh man years Source: Pre-feasibility and feasibility studies of NHDA.

228 204 India Infrastructure Report 2007 wise districts which benefit from the project is presented in Tables A7.2.3 and A ROADBLOCKS IN ILR The benefits enumerated above can only be reaped if the ILR project is implemented in time and managed in an appropriate manner. The implementation of ILR programme is not going to be a cakewalk. The many hurdles on the way include: arriving at consensus, addressing environmental concerns, sourcing funds and so on. Consensus on ILR proposals Ensuring consensus on ILR among the states is a complicated challenge. States have their own priorities in planning internal water resources which are not likely to be in unison with that of other states. The conflicting interests of the basin states, target states, and en route states are not easy to resolve. Therefore, relentless efforts are required on the part of the GoI to convince the states and get them to agree with the proposals. A group headed by the Chairman, Central Water Commission (CWC) and consisting of other officers of the CWC and the Secretaries of the Irrigation/Water Resources Department from concerned states was constituted by GoI in June, 2002 to discuss with the states the issues of arriving at a consensus regarding sharing of surplus waters and the preparation of a detailed project report by NWDA. Intensive efforts are being made by the government through deliberations in various meetings to ensure a consensus among the concerned states on the basis of feasibility studies of ILR proposals. As a result of such efforts, a Memorandum of Understanding was signed recently among the Centre, Madhya Pradesh, and Uttar Pradesh for the preparation of the DPR of the Ken Betwa Link. The preparation of the DPR of this link has been taken up by NWDA and the quantification of various tangible and intangible benefits will be attempted at the DPR stage. To arrive at similar agreements in respect of the remaining links will be the main challenge, towards which consistent efforts have to be made. Environmental Concerns The ILR proposals have to address environmental concerns and clearly delineate remedial measures to mitigate damage to the ecology and biodiversity of the project areas, if any. Major concerns listed by the Ministry of Environment & Forests to be addressed during implementation of the Interlinking of Rivers proposals are: 1. Protection of forest cover. 2. Protection of reserve forests and wild life sanctuaries. 3. De-reservation of National Parks/Sanctuaries. 4. Loss of biodiversity, particularly for threatened species, endemic species of both animals and plants. 5. Adverse impact on migratory path of birds and corridor loss for animals due to change of habitat. 6. Resettlement and rehabilitation of lakhs of people and its adverse socio-economic impact. 7. Adverse impact on river hydrology and eco-system. 8. Loss of vegetation due to siltation of dams. 9. Impact on aquatic aspects, particularly fisheries. 10. Contamination due to agro-chemicals and organics. 11. Transfer of bad quality of water from one basin to another. 12. Measures to counter irrigation induced salinity, water logging. 13. Groundwater pollution due to seepage from canal systems. 14. Harnessing surface water alone is detrimental to conjunctive use. Minimizing the adverse impact on the environment has to be meticulously planned and EIAs drawn up. In this direction, GoI constituted a committee of environmentalists, social scientists, and other experts on Interlinking of Rivers with a view to making the process of proceeding on Interlinking of Rivers consultative under the chairmanship of Secretary (WR) and environmental concerns to be resolved have been included in the Terms of Reference (ToR) for DPRs. Financial Constraints Interlinking of rivers is going to be a task of gigantic proportions both in terms of size as well as in terms of investment. However, if the investments are spread over a number of years, annual investment may not be substantially higher than the present state funding targeted at the water resources sector or other poverty alleviation programmes. The cost of the Interlinking of Rivers Programme is tentatively estimated to be about Rs 560,000 crore at 2002 price level. NCAER, in its study, has estimated that the cost of the ILR project would be about Rs 444,000 crore which is per cent lower than the present rough estimate. The exact requirement on realistic basis will be available only after the preparation of the DPRs of all the links. Funding can be partly through public, public private, and private inputs (TFILR, 2004). In addition to the above, a plethora of points for debate in regard to the ILR Programme: (i) Should water be made available to non-basin States? (ii) What should the role of the Union government be? (iii) Should the Tribunals decide on the ultimate requirements of the basin and identify balance surplus waters? (iv) Should normal criteria of economic analysis be applied for ILR? (v) Is better water management a substitute to water transfers? (vi) Do we need Constitutional amendments to enable the ILR programme? and (vii) Should food self-sufficiency be a national goal? These points need to

229 Irrigation and Water Resources 205 be debated on various fora and the modalities decided upon by the planners in the interest of the country (IWRS 1996). MONITORING OF THE ILR PROGRAMME The Supreme Court of India, in the Writ Petition No.512 of 2002 regarding networking of rivers, directed the Union Government to file an affidavit. The government has informed the Court that the MoWR has prepared a National Perspective Plan for inter linking of rivers of the country for transferring water from water surplus basins to water deficit basins. It was also stated in the Affidavit that a High Level Task Force can be formed to go into the modalities for bringing out the consensus among the states. As per the Perspective Plan for implementation of inter-basin water transfer proposals prepared by the National Water Development Agency submitted by the State of Tamil Nadu along with its affidavit to the Supreme Court, the completion of the Peninsular links will be achieved by 2035 and Himalayan links by On this, the Supreme Court has observed in the said petition, We do expect that the programme when drawn up would try and ensure that the link projects are completed within a reasonable time of not more than ten years. We say so because recently the National Highways Projects have been undertaken and the same is nearing completion and the inter-linking of the rivers is complementary to the said project and the water ways which are constructed will be of immense benefit to the country as a whole. The Supreme Court regularly monitors the progress of implementation of ILR projects. The Affidavits indicating progress of ILR are submitted by the government on a regular basis. The Court in its recent order has directed that the ILR website should contain an interactive contact so that those intending to give suggestions can use it to reach the concerned authorities. Further, the Court has directed that the authorities should expedite the completion of the DPR of Ken-Betwa link. While the macro level monitoring of the ILR Programme is regularly being done by the Supreme Court, the detailed micro level monitoring is being carried out by the Steering Committee headed by Secretary (WR) and Monitoring Committee headed by Chairman, CWC. CONCLUSIONS To accelerate the country s GDP rate of growth to 8 10 per cent, it is essential that agricultural sector productivity be raised. Making use of water which runs off during monsoons is one of the ways to assure supply of water in a timely and equitable manner. The ILR project has the potential to catalyze socio-economic transformation of rural masses and alleviation of poverty. It is focused on providing water for drinking, irrigation, and agro-based industries which will benefit rural people. Of course there are some important issues such as submergence, environmental concerns, and displacement which need to be addressed amicably. There are a number of successful examples of water resources projects such as Bhakra (Box 7.2.2), Rajasthan canal, and the Sardar Sarovar project which have been instrumental to the overall well-being of the hinterland. ILR project is expected to emulate these projects in transforming the water resources development scenario in the country, both spatially and temporally. Development of local water resources through watershed management must be carried out in tandem with interlinking of rivers to gain the true benefits of existing water resources. Watershed management measures are site specific and cannot be applied universally. Particularly, when the normal rainfall itself is quite low in the region the scope of watershed development in semi-arid and arid regions is not very significant. This strategy alone may not be able to solve the massive water availability problems which the Interlinking of Rivers Project is attempting to do. Integrated Water Resources Development plans must take into account all the options in meeting the prevailing as well as projected demand for water in the country. Also, it must be appreciated that conservation of water for its prudent use round-the-year will pay rich dividends.

230 206 India Infrastructure Report 2007 ANNEXE PROPOSED DAMS IN INTERLINKING OF RIVERS PROJECT Table A7.2.1 Peninsular Rivers Development Component S.No. Name of Link Proposed Dams 1. Mahanadi (Manibhadra) Godavari (Dowlaiswaram) Manibhadra 2. Godavari (Inchampalli) Krishna (Nagarjunasagar) Inchampalli 3. Godavari (Inchampalli) Krishna (Pulichintala) Pulichintala 4. Godavari (Polavaram) Krishna (Vijayawada) Polavaram 5. Ken Betwa Daudhan 6. Parbati Kalisindh Chambal Patanpur, Mohanpura, Kundaliya 7. Par Tapi Narmada Jheri, Mohankavchali, Paikhed, Chasmandva, Chikkar, Dabdar, Kelwan 8. Damanganga Pinjal Bhugad, Khargihill, Pinjal 9. Bedti Varda Pattanadhahalla, Shalamalahalla 10. Netravati Hemavati Yattin hole, Keri hole, Hongadhallad hole 11. Pamba Achankovil Vaippar Punnamedu, Achankovil Kal Ar, Achankovil Table A Proposed Dams in Inter-linking of Rivers Project: Himalayan Rivers Development Component S.No. Name of Link Proposed dams 1. Kosi Mechi and Kosi Ghagra Kosi 2. Gandak Ganga Gandak 3. Ghagra Yamuna Chisapani 4. Sarda Yamuna Poornagiri 5. Sone Dam Southern Tributaries of Ganga Kadwan 6. Brahmaputra Ganga (Manas Sankosh Tista Ganga) Manas, Sankosh Table A7.2.3 States/Districts Benefitted by various Link Proposals of NWDA under Peninsular Rivers Development Component S.No. Name of Link States/Districts Benefited 1. Mahanadi (Manibhadra) Godavari (Dowlaiswaram) Orissa: Cuttack, Khurda,Nayagarh, Puri, Gajapati and Ganjam Andhra Pradesh: Srlkakulam,Vizianagaram and Visakhapatnam 2. Godavari (Inchampalli) Krishna (Pulichintala) Andhra Pradesh: Warangal, West Godavari and Khammam 3. Godavari (Inchampalli) Krishna (Nagarjunasagar) Andhra Pradesh: Warangal, Khammam and Nalgonda 4. Godavari (Polavaram) Krishna (Vijayawada) Andhra Pradesh: Krishna and West Godavari 5. Krishna (Almatti) Pennar Karnataka: Raichur*and Bellary* Andhra Pradesh: Ananthpur* 6. Krishna (Srisailam) Pennar Andhra Pradesh: No en route irrigation proposed 7. Krishna (Nagarjunasagar) Pennar (Somasila) Andhra Pradesh: Prakasam* and Nellore 8. Pennar (Somasila) Cauvery (Grand Anicut) Andhra Pradesh: Nellore and Chittoor* Tamil Nadu: Tiruvallur,Kanchipuram, Cuddalore, Vellore, Villupuram and Tiruvannamalai Pondicherry: Pondicherry (contd)

231 Irrigation and Water Resources 207 Table A7.2.3 (continued) S.No. Name of Link States/Districts Benefited 9. Cauvery (Kattalai) Vaigai Gundar Tamil Nadu: Truchirapalli, Pudukkotai, Sivaganga, Ramanadhapuram*, Virudhnagar, Karur and Thoothukudi 10. Ken Betwa Madhya Pradesh: Chhatarpur, Panna, Tikamgargh, Rajasthan and Vidisha. Uttar Pradesh: Hamirpur and Jhansi. 11. Parbati Kalisindh Chambal Madhya Pradesh: Rajgarh, Guna, Shajapur* Mandsaur, Ujjain,* Alternative-I Ratlam and Dhar*. Rajasthan: Jhalawar. Alternative-II Madhya Pradesh: Rajgarh, Guna, Shajapur* Mandsaur, Ujjain,* Ratlam and Dhar*. Rajasthan: Jhalawar, Kota and Chittaurgarh 12. Par Tapi Narmada Gujarat: Valsad, Dang, Surat, Bharuch*, Vadodara, Kutch and Saurashtra*. 13. Damanganga Pinjal Maharashtra: Water supply to Mumbai City. 14. Bedti Varda Karnataka: Raichur* 15. Netravati Hemavati Karnataka:Tumkur* Hassan* and Mandya 16. Pamba Achankovil Vaippar Tamil Nadu: Chidambaranar, Tirunelveli* Kamarajar Table A States/Districts benefittig by various Link Proposals of NWDA under Himalayan Rivers Development Component S.No. Name of Link States/Districts Benefited 1. Brahmaputra Ganga (MSTG) Assam: Goalpara, Dhubri, Kokrajhar and Barpeta West Bengal: Cooch Behar and Jalpaiguri Bihar: Purnea and Katihar 2. Kosi Ghagra Bihar: West Champaran (Bettiah), East Champaran (Motihari), Saharsa (including Supaul and Madhepura new distt.), Madhubani, Darbhanga, Samastipur, Bengusarai, Khagaria, Bhagalpur, Katihar, Munger*, Sitamarhi, Muzaffarpur, Vaishali, Patna, Chapra, Siwan and Gopalganj Uttar Pradesh: Gorakhpur, Ballia and Deoria 3. Gandak Ganga Uttar Pradesh: Sultanpur, Faizabad, Jaunpur, Azamgarh, Ghazipur, Ballia, Pratapgarh, Raibareli, Baharaich, Gonda Gorakhpur, Basti, Barabanki, Lucknow, Allahabad*, Varanasi* and Sitapur 4. Ghagra Yamuna Uttar Pradesh: Pilibhit, Bareilly, Kheri, Shahjahanpur, Sitapur, Hardoi, Lucknow, Unnao, Etah, Mainpuri, Farrukhabad, Kanpur, Fatherpur, Allahabad*, Budaun, Etawah and Raibareli 5. Sarda Yamuna Uttar Pradesh: Bareilly, Rampur, Muradabad, Budaun and Bijnor. Uttranchal: Udhamsingh Nagar NCR of Delhi: Domestic and Industrial Water Supply 6. Yamuna Rajasthan Haryana: Bhiwani* Rajasthan: Ganga Nagar, Bikaner*, Jodhpur* and Jaisalmer* 7. Rajasthan Sabarmati Rajasthan: Jaisalmer*, Barmer* and Jalore* Gujarat: Banaskantha*, Mehsana* and Gandhinagar 8. Chunar Sone Barrage Bihar: Rohtas*, Bhojpur* and Buxer Uttar Pradesh: Mirzapur* Varanasi*, Gazipur and Ballia 9. Sone Dam Southern Tributaries of Ganga Bihar: Patna, Saran, Nalanda, Gaya*, Jehanabad, Vaishali, Munger*, Begusarai, Bhagalpur, Nawada*, Jamui and Aurangabad* Jharkhand: Palamu* (contd)

232 208 India Infrastructure Report 2007 Table A7.2.4 ( continued) Sl.No. Name of Link States/Districts Benefited 10. Ganga Damodar Subernarekha West Bengal: Murshidabad, Birbhum, Nadia, Hoogly, Howrah, Burdwan, Bankura* and Midnapur* Jharkhand: Pakur and Dumka Orissa: Balasore and Mayurbhanj 11. Subernarekha Mahanadi West Bengal: Midnapur* Orissa: Balasore and Mayurbhanj 12. Kosi Mechi Bihar: Purnea and Saharsa 13. Farakka Sunderbans West Bengal: Murshidabad, Nadia and 24 Paraganas 14. Brahmaputra Ganga (JTF) Assam: Goalpara, Dhubri and Kokrajhar (Alt. to MSTG) West Bengal: Jalpaiguri and Cooch Behar Bihar: Katihar and Purnea Note: * Drought Prone Districts. Source: Pre-feasibility and feasibility reports of NHDA.

233 Irrigation and Water Resources 209 REFERENCES IWRS (1996). Interbasin Transfer of Water for National Development Problems & Prospects, Indian Water Resources Society, New Delhi. (2005). A Brief Rebuttal of Unravelling Bhakra, India Water Resources Society, New Delhi. MoI (1980). National Perspectives for Water Resources Development, August, 1980, Ministry of Irrigation, GoI, New Delhi. MoWR (2003). Interbasin Water Transfer Proposals, Task Force on Interlinking of Rivers, Ministry of Water Resources, GoI, New Delhi. NCAER (2004). Economic Impact of Interlinking of Rivers Programme, Draft Report, National Council of Applied Economic Research, New Delhi. Talati Jayesh, M. Dinesh Kumar and Devang Shah (2004). Quenching the thirst of Saurashtra and Kutch regions through Sardar Sarovar Project, JWMI-Tata Water Policy Program, Sri Lanka. TFILR (2004). Note on Funding Options, Task Force on Interlinking of Rivers, March 2004, New Delhi.

234 210 India Infrastructure Report RURAL DRINKING WATER AND SANITATION Jyotsna Bapat, P. Amudha, Alok Kumar, S.V. Mapuskar, N.S. Moorthy, Vibhu Nayar, T.R. Raghunandan, and Sumita Ganguly (The) water crisis is largely our own making. It has resulted not from the natural limitations of the water supply or lack of financing and appropriate technologies, even though these are important factors, but rather from profound failures in water governance... Consequently, resolving the challenges in this area must be a key priority if we are to achieve sustainable water resources development and management. UNDP on Water Governance INTRODUCTION Availability of potable water in rural areas is strongly interlinked with rural development and growth and displays direct, positive results for human health and well-being, especially for women and children. As the burden of obtaining drinking water is shouldered by young girls, easy availability results in better school attendance among girl children. Women tend to benefit from the reduced drudgery and improved quality of life. 1 Thus, effective policy attention to the drinking water sector has the singular positive distinction of being biased towards women and girls. Sanitation facilities improve the health of rural inhabitants and their quality of life. The rural environment also benefits from better drainage and waste management practices. We explore the status of water supply and sanitation in rural India and examine the milestones achieved through decentralization of this sector the role of NGOs, CBOs, and panchayats in promoting water and sanitation is evaluated through case studies. State government-owned corporations 1 While it may be intuitively logical to assume that the time and energy saved with easily accessible potable water supply may be applied to economically productive activities leading to increased household income, this link is not well-established statistically. such as Maharashtra Jeevan Pradhikaran, Tamil Nadu Water Supply and Drainage Board (TWAD), Gujarat Water Supply and Sewerage Board would continue to remain a major provider of piped drinking water in villages. We highlight the case of TWAD that transformed itself into an organization responsive to user demands mobilizing community involvement to provide water in villages under challenging conditions of acute shortage. The Total Sanitation Campaign with hygiene education as a central theme is underscored using case studies from Maharashtra, Karnataka, Andhra Pradesh, Jharkhand, Orissa, Bihar, and West Bengal. Lastly, we provide some suggestions on how the situation can be improved through PRIs. DRINKING WATER SECTOR Present Status In India, the rural water supply and sanitation (RWSS) service is as close to the textbook definition of a public good as is possible therefore almost the entire sector is financed by public funds. The sources of drinking water in rural India are quite diverse ranging from dug wells and hand pumps (often privately owned) 2 to electric motor driven pumps pumping water to overhead storage tanks releasing supplies through a distribution system to a smaller community or an entire village. Finally, there are the multi-village schemes that bring water over long distances with valves and pumps into overhead storage tanks in villages for distribution. Hand pumps continue to be the largest source of public drinking water followed by single village schemes and open dug wells (Table 8.1). 2 These sources are not counted in official statistics due to uncertain hygienic conditions. But people use them.

235 Rural Drinking Water and Sanitation 211 Table 8.1 Access to Water Services in 2002 Population % (in lakh) share Unserved Population Hand Pump Open dug wells Mini water schemes for group of households Single village schemes Multi village schemes Total Rural Percentage of habitations covered Fully covered Partially covered Not covered Source: The World Bank (2006). RWSS has traditionally focused on extending coverage to rural areas in order to provide safe quality of water and service. In 1990s, recognizing the unsustainability of the existing sources of water without better resource management practices, the government asserted for the first time that investments in the sector should be designed in accordance with the demand of users. Further, ownership and maintenance responsibilities of assets should be transferred to users and communities to ensure sustainability. Thus, demand-driven approach was initiated, to provide users with the services they want and are willing to pay for. It was in the Eighth Five Year Plan (1992 7), that the government enumerated the following principles: (i) water should be managed as a commodity; (ii) the provision of RWSS services should be based on expressed demand; (iii) emphasis should be placed on decentralization, user participation and private sector involvement; (iv) operation and maintenance should be managed at the local level with emphasis on financial sustainability; and (v) sanitation programmes should be integrated with those of water supply. Water is a state subject, and the schemes for providing drinking water facilities are implemented by the states. In addition, the 73rd Constitutional Amendment, which provided for the constitution of Panchayats at the District, Intermediate, and Village levels, also provides in the Eleventh Schedule of the Constitution that Drinking Water and Sanitation are matters that could be devolved to the Panchayats through State legislations. Under the provisions of Article 243G of the Constitution, most states have devolved powers and responsibilities in respect of Drinking Water and Sanitation to the Panchayats. As per 2001 Census, 94.2 per cent of the rural inhabitants have access to potable water with a norm of 40 litres per capita per day. The Central Government supplements the efforts of the states by providing financial and technical support. The Tenth Five Year Plan (2002 7) envisages provision of safe drinking water to all rural habitations. A major Fig. 8.1 Coverage of Rural Water Supply in India ( ) Source: The World Bank (2006) and GOI (2006a). programme Accelerated Rural Water Supply Programme (ARWSP) is being implemented since to achieve this objective with an investment of over Rs 50,000 crore (up to March 31, 2005). More than 3.7 million hand pumps and 1.73 lakh piped water schemes have been installed in the rural areas. As on April 1, 2005, 96.1 per cent of rural habitations were fully covered, and 3.6 per cent were partially covered, leaving 0.3 per cent not covered with drinking water facilities (Figure 8.1 and Table 8.2) (GoI, 2006a). The Indian government has made a commitment to providing all the villages with safe drinking water supply all the year round. It has been supplementing the efforts of the states in the areas of drinking water supply and sanitation in villages through two centrally sponsored programmes namely, the ARWSP since and the Central Rural Sanitation Programme (CRSP) since 1986 (GoI 2004). ARWSP, currently being implemented through the Rajiv Gandhi National Drinking Water Mission (RGNDWM), aims at coverage of all rural habitations with population of 100 and above, especially the un-reached ones by providing rural drinking water supply within 200 metres. The RGNDWM is expected to ensure sustainability of the systems and sources, tackle the problem of water quality, and institutionalize water quality monitoring and surveillance through a catchment area approach. The Central allocation of funds for ARWSP has been stepped up from Rs 2900 crore in to Rs 5200 crore in The results of a fresh habitation survey conducted in 2003 are under validation. However, the preliminary results of the survey indicate large incidences of slippage from fully covered to partially/not covered categories due to a number of factors such as: sources going dry, lowering of the groundwater table, systems outliving their lives, and increase in population resulting in lower per capita availability. Drinking Water Supply is one of the six components of Bharat Nirman, which has been

236 212 India Infrastructure Report 2007 Table 8.2 Status of Coverage of Habitations under Rural Water Supply (as on 1 April 2005) Status of habitations State/UT NC PC FC Total Andhra Pradesh ,732 69,732 Arunachal Pradesh ,630 4,298 Assam 238 7,137 63,180 70,555 Bihar , ,340 Chhattisgarh ,379 50,379 Goa Gujarat ,233 30,269 Haryana 0 0 6,745 6,745 Himachal Pradesh 0 6,891 38,476 45,367 Jammu & Kashmir 660 2,551 7,973 11,184 Jharkhand , ,096 Karnataka 0 5,618 51,064 56,682 Kerala 0 7,573 2,190 9,763 Madhya Pradesh , ,489 Maharashtra ,411 68,192 85,930 Manipur 0 0 2,791 2,791 Meghalaya ,385 8,636 Mizoram Nagaland ,525 Orissa , ,099 Punjab 803 1,128 11,518 13,449 Rajasthan 2, ,646 93,946 Sikkim ,605 1,679 Tamil Nadu ,631 66,631 Tripura 0 0 7,412 7,412 Uttar Pradesh , ,508 Uttaranchal ,702 30,974 West Bengal ,036 79,036 A&N Islands Dadra Nagar Haveli Daman & Diu Delhi Lakshadweep Pondicherry Chandigarh Total 4,588 50,479 1,367,236 1,422,303 Note: NC: Not covered, FC: Fully covered, PC: Partially covered. Source: GOI (2006a). conceived as a plan to be implemented in four years from to for building rural infrastructure. Panchayati Raj Institutions have been made central to the implementation of Bharat Nirman. However, these figures conceal intra and inter-state distributional inequities. Though habitation in hill states are almost fully covered under rural water supply, one in three households still has to fetch water from far away (GoI, 2004) (Table 8.3). Gujarat faced a unique water supply problem as the source of water supply was required to be developed (see Box Drinking Water from Sardar Sarovar Project). Gujarat has used NGOs to facilitate creation of Pani Panchayats at village level under the guidance of the state water authority. Pani Panchayats are responsible for supplying drinking water to individual households and O&M of the system at village level. Pani Panchayats also have to collect the water charges from beneficiary households and have to pay their share of water charges to Gujarat Water Supply and Sanitation Board on volumetric basis. Under Bharat Nirman, it is planned to have rural water supply in the 55,067 uncovered and partially covered habitations in four years (2005 9). Rural water supply is, however, beset with the problem of sustainability, maintenance, and water quality. Out of the lakh habitations in the country, although more than 95 per cent coverage was achieved prior to Bharat Nirman, about 2.8 lakh habitations have slipped back from fully covered to partially covered category. Another 2.17 lakh habitations have problems with the quality of water, with about 60,000 habitations facing the serious problems of salinity or arsenic and fluoride contamination. Under Bharat Nirman, it is also proposed to tackle the habitations that have slipped back or have problems with water quality. The 11th Five Year Plan must emphasise full and timely realization of the Bharat Nirman targets during the Plan (GoI, 2006b). Operation and Maintenance Adequate operation and maintenance (O&M) is critical for sustaining water supply systems already created. The annual estimated cost of O&M at Rs 6000 crore is heavy for the government to bear alone. Until the sector reforms were introduced in the 1990s, people s involvement in O&M of most village water supply schemes was minimal resulting in poor upkeep, which in turn resulted in early breakdown of the assets. People s involvement is envisaged not only to enhance the economic viability of O&M but also for better upkeep and enhanced lifespan of the system created (the Swajaldhara scheme is discussed in the subsequent section in this context). The RGNDWM has adopted a development planning approach that has a component of community participation and local management of rural drinking water systems. Funds

237 Rural Drinking Water and Sanitation 213 Table 8.3 Rural Households without Drinking Water and Sanitation Facilities in 2001 Fetching water With no With no from far drainage latrine States away (%) (%) (%) Andhra Pradesh Arunachal Pradesh Assam Bihar Chhattisgarh Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttar Pradesh Uttaranchal West Bengal India Source: GoI (2004). for Central rural drinking water supply programmes are allocated directly to Panchayats, through the State Government. The Public Health Engineering Department is mainly responsible for maintenance of assets, though in some states the Water Supply and Sanitation Board takes the responsibility. Again, in several States the Public Health Engineering Department has been placed with the Zilla Parishads, in consonance with the devolution of powers and responsibilities concerning water supply to the Panchayats. In most states, Panchayats are responsible for operating and maintaining rural drinking water schemes and for providing rural water supply and sanitation services. Monitoring and Evaluation The state governments submit monthly, quarterly, half yearly, and annual progress reports to the centre on physical as well as financial aspects of drinking water programmes under way. Performance is also reviewed in periodic meetings with the concerned state officials. To make the monitoring mechanism more effective, the Ministry of Rural Development has also introduced a scheme of Area Officers under which senior officers of the Ministry are allocated specific states/uts to oversee the progress and performance of various Rural Development programmes with special emphasis on qualitative aspects of the programmes. This inspection of works envisage checks to ensure that the construction work has been done in accordance with the prescribed norms and guidelines and that the rural community has been involved in the implementation of the programme. A key aspect of the sector reform programme is the thrust on tackling contamination in water sources. Arsenic, iron, fluorides, salinity, organic pollutants in groundwater are major concerns related to drinking water quality. Therefore, appropriate technical competence and laboratory capacity for testing the water locally and centrally are being developed as part of the sector reform strategy. 3 Issues in Rural Drinking Water The main issues are institutional development, financial viability, and protection of water sheds for water sources apart from the leakages in distribution system. Institutional Development The main issue in drinking water, at present, is not so much setting up schemes for safe drinking water but sustaining the schemes through a maintenance mechanism. Reforms in the rural drinking water sector were adopted in 1999 through Sector Reform project (SRP) on pilot basis and scaled up throughout the country in the form of Swajaldhara launched on 25 December The programme is a paradigm shift 3 Drinking water quality has two components, namely, source water quality and tap water quality. Quality of water sourced from groundwater is linked to environment and covered in Chapter 9 under Rural Anthropogenic Activity. Surface water source is generally used for piped water system and tap water quality is the responsibility of the provider. To improve tap water quality, sourced either from groundwater or surface, is part of sector reform.

238 214 India Infrastructure Report 2007 from supply driven to demand driven, centralized to decentralized implementation transforming the government s role from service provider to facilitator. The fundamental reform principles in Swajaldhara are adhered to by state governments and implementing agencies through a strategy to develop a vision, mission, and approach to sector development through multi-stake holder participation process. Demand-responsive approach with community participation is based on empowerment of villagers to ensure full participation in the project in a decision-making role in the choice of the drinking water scheme, planning, design, implementation, control of finances, and management arrangements including full ownership of drinking water assets. The community has to share partial capital cost either in cash or kind or both, taking on 100 per cent responsibility of operation and maintenance (O&M). 4 The demand-responsive approach is a move towards more decentralised rural water supply, based on the micro-demand for rural water and prioritizing coverage. Methodologies exist that help villages to select the appropriate water supply scheme based on socio-economic and technical criteria. A key part of the institutional strengthening for more efficient and sustainable water supply is the need to ensure the centrality of Panchayats in planning and implementation. The last fourteen years since Constitutional status was given to Panchayati Raj have seen the culmination of first generation reforms. 5 However, the political empowerment and the formal devolution of matters to Panchayats through state legislations, including the supply of drinking water, have not been very effective except in certain states, because of the lack of the concomitant transfer of funds and functionaries to the Panchayats. In the absence of adequate funds transferred to the Panchayats, they do not have a control over the construction of these projects and maintaining them. However, there is increasing realization that only large-scale involvement of the Panchayats can ensure sustainability. This is also matched by increasing rumblings from the large number of elected representatives of Panchayats, who feel disillusioned by the mismatch between the formal transfer of powers to the Panchayats and the continuing de facto hegemony of technical departments who are neither subordinate to nor accountable to the Panchayats. Therefore, the Eleventh Plan period might see a paradigm shift when the Panchayats are neither bypassed nor ignored by line departments dealing with water supply, or treated as implementation agents of departmental projects The objective of establishing a large base of politically empowered ordinary people has been achieved. More than 22 lakh representatives now stand elected to about 250,000 Panchayats at the Gram, Intermediate and Village levels. The key to the shift is three-fold. First, the formal transfer of powers regarding water supply and sanitation will need to be clarified and detailed through an activity mapping exercise, 6 which clearly delineates the responsibilities and powers transferred to each level of Panchayat. Second, the budgets of State departments dealing with drinking water will need to be unravelled and those funds that pertain to the mandates transferred to the Panchayats in respect of drinking water will need to be placed in a Panchayat Sector Window in the budget and sent directly to the Panchayats without delay or diversion. Third, departments and departmental officers will need to be made accountable to the Panchayats to undertake the work in respect of drinking water. Though the lack of capacity, or the imagined lack of capacity, is often mentioned as the stumbling block for the transfer of real responsibilities to Panchayats in drinking water as in every other sector the transfer of responsibility is itself the best motivator for capacity building. Inadequate Finances for Operation and Maintenance Though almost all the villages have been connected by drinking water, the condition of the village drinking water projects is sub-optimal. This is because while central government resources are available for the creation of rural drinking water, state governments are responsible for their operation and maintenance. Financial resources are thus critical for the maintenance of the drinking water service delivery. States revenues have been growing at slower rates over time while proportion of budgetary allocation for rural development and rural drinking water supply has remained constant in the 1990s. Protection of Water Sources Protecting both, the sustainable yield and quality of ground water is critical to existing RWSS investments as well as to meeting the future requirements with potable and affordable services. In addition to being the primary drinking water source for privately funded schemes, groundwater serves 85 per cent of the rural population through public schemes. The need to protect groundwater for drinking purposes, however, is in direct conflict with the government s food security objectives and subsidies to the agricultural sector which encouraged the rapid and unregulated development of groundwater for irrigation. The result has been over-extraction of groundwater and in certain localities, the depletion and contamination of groundwater sources. 6 See Box 2.1 in Chapter 2 of this report on Rural Infrastructure, Panchayati Raj and Governance.

239 Rural Drinking Water and Sanitation 215 Seasonal and permanent depletion of groundwater aquifers has serious social, financial, and institutional implications including the need to continually replace dried-up source. Such replacement needs, particularly where surface water has to be brought through pipes, has financial implications. Capital and recurring cost is 100 to 150 times more compared to the existing system (World Bank, 1999). These long-term issues have led to the Swajaldhara Scheme and a revaluation by state water supply agencies of the way they manage water supply schemes. Swajaldhara project in Uttaranchal and a paradigm shift in the water sector by the Tamil Nadu Water Supply and Drainage Board (TWAD) are pro-active responses to the intractable issues enumerated above. Swajaldhara Project, Uttaranchal In line with the 73rd CAA, the Government of Uttaranchal devolved to the PRIs the responsibility of fourteen departments including development of watershed and water supply. The state government and the implementing agencies adopted a demand-responsive approach with community participation and adhered to the fundamental reform principles of Swajaldhara. An integrated service delivery mechanism is also promoted which includes taking up conservation measures through rainwater harvesting and groundwater recharge systems for sustained drinking water supply. The experience of Swajal-Phase I, the current Swajaldhara, and Total Sanitation Campaign shows that sustainability of the schemes hinges on the actual users. The lack of effective Village Water and Sanitation Committees (VWSCs) in most Swajaldhara habitations suggests institutional weakness, where effective maintenance and repair of local tap stand problems is left to strong women leaders and not a representative institution mandated to address such issues on behalf of the community. While strong individuals may be quite effective in the short run, there is a need for greater institutional stability in the system for redressing water supply problems through the VWSC. A Paradigm Shift in the Water Sector by the TWAD Board The Tamil Nadu Water Supply and Drainage Board (TWAD) was constituted under the Tamil Nadu Water Supply and Drainage Board Act, 1970 for the purpose of regulation and development of drinking water and drainage in the state of Tamil Nadu barring the Chennai Metropolitan Area. TWAD, as an autonomous corporation set up by the state government, thus has exclusive mandate over all drinking water projects in the state. The Board is responsible for investigation, design, execution, and technical assistance. Operation and maintenance functions are generally the responsibility of local bodies. The chief funding sources for TWAD are from the Government of India, the state government, loans from financial institutions like LIC (Life Insurance Corporation), HUDCO, World Bank, and other sources. In Tamil Nadu, 96 per cent of all sources are groundwater based. The phenomenal spurt of piped water schemes across the state in the 1980s and 1990s had its eventual impact on groundwater tables. Out of the 385 water blocks in the state, 138 were identified as over-exploited, 37 as at critical levels, 105 as semi-critical and 8 as saline. Only 97 blocks were identified as safe. Meanwhile, of the total 81,587 rural habitations in the state, about 27 per cent were affected by quality. Of these affected habitations, about 25 per cent did not have safe sources of drinking water. The two main schemes operated by TWAD are (i) Individual Power Pump Schemes (IPPS) for individual village panchayats and (ii) Combined Water Supply Schemes (CWSS). The CWSSs have become necessary with the falling groundwater table as well as water quality problems with hand pump and other groundwater sources. TWAD implemented CWSSs that have benefitted more than 15,000 of the 81,787 rural habitations in the state. They supply water to local bodies in bulk and are maintained by the operations wing of the TWAD Board with regard to the common components. The in-village components, distribution, and tariff collection is done by the local bodies. Overall, a challenging scenario presented itself to all those concerned with and involved in water management since Despite occasional good monsoons, the first five years of the new millennium witnessed the cumulative impact of years of poor rainfall in Tamil Nadu. Near-drought conditions did little to help recharge already precarious groundwater tables. Unregulated mining of water and un-coordinated irrigation and industry use in the absence of a rational and integrated water policy framework spelt disaster for the state s water resources. Technocratic approaches of the agencies providing water did not lend themselves adequately to stakeholder inclusive methods and lacked capabilities to enhance peoples participation. In the absence of a sense of ownership and alienation from meaningful association, user and stakeholder involvement in water management was minimal with a pronounced reluctance to participate in ensuring sustainable drinking water use practices. Coupled with an outdated approach and complaints of inefficient service delivery, the water crisis presented itself as a complex multidimensional problem calling for inputs from a variety of disciplines, perspectives, and experiences. TWAD schemes which were focused largely on tapping groundwater sources and construction of overhead tankers, whether as IPPS or as CWSS, came under scrutiny to identify

240 216 India Infrastructure Report 2007 a strategic thrust that would adequately address the problems being faced. In the course of the discussions a tentative proposal was articulated which evoked very intense response from almost all the participants. As participants reflected on constraints and pressures arising from target oriented schemes, a critical view slowly emerged defining the need to take stock of the situation, study the existing pattern of schemes, and to make course alterations as found necessary. A draft resolution emerged which, after many rounds of discussions throughout the length and breadth of the statewide department was finalized as The Maraimalai Nagar Declaration in The Declaration stated: 1. We will evaluate the existing schemes and ensure that the schemes are put into optimal use first. 2. Then rehabilitation will be undertaken wherever necessary along with revival of traditional sources. 3. This will be taken up before initiating any new schemes in the block. 4. We will all aim at 10 per cent increase in coverage within the same budget. The momentous significance of the Maraimalai Nagar Declaration becomes apparent when we consider the fact that TWAD, like many other state controlled autonomous public utilities, is not supported for its revenue from state budgets, but instead depends on revenues earned from schemes it implemented. Moreover, the TWAD Board was entitled to 18 per cent of all budgeted schemes, from which it had to take care of salaries, operating expenses, and other costs. Built-in incentive structure in the programme implies that the larger the number of schemes TWAD undertakes the greater will be its revenues. In 2004 the Government reduced the earning percentage from 18 per cent to 13 per cent. Apart from leading to reduced revenues, there was apprehension in the minds of engineers about future financial stability or viability of the TWAD given the sweeping changes overtaking the water sector and the advent of the private sector in the water arena. Democratizing Water Management: The Process The current change process was launched at the end of Under this, the water engineers were no longer seen as the sole providers but were to play a different and expanded role of being social engineers and facilitators in the first phase, and of competing with other players in a vastly changed water supply scenario in the future. The rural water division of TWAD decided that the only way forward was not to regurgitate old solutions but to start afresh by going back to asking fundamental questions about the relevance of public utilities, the values and vision it should embody, distortions and corruptions in practice, and the shape of the future change efforts to reinvent a role and relevance for itself. As the change process gathered momentum, a Change Management Group was formed, made up of volunteers who came forward to champion the change process within and outside the organisation. Some of the more important perspective changes that needed to be brought about in the internal functioning of the water utility were as follows: SHIFT FROM ACCESS TO SERVICE DELIVERY This approach, in effect, was rooted in the view that the citizen was considered not merely a consumer served by the water delivery system but as a citizen, a key stakeholder with a right to safe, adequate, and regular water. By acknowledging the right of the citizen, the water department was recognizing and reflecting a shift in self perception, from being sole determinants of all water related policies, planning and implementation to being one of several, albeit important, players in the water field. SHIFT FROM PROVIDERS TO PARTNERS The water providers were also accountable for performance and satisfactory delivery acknowledging these to be a right of the citizens. In acknowledging citizenship rights, the citizens responsibilities in managing a scarce resource were brought into the frame of the partnership that the TWAD functionaries sought to put in place with the communities accessing drinking water. SHIFT TO SUSTAINABILITY ENHANCEMENT APPROACH The changed perspective of examining system performance around issues of efficiency and effectiveness is grounded in a much more pressing imperative; ensuring the sustainability of the water system involving issues of conservation and scientific, rational, and appropriate use of water. The sustainability approach would have to be rooted in a holistic, integrated, and multi-dimensional perspective on changes in the water sector. While bringing about seminal changes in the functioning of the utility, the following issues were addressed. 1. Ensuring the supply of adequate safe drinking water to all citizens in a manner which does not further endanger an already precarious water system. 2. Encouraging and enabling active partnerships between government departments, local bodies, actual stakeholders, and wider representatives of civil society with a shared goal of building sustainable water systems. 3. Initiating institutional reform of both formal and traditional water management systems, to restructure water access systems which would recognize new norms of conservation, appropriate use of technology, knowledge and skills, and approaches based on values of equity and social justice. 4. Reviving traditional water bodies and management systems while sensitizing and empowering stakeholders and local community to play a more active and intense role in managing the water systems.

241 Rural Drinking Water and Sanitation Achieving convergence and coherence in policy formulation, planning, and implementation to trigger Convergent Community Action by bringing together state service provider and officials with an informed, involved and active community. 6. Creating a sense of common ownership, identity of interest, and understanding of mutually complementary roles of the various stakeholders aimed at enabling sustainability of water systems.* 7. Capacity building of different stakeholders including government officials, women and local communities, local bodies, NGO representatives and elected representatives. 8. Strategic utilization of the technocratic and managerial expertise of the state agencies as the starting point to transform the organization into a more people focused, community responsive, and publicly accountable one. Results Within a few months of the change in the management process within TWAD, the impact of the churning started to manifest itself. One of the key aspects was to persuade participating water engineers to evolve a set of parameters to evaluate in a critical manner the context of water schemes in the villages during the field visit. These covered issues of a community wise socio-economic analysis of the need for new water schemes, studying the supply aspect in the context of sustainability and environmental considerations, issues related to recovery of operation and maintenance costs and contribution to capital costs, the importance of sanitation schemes, and the willingness of the village residents to accept changed sanitation methods and so on. The process of widening the consensus within TWAD and ensuring implementation was strengthened by bringing on board District Collectors, policy-makers, opinion makers, and members of civil society too. The involvement of local people was strategically important for they had grown used to the idea that water scarcity could only be tackled through new schemes, sinking bore pumps, and constructing overhead tanks (OHTs). As the state-level discussion on the Maraimalai Nagar Resolution progressed with a larger number of engineers embracing it and actually implementing it on the field, a wider vision of the future course of the utility s functioning became imperative. After due deliberations the TWAD adopted a holistic development of the water sector as their vision (Box 8.1). A study of 472 villages under 145 village panchayats across 29 districts in April 2006 showed that Rs 1.42 crore were contributed by 50,896 households in 145 village panchayats, in 29 districts reflecting their sense of ownership. There was an overall reduction of per cent in governmental investments leading to reduction in average project costs to Rs 1827 per household from an earlier figure of Rs 4580 per household. Fifty per cent of schemes now involve rehabilitation such as pipeline extensions instead of more expensive options. Savings between 8 per cent and 33 per cent have been achieved over the regular budget. Operation and maintenance expenditure is reduced to Rs 18.6 per household per month (compared to Rs per household per month earlier). Sixty-five per cent of schemes were catered to large sections of the population below the poverty line including scheduled castes. As many as 90 per cent households are undertaking rainwater harvesting. Around 150 traditional water bodies have been revived (James, 2006). The finiteness of water availability was a constant underlying message of the project. The communities are encouraged to take up ground water recharge activities including revival of traditional waterbodies as a first step to revisit historical practices of community living and sharing of scarce resources. Adoption of appropriate technology options, ensuring timely maintenance, thereby reducing potentially expensive replacements in the future, regulating hours of pumping and Box 8.1 Our Dream Secure Water for all, Forever OUR VISION 1. Conservation of nature as a guarantee for future water availability. 2. Vibrant, revived and recharged water bodies. 3. Assured, equitable, and sustainable water for all. 4. Successful community managed water supply system through active participation women s groups and poorer sections. 5. Safe disposal of solid and liquid waste for clean and healthy environment. 6. Cost effective technology options to ensure local maintenance and sustainable financial management. 7. Formation of Common Water Regulatory Authority for judicious use of water for all sectors. *The TWAD used Koodam a traditional cultural and social space where all persons are treated equal. It allows participants to be open, self-critical, and experimental. The democratic and consensual decisions arrived at the meetings are collectively owned. The TWAD held facilitating Koodam workshops for 4 5 days each in each of the 145 villages to reach consensual decisions.

242 218 India Infrastructure Report 2007 supply, maintaining both adequate quality and quantity all had an effect in the nature and functioning of water systems at each village. The work in Tamil Nadu shows that investing in governance reform is urgent. Reform and institutional change towards sustainable resource management is not a pipedream. It is an eminently practicable strategy with direct short and long-term benefits. The ethos of change management is well summed up by a water engineer of the TWAD Board, It is the only gift we can give to the unborn 5th generation who we will never see but who will experience the wisdom of the path we have now begun to travel. The TWAD experience, which involved panchayats extensively, is well appreciated by other state water supply organizations. The TWAD is helping Maharashtra Jeevan Pradhikaran in implementing change management practices in Maharashtra. SANITATION The Central Rural Sanitation Programme (CRSP) launched in 1986 was restructured in 1999 to introduce the Total Sanitation Campaign (TSC). TSC envisages synergized action among government, people and active NGOs. TSC aims to provide sanitation facilities in households, schools, anganwadis, and public places while promoting alternate delivery mechanisms for sanitary goods and services through Rural Sanitary Marts/ Production Centres. It also incorporates intensive Information, Education and Communication (IEC) campaign, provision of an alternative delivery system and more flexible, demandoriented construction norms. The revised centrally sponsored scheme envisages a shift from allocation-based programmes to a demand-based project mode with greater household involvement, intensive IEC campaign, and emphasis on school sanitation. Rural sanitation coverage was only 1 per cent in the 1980s. With the launch of the Central Rural Sanitation Programme in 1986, the coverage improved to 4 per cent in Under TSC, projects in 567 districts covering 30 States/UTs have so far been sanctioned with an approved outlay of Rs 6325 crore in As per 2001 Census only 22 per cent of households had basic sanitation facilities (GOI, 2004). Thus, projects under campaigns may have covered many villages but access by people is quite poor (Table 8.3). TSC is a comprehensive programme, with a strong information and education component focused on sustainability of facilities and hygiene habits. A wide range of technological choice is provided under the programme to make toilets affordable for households at different income levels. TSC is implemented in a decentralized mode and centrality of Panchayati Raj Institutions (PRIs) is crucial to its success. NGOs and community-based organizations play an important role in awareness generation and social mobilization through advocacy and education campaigns in villages. School Sanitation and Hygiene Education has a prominent place in the TSC with schools acting as entry points to spread the messages of sanitation and hygiene. Children take the message home from schools and from homes it travels to the community. Anganwadis under TSC have baby-friendly toilet designs and provide toilet training to children from an early age. Right from the inception TSC and Swajaldhara have been implemented with the full involvement of PRIs at all levels. In order to encourage the PRIs, the Ministry of Rural Development has also instituted awards in the form of Nirmal Gram Puraskar (NGP is awarded to communities 100 per cent free of open defecation practices) to reward relatively better performing panchayats in the implementation of these programmes. Several districts/blocks and gram panchayats have received this award in the last two years and there is hope that access will improve in the coming years. During independent third party monitors were entrusted with the task of monitoring and evaluating the implementation of this programme. It is evident from their reports that the degree and impact of implementation of TSC vary from district to district, although the institutional framework of PRIs remains the same throughout the state. There are several districts in the country which have inactive and ineffective PRIs while some others have shown excellent record of performance in the implementation of the two programmes. Nirmal Gram Puraskar: A Reward for Achieving Quality of life To motivate PRIs to promote rural sanitation on a mass scale, the Nirmal Gram Puraskar (NGP) was initiated under TSC on 2 October The NGP is both a recognition and a reward for districts, blocks, and Gram panchayats that have achieved full sanitation coverage. This award has multiple social and economic benefits because an estimated 30 million people in rural India suffer from sanitation-related diseases causing a loss of 180 million man-days and Rs 12 billion to the economy each year. The NGP award includes a memento, a citation, and a cash prize. The cash component of the prize ranges from Rs 2 lakh to Rs 50 lakh for a PRI depending on the size of its population (Table 8.4). While selecting PRIs for the award, the following criteria are considered: 1. All households should have access to fully functional toilets which are in use and there should be no place for open defecation in the PRI. 2. All schools must have sanitation facilities, which are in use. All co-educational schools should have separate toilets for boys and girls.

243 Rural Drinking Water and Sanitation 219 Table 8.4 Incentive Pattern of Nirmal Gram Puraskar Scheme Particulars Gram panchayat Block District Population Up 5001 Up Up to Above Criteria to and to and above above lakhs lakhs Cash Incentive Recommended (Rs in Lakhs) Incentive to Individuals Incentive to Organisation/s other than PRIs 3. All anganwadis must have access to sanitation facilities. 4. The village must have a clean environment. The cash incentive that comes with the award can be used by PRIs for improving and maintaining sanitation facilities with greater focus on solid and liquid waste disposal and keeping up standards. It is an annual award and is distributed by the President of India. This scheme has provided a tremendous boost to the sanitation programme as large numbers of PRIs strive to become eligible for the award. The first NGP award ceremony was held on 24 February In the first year, thirty-eight Gram panchayats in six states and two blocks Gujarat (1), Kerala (1), Tripura (1), West Bengal (10), Tamil Nadu (12), Maharashtra (13), and two blocks one each in Tamil Nadu and West Bengal received the award. Inspired by the success of these PRIs, about 1700 applied for the award in A total of 759 gram panchayats and nine blocks from fourteen states received the NGP on 23 March 2006 marking an almost nineteen times increase in the number of NGP awardees over the previous year. It is expected that the numbers will increase exponentially in the years to come. The NGP is proving a crucial scheme to the move to make India open-defecation free by It may be hoped that with allocation of the required funds in the 11th Plan, India will achieve the Millennium Development Goal of providing access to basic sanitation well ahead of the United Nations timeframe of As the TSC is a highly decentralized programme, it has been implemented by communities with the help of NGOs keeping in mind local needs. The case studies on Dhamner village of Maharashtra, School Sanitation and Hygiene Education, successful sanitation programme through Women s Collective in Bihar, the Individual Sanitary Latrine by the Byrraju Foundation and the success of Rural Sanitary Marts in West Bengal show how communities in different states are handling sanitation in their villages. Community Waste Water Treatment and Reuse in Dhamner village of Maharashtra A large number of deaths in Indian villages occur due to diseases caused by poor sanitary conditions. The Government of Maharashtra, in tandem with the Government of India (GoI), has taken rigorous steps to improve the sanitation situation in villages in the state. These activities are based on some key learning experiences from earlier programmes that simply providing sanitation facilities is not enough. Communication activities aimed at changed attitudes and behaviour of the user group with the involvement of the community, are crucial to the success of a holistic programme to achieve a clean village environment. Dhamner village in Satara district of Maharashtra is an example of a success story of community involvement. The village has a population of 2657 spread over a main village and three hamlets. There are a total of 550 residential houses and a cattle population of The main village sits on a small hillock from where the water flows in four different directions. Earlier, waste water from the main village flowed directly into the Krishna river. In the hamlets, it accumulated in multiple cesspools. Located on the banks of the Krishna, Dhamner has adequate water supply all the year round. The village gets piped water supply at the rate of nearly 65 litres per capita per day amounting to about 150 thousand litres. Roughly 120 thousand litres of waste water is generated in the village each day. Prior to the project on waste water management, this large quantity of waste water flowed freely along the streets and lanes accumulating in cesspools breeding mosquitoes and flies. Dhamner had already been exposed to IEC activities of Maharashtra government programmes like the Sant Gadge Baba Swachhata Abhiyan which focuses on the involvement of the community. Government functionaries act as facilitators while villagers are encouraged to decide upon and set up sanitation facilities at their own expense. The programmes are supported financially and in other ways through the government s TSC programme. At the Gram Sabha, villagers of Dhamner decided to take measures to manage sullage. It was decided to construct partially-covered roadside drains and use RCC pipes where necessary. This system was established in the main village, where almost all houses have now been connected to a drainage system. It was made mandatory for each house to connect their domestic waste water to the community drain. A chamber was provided between the house and the main drain and a grid placed at each opening between the main drain and a household connection to stop materials like paper and plastics from entering the drainage system. Due to the natural slope of the grounds around the village, the drainage was automatic in four directions without any need for pumping.

244 220 India Infrastructure Report 2007 The sullage is collected at four low-lying points. At one point, an intercepting tank is in place to stabilize the sullage. At the other three points, tanks are under construction. The stabilized effluent has been utilized for developing gardens. The effluent from the first point is used to water a children s park and playground. Effluent from the other three points is being used for developing horticultural gardens and orchards. Individual connections to the drains are maintained by the families and the community drainage system by the gram panchayat. The pumping of the stabilized water at one point is managed by the gram panchayat. At other points, the flow is gravitational. In the last four years, the gram panchayat did not need to spend any money on maintenance. The park and horticultural gardens are maintained by women s self help groups and a youth club. For the initial construction of the system, the total capital expenditure was Rs 9.46 lakh. A part of this was raised from contributions and voluntary labour by the local people. A major share was provided from the Rajya Sabha member s discretionary fund. In due course, the village panchayat is expected to earn Rs 1 lakh per year from the sale of the produce of the orchards making waste water management a very viable and sustainable programme. With site-specific modifications, this project has excellent replicability and sustainability characteristics. In fact, waste water management in Dhamner is a commendable example of what can be achieved when there is community involvement, collective efforts and dynamic leadership with the government acting as facilitator. The technology used is low-cost, easily manageable and environment-friendly. In recognition of its achievements, Dhamner village panchayat received the Nirmal Gram Puraskar in Scaling up School Sanitation and Hygiene Education with Quality The importance of water and sanitary facilities for schools is widely acknowledged. Yet in practice, the situation in many schools, especially in rural India, is far from satisfactory. Of about 1.0 million primary schools in India, roughly 70 per cent have safe drinking water but only 50 per cent have sanitary facilities. The TSC was launched with a School Sanitation and Hygiene Education (SSHE) component in TSC is a process driven project with a budget provided for various preparatory activities and about 10 per cent of the TSC project cost is earmarked for the SSHE component. The SSHE provision supports toilets in all government schools with separate units for boys and girls. The average cost of a toilet complex unit is Rs 20,000, which the Central Government and State Government share at the ratio of 70:30. School sanitation is not just construction of toilets, but a package of school-centric interventions to bring about attitudinal and behavioural change towards critical sanitation and hygiene practices among children and empower them to lead a healthy life. Children are also very effective change agents. They help to create a healthy, clean and active learning environment in school and then carry the messages back home to motivate their families to improve sanitation and hygiene habits. During , UNICEF-assisted school sanitation projects were undertaken in Alwar (Rajasthan), Ranchi (Jharkhand), Mysore (Karnataka), and Erode (Tamil Nadu) under the TSC programme. Scaling up SSHE, while retaining quality, is a focus area for the TSC programme, complemented and supplemented by the Serva Shiksha Abhiyan (SSA). Many states are making remarkable efforts to scale up SSHE projects statewide. The challenge is to meet the institutional and capacity requirements for scaling up SSHE with quality, which means that the SSHE programme should be effective and produce sustained improvements on a large scale. Without quality, the programme would slide into failure as facilities fall into disrepair and disuse. Key strategies adopted for scaling up SSHE are intersectoral coordination, construction of child-friendly gender-sensitive water and sanitation facilities, capacity building of teachers and Village Education Committees, school health check-up and regular deworming, hygiene education activities, and monitoring and evaluation. Several states have prepared plans of action and submitted them to the GoI. There is commitment from the Department of Drinking Water and Sanitation (DDWS) and the Department of Elementary Education and Literacy (DEEL) to accelerate SSHE implementation by promoting better convergence to achieve full coverage by The national steering committee for SSHE is an intersectoral task force that guides convergence and takes policy decisions to support SSA TSC linkage in states. State and district task forces for SSHE are being formed in all states under the SSA programme. Capacity building of key stakeholders at state level to support programme implementation is crucial. Therefore, the GoI with support from UNICEF and the International Reference Centre (Netherlands), trained the functionaries of state level communication and capacity development units (CCDUs) and key resource centres (KRCs) on all aspects of SSHE through a national foundation course in SSHE is an integral part of TSC communication strategy and some prototype materials for schools are developed at the national level. Rajasthan, Bihar, Jharkhand, Tamil Nadu, Karnataka and some other states have developed state-specific modules and manuals for key stakeholders like teachers, Village Education Committee members, children, and block officials to strengthen their capacities and motivate them to support SSHE.

245 Rural Drinking Water and Sanitation 221 Teaching and learning materials and supplementary readers are used along with posters, games, and other activities to strengthen the hygiene education component with the aim to improve use and maintenance of water and sanitation facilities and inculcate hygiene practices among children. Schoolchildren are organised into clubs, committees, and cabinets in states like Karnataka, Rajasthan, Jharkhand, Orissa, and Tamil Nadu to instil in them a sense of responsibility and promote peer education. In Maharashtra, Rajasthan, Jharkhand, and Tamil Nadu, schoolchildren participate in community outreach activities like rallies, surveys, and family visits. Women s Collective Makes Sanitation Programme a Success in Bihar A forum of women s self help groups in Bih