The importance of infrastructure financing towards economic growth can hardly be overemphasized. It has remained a principal area of State intervention in India, given the sector’s fundamental contribution to economic growth and social welfare. The extent of State intervention was justified by market failure hypotheses, high risk perception emanating from long gestation periods, irregular revenue flows, higher average debt-equity ratio, and economies of scale as well as substantial sunk costs reflected in the high costs of entry and exit. While the Government entered many spheres of the infrastructure sector, public sector ownership, management and financing of infrastructure in India started showing several forms of inefficiencies which has impeded the generation of adequate internal surpluses leading to excessive dependence on budgetary support.

The Developing Country Perspective

The provision of infrastructure services through traditional institutional arrangements - public sector financing and operation - has generally been fraught with inefficiencies. Low productivity of labour and capital, weak incentive structures, neglect of timely maintenance, lack of sufficient links between demand and supply, soft budget constraints, the absence of financial risk management and the entwining of financial management of public enterprises providing infrastructure services with macroeconomic management are only a few sources of inefficiencies that have characterized the provision of infrastructure services especially in developing countries. The World Development Report (World Bank, 1994) has provided some information on the annual costs to developing countries of inefficiencies in the traditional structure of provision of infrastructure services (Table 1.1) and considerable gains that can be achieved through appropriate reform (Table 1.2).

Emerging Requirements for the Transport Sector

Available demand based and need based estimates of the financing gap in the transport sector indicate the investment requirements of a very

high magnitude. The most comprehensive effort at estimating the investment requirement for the transport sector was done by the India Infrastructure Report. The Report projected gross domestic investment in infrastructure in India to grow from the current level of 5.5 per cent of GDP in mid nineties to about 7 per cent in 2000-01 and 8 per cent in 2005-06. Thus, it would continue to comprise 22 to 25 per cent of gross domestic investment. While arriving at the overall macro estimation, the report took into consideration the Indian experience over the past 15 years, observing broad generalities of infrastructure investment across the world and examining in particular the East and South East Asian experience over the past two decades. Sectoral additional requirement of funds were also estimated by the report. For the road sector, investment requirement was about Rs.100 billion in 2000-01 and Rs.150 billion in 2005-06. The requirements for ports estimated by the Report was about Rs.24 billion in 2000-01 and Rs.40 billion in 2005-06.

The India Infrastructure Report observed that the projected share of the private sector in infrastructure investment would increase from the current 25 per cent to 40 per cent in 2000-01 and to about 45 per cent by 2005-06. This would mean an increase in private sector infrastructure investment from 1.0 - 1.3 per cent of GDP to 2.8 – 3.0 per cent of GDP by 2000-01 and to 3.5 per cent by 2005-06. In absolute numbers, it implies an increase from the current Rs.160 billion to about Rs.430 billion in 2000-01 and about Rs.800 billion by 2005-06.

Other estimates of investment requirement include the estimates by the Expert group on Commercialisation of Infrastrcture projects, which estimated that to meet projected growth of infrastructure, India would have to invest $ 115-130 billion and $ 215 billion for the five years after that. This effectively means an additional 20,000 crore per year in Ninth Plan, which will be further enhanced to Rs.30,000-35,000 crores a year in the Tenth plan.

The working group on roads for the Eighth Five Year Plan predicted that freight and passenger traffic are expected to rise further to 800 BTK(Billion Tonne Kilometre) and 3000 BPK( Billion Passanger Kilometre) respectively by 2001. The existing network also needs upgradation by way of widening, strengthening, provision of user friendly improvements

Estimates by Rail India Technical and Economic Services (RITES) indicate that the amount required for urban transport infrastructure investment in cities with population 100,000 or more during the next 20 years would be of the order of US $ 49.28 billion.

The Department of Road Transports and Highways has placed the investment requirement for Road Transport projects at Rs. 1,72,000 crores for the seven year period 2005-06 to 2011-12. On an average, this implies an annual investment of Rs. 24,571 crore. The private sector is estimated to contribute Rs. 10,714 crore ( 43.6 per cent) while the public sector is estimated to finance Rs. 13,857 crore( 56.4 per cent) annually during the period.

Traditional Form of Financing the Transport Sector

The transport sector, as a whole, has traditionally been one of the principal recipients of budgetary support in India. According to the World Development Report,1994 (World Bank,1994), excessive financial dependence on the state, poor performance of governments in providing transport infrastructure and services and unresponsiveness to user demand are major factors that have contributed to operational inefficiency, poor quality and unreliable delivery of transport services. These factors apart, pricing of services invariably below the costs of provision has resulted in constraining providers from generating internal surpluses leading to excessive dependence on budgetary support.

Figure 1 illustrates the flow of resources involved in Transport Sector Financing within the traditional framework. The framework shows that

An important component of the new economic policy framework introduced in India in the early nineties is the resolve to correct the fiscal deficit by emphasizing internal resource generation with a view to reduce budgetary support to public sector organizations in general including the transport sector. This envisages encouraging the public sector to generate maximum internal resources to finance future expansion programmes without having to depend on government support by motivating them to operate on business- like principle without relying on public funds to close the resource gap. For a developing country like India which has built up substantial transport infrastructure capacity, strategies for further development must necessarily take into account the issue of whether the dependence on budgetary resources is one of resource availability or efficient management of service delivery or both.

Scope of the Study

It is against this background that our attention in the Indian context would need to be focussed on examining: