03 financing

FINANCING OF RURALINFRASTRUCTURE

Vijay Mahajan, Preeti Sahai, and Sandeep Pasrija

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INTRODUCTION

Economic growth and human development arestrongly determined by the prevailing infrastructuredevelopment 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 isalmost totally publicly funded, and the governments at thecentre and the states, have severe budgetary constraints. Thelocal governments—zilla parishads and panchayats in case ofrural areas—are largely dependent on central and stategovernment disbursals, and are thus hardly ever in a fundsurplus situation to spare money for infrastructure investment.Rural communities themselves are impoverished andunorganized, so community financing of infrastructure is notpossible beyond an occasional piau (communal source ofdrinking water) or dharamshala (resthouse or shelter). In thiscontext the role of private capital in filling the need gapacquires tremendous importance. Seventy per cent of Indianslive in villages and rural infrastructure is a key determinantof rural development and economic and social well-being.

In this paper we try to understand the prevailing financingoptions for rural infrastructure and attempt to identify viablealternatives towards bridging the gap. For our purpose weextend the standard elements of infrastructure (roads, irrigation,water and sanitation, telecom, and electricity) to include agro-processing and marketing facilities within the ambit of ruralinfrastructure needs. This is driven by the fact that the positiveimpact of these services on agriculture-based economic activityin rural areas is significant, the user group for them is largeand the investment required is lumpy.

In the initial sections of the chapter we lay out the basicattributes of the rural infrastructure sector in terms of its

economic, social as well as political aspects, features, andcompulsions in order to draw implications for existing financingpractices. This is followed by a brief assessment of the demand–supply gap that exists in rural infrastructure segregated byservice, that is, water and sanitation, roads, irrigation, electricity,telecom, agro-processing, and marketing. Detailed discussionsof prevailing funding options and avenues are followed inthe subsequent sections by an examination of viability of newoptions in the resource generation.

ATTRIBUTES OF RURAL INFRASTRUCTURE AND

INTERLINKAGES WITH FUNDING ISSUES

Economic Parameters and DecentralizationPossibilities across Services

Institutional and financing arrangements relevant for serviceprovisioning will be derived from the nature of the infrastructurein question, in terms of its public good versus private goodcharacteristics (a rural road tends to be public in nature, anin-house electric connection is a private good); and the scaleof the service—whether the service helps a single communityor many communities. Even for most ‘heavy capital investment’intensive infrastructure, some part of the recurring expenditurecan be paid by the consumers. It is critical that policy-makersrecognize the need to balance cost sharing strategies withobjectives of maximizing outreach to the poor. ‘As a rule, thepotential for private sector interest in providing infrastructureincreases as the activity shifts from public to private. A shiftfrom smaller to more extensive coverage also tends to transcendcommunity-based solutions’ (World Bank, 2006a).

We characterize rural infrastructure based on parameterssuch as investment required, extent of incremental expenditure,consumers’ willingness to pay, and scale economies (Table 3.1).

48 India Infrastructure Report 2007

Health and education delivery can be decentralized to thelocal level. However, resource needs for research, training todifferent cadres of health/education workers, curriculumdevelopment and so on are significant and require centralizedinfrastructure. Similarly, promotional activities required torun both health and education facilities are significant andrequire large administrative machinery to deliver. InformationTechnology (IT) related services typically require huge basicinfrastructure to extend services. For water services, it isless the connection to a physical network and more the accessto organizational and professional skills that drives utilityexpansion.

Measured by scale economies, electricity falls somewherebetween IT and water. Unlike telecom, electricity can bedecentralized to local levels, without being necessarily connectedto a larger regional or national network. This is a viablesolution for remote areas, where establishing transmission linksfrom a larger network is prohibitively costly, given the size ofthe rural market. Private entrepreneurs in India are alreadyselling power generated micro-hydel and wind-based renewableenergy generation systems to large grids. The next step couldbe to enable them to distribute power in localized rural areas.Rural power distribution was prioritized by several pioneeringprojects of the Rural Electrification Corporation, using ruralelectric supply cooperatives. One of these, in Ankapalle inVishakhapatnam district of Andhra Pradesh, is an exampleof a robust community institution owning and managing animportant rural infrastructure facility. (See Box 6.1.5)

Social Attributes

That the term ‘infrastructure’ was traditionally usedinterchangeably with ‘social overhead capital’ sets the tone for

how it has been viewed by policy-makers and stakeholdersalike as a need that must largely be addressed by thegovernment. In India, even sixty years after independence thegovernment plays an overwhelming role in financing, building,and maintaining infrastructure.

Public infrastructure faces disuse and apathy at the handsof its target segment, its users. There are often no clearincentives to maintain public infrastructure at the local level.In addition, factors which have created an institutionalenvironment for low maintenance of infrastructure includethe non-excludability of public infrastructure, concern for socialjustice leading to absence of or low user fees, and ownershipand operation by a public bureaucracy. The government mostlylimits its role to infrastructure creation, without creating alocal institutional set-up with user participation, which has astake in the maintenance, use and other issues such as billing,recovery of payments and so on. Thus, in the interest of moreeffective infrastructure services, the ‘rules of the game’ willhave to be redefined.

Political Attributes of Infrastructure

Allocation of resources for infrastructure creation is as mucha subject of political decision-making as anything else. Suchallocation is often based on parameters that go beyond theinfrastructure deficiency of an area, or its people, or even theefficiency of resource use. Infrastructure requires large, lumpyinvestments, and politicians use this as an opportunity tobestow visible patronage on their constituents. The electedrepresentatives to the government often waive user chargesfor political mileage and gains from their voter base. Thiscreates distorted responses on the part of the consumers andalso adversely affects their attitude to infrastructure, andwillingness to pay for it. This offers perverse incentives to theusers to misuse infrastructure services and get away withinadequate or no payments. Electricity and water, for examplehave been the focus of competitive populism (Vaidyanathan,

Table 3.1Categorization of Rural Infrastructure

Health Education Energy Water and IT/Telecom Roads CanalSanitation Irrigation

Scale Economies Low Low Moderate Moderate V. High V. High V. Highto High

Initial Investment Moderate Low Moderate Moderate V. High V. High V. Highto High

Recurring Expenditure1 Moderate Low High Moderate Moderate Low Low

Willingness to pay High Moderate High High Moderate Nil Highto High to High

Source: Computed by author.

1 Expenditure on continued provision of the service includes expenseon salaries of doctors and teachers, maintenance of the power plant,maintenance of the water structures and so on.

Financing of Rural Infrastructure 49

2003). Raising water rates is considered as an electoral disaster,regardless of the political party doing it. Similarly, waivingelectricity bills, or announcing free power for farmers is aninfamous yet popular pre-election promise.

DEMAND–SUPPLY GAP IN RURAL INFRASTRUCTURE

Rural areas are often perceived to generate low demand forinfrastructure services, thus imposing a major constraint onthe viability of rural infrastructure projects. While demandfor connections is often lower than comparable urban areas,many studies show that a high number of rural customers areoften willing to pay and to consume more than is commonlyexpected. Precise quantitative measures of rural demand willbe difficult because estimating demand is complex. Ifwillingness and/or ability to pay are measured before a serviceis introduced, they may lead to underestimation of thepotential demand. The impact of education or informationabout the service is much higher when the service is visible,and to this extent most estimations account for demandinadequately (Econ One Research, 2003).

The ensuing section attempts a rough estimation of thedemand-supply gap in different sectors and some broaddiagnosis of how the system has addressed the respectiveinfrastructure sector needs over time. This section gives someidea, not only of the gap, but also the current outreachof infrastructure services. The full picture, however, is notcomplete without understanding the quality of servicedelivery. The actual demand is likely to be higher than whatthese figures convey to the extent that infrastructure wascreated but lies defunct or underused due to partial ordiscriminatory access.

Water and Sanitation

The Rajiv Gandhi National Drinking Water Mission, statesthat (as of 2005) about 96 per cent of rural habitations can becategorized as ‘fully covered’ by drinking water provisioningservices, and 35 per cent of population has access to sanitationfacilities.2 An evaluation by UNICEF in 2004 assesses thatonly around 40 per cent of the below poverty line (BPL) familiesuse constructed toilets compared with 80 per cent of the abovepoverty line (APL) households using the same.

To project this to the current scenario, with a populationof approximately 1100 million, 75 per cent rural population,and 65 per cent of this population un-served by sanitationfacilities, we have around 536 million people to cover. Assuminga household of 5.5 persons, this translates to a little less

than 100 million households, who need to be providedsanitation facilities.

According to the Bharat Nirman Plan, by 2009 around 33million people across 55,067 habitations have to be providedaccess to water.

Roads

The demand for rural roads can be better understood by thedemand for vehicles. In the period 1990–7, rural roads grewby around 15 per cent, whereas the estimated growth in demandfor scooters was 56 per cent, and that of bicycles was 28.5per cent. The availability of road infrastructure is, in generalpoor for smaller villages with less population (Table 3.3).

Table 3.2Access to Water and Sanitation Services by the Rural Population

1992 1997 2002

% Population with no access to Water 34 23 8

% Population with access to Sanitation 6 10 20

Source: NSSO (1999), NSSO (2003).

Table 3.3Village Connectivity by Size of Village

Population Connectivity in 1995 (%)

Less than 1000 37.5

1000 to 1500 75.9

Greater than 1500 91.7

Source: Bery et al. (2004).

As per the Tenth Plan document, there are around 100,000unconnected habitations with population of more than 500persons. The average distance from a village to an all-weatherroad is 2 km, and on an average 52 per cent people livingaway from the main village do not have access to all-weatherroads (Bery et al. 2004).

Irrigation

The water use efficiency in Indian agriculture is one of thelowest in the world, at around 30 per cent to 40 per cent, asagainst an ideal of 60 per cent. The utilization of createdpotential is poor at around 86 per cent for all types of irrigationschemes. This gap between the potential created andutilized has widened over time from around 5 per cent inthe first three Plans to about 11 per cent from the SeventhPlan onwards.3

2 Figures based on the Comprehensive Action Plan, 1999, baselineassessment.

3 Some of this is also due to higher estimates of potential adoptedfor certain projects (Desai, 1991)


approximately 54.6 million households that are currently notelectrified but are above the poverty line, will not receive anysubsidy to provide an electricity connection.

Tariffs have been set too low to justify investments. Thisfactor has also increased the risk of investment in powergeneration. The policies and regulations have also been largelyreactive to private response and this has slowed the process.While the attention of private investments is largely urbanand industrial in nature, higher levels of investment are likelyto benefit rural India, both directly and indirectly. Transmissionand distribution losses, largely attributed to technical challenges,illegal use, heavy subsidies around power used for irrigation,and challenges in appropriate fee collection have pulled theState Electricity Boards into losses.

Telecommunication

Rural teledensity increased from 0.02 per cent to 1.92 percent in the last 50 years (1948–98). Village-level telephoneconnectivity, carried out through Village Public telephones(VPT) for rural India is missing in 58,648 (roughly 10 percent) villages. Compared to this government plans to raisethe teledensity in rural areas from the current 1.9 per cent to15 per cent by 2007 and has proposed Rs 8000 crore subsidyfor creating necessary infrastructure. With this kind of subsidysupport, it will be possible to install 20,000 base stations inrural areas to cover about 80–90 per cent of the villages,according to TRAI. According to the TRAI, if the present USOPolicy continues then India would achieve rural teledensityof only 3 per cent by 2007.4

Agro-Processing and Marketing Infrastructure

Agricultural Markets

As of March 2003, there were 7323 regulated wholesaleagricultural produce markets in India, up from 57 in 1939.In addition, there were 27,046 rural periodic markets.On an average 21 villages are served by one rural marketwith the state-wise figure ranging between one rural marketfor one village in Kerala to 667 villages in Himachal Pradesh.The need to develop haats or weekly bazaars has beenemphasized upon by the Expert Committee on Strengtheningand Developing of Agricultural Marketing (GoI, 2001).The report recognizes that since these markets constitutethe ‘first contact point with commercial circuits for theproducers’ and ‘80 per cent of the household incomes ofthe rural masses is estimated to be spent at these markets’,their development, therefore, ‘with proper operational,pricing and technical efficiency constitute the foundation of

Table 3.4Existing and Potential Irrigation Capacity in India, 1997–8

Major Minor Minor Total and (Surface (Ground

Medium Water) Water)

Ultimate Potential 58.5 17.4 64.0 139.9(million ha)

Irrigation Potential 58 72 73Created (per cent)

Created Irrigation 33.9 12.5 46.7 93.2Capacity (ha)

Utilized Potential 86 88 92(per cent)

Irrigation Potential 29.2 11.0 43.0 83.2Utilized (million ha)

Maximum Irrigation 24.6 4.9 17.3 46.7Potential that can becreated (million ha)

Source: Central Water Commission (P&P Directorate) and PlanningCommission (2002).

As of 1997–8, the 83 million hectares of irrigated areaserved only about 46.5 per cent of the landholdings, whichmeans that at the current rate, further irrigation potential ofaround 95.5 million hectares will have to be created to providefor the remainder 53.5 per cent of landholdings. Givenassessments of ultimate potential, only around half of thisrequirement (46.7 million hectares) can be addressed throughcreation of new potential. Further, to the extent that thereis underutilized potential, the figures will diminish further(Table 3.4).

Major and medium projects require an average investmentof Rs 1 lakh per hectare of irrigated area, and the sumrequired will therefore be around Rs 246,000 crore, just toexploit full potential of major and medium projects. Ataround Rs 10,000 per hectare, for minor irrigation, theadditional funds required are Rs 22,200 crore (PlanningCommission, 2002).

Electricity

Rural electrification is defined broadly to cover for creationof the physical infrastructure for electricity. However, the accessof individual households to electricity is questionable even ifthese targets are met. The Rajiv Gandhi Gram VidyutikaranYojana (RGGVY) aims to electrify 125,000 villages, connectall the estimated 2.34 crore unelectrified households belowthe poverty line (BPL), offer 90 per cent subsidy for providingconnections and augmenting the network in all thealready electrified 0.46 million households by 2010. The 4 http://www.telecomindustrystocks.com/IiI/News/061206.asp


integrated market system for distribution of agricultural andallied produce.’

Storage

The three main agencies in the public sector, which are engagedin building large scale storage capacity: the State WarehousingCorporation (SWC), Central Warehousing Corporation(CWC) and Food Corporation of India (FCI). The CWCand SWC have enhanced capacity from 8 warehouses handling7000 tonnes in 1957–8 to over 1800 warehouses handlingover 23 million tonnes in 2000–1. The FCI has created storagecapacity of over 35 million tonnes.

The storage capacity, at its present level is sufficient onlyfor 10 per cent of the total production of fruits and vegetables.The capacity requirement for post-harvest management ofperishables is estimated to be over five times that of the currentcapacity. The Expert Committee on Strengthening andDeveloping of Agricultural Marketing (GoI, 2001) assessesthe need for creation of 15,000 additional cold storages witha capacity of 45 million tonnes. This would require aninvestment 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 hasincreased capacity three-fold from 0.7 million tonnes to 2.1million tonnes between 1990 and 2001. This processinginfrastructure for fruit and vegetable is highly decentralized,and most units operate in cottage/homes and the small scalesector. Dairy related micro infrastructure, for example, entailsnot just the processing units such as bulk coolers, chillingplants, pasteurising facilities, and packaging facilities, but alsomilk collection cans, fat testing machines, milk vans operatingon milk routes, and marketing facilities.

The financing of such infrastructure is likely to be differentfrom other larger infrastructure in that there is scope forsignificant private finance. An integrated approach to creatingsuch infrastructure and attracting private finance is neededto 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 ruralareas, and therefore, Indian planning has a history of interven-ing in and focussing on the problems of the rural sector. Itwas around the mid-1970s that the concept of basic mini-

mum needs came into the policy frame, with an explicitacknowledgement of the worsening rural poverty situationand large scale unemployment (Das, 2002). During the SixthPlan, issues relating to basic infrastructure were sought to beaddressed in a rather more cohesive and direct manner thanbefore under the Minimum Needs Programme.

The infrastructure investments in rural areas are mired inhidden and explicit subsidies and heavy losses. The approachto investment in rural infrastructure was traditionally that ofcomplete state support as such investment was viewed aseconomically unattractive and also too complicated for theprivate sector to consider.

While on the one hand, public investment was the onlysource of finance for rural infrastructure; on the other eventhese have been declining as a proportion of both totalgovernment expenditures and as a proportion of GDP. Duringthe post-reform period, between 1993–4 and 2001–2, notonly has the share of budgetary expenditure on all social servicesand poverty alleviation programmes declined from 2.08 to1.87 per cent, but also the share of rural development in allsocial services and poverty alleviation programmes has fallenfrom about 32 to 25 per cent (Das, 2002).

The expansion and improvement of irrigation infrastructureoccupies a central place in India’s agricultural strategy.Investment in the major and medium irrigation programmescomes almost entirely from public sources, whereas for minorirrigation programmes a significant share comes from institutionaland private sources as well. Between 1977–8 and 1994–5,capital investments in major and medium irrigation schemeswent up 7.5 times at current prices and 4 times at constantprices, whereas the irrigation potential increased only by30 per cent (Vaidyanathan, 2003). Investment in irrigationconstitutes 55 per cent of total agricultural investment—thesingle largest component of the investment by the publicsector. The government has spent over Rs 120,000 croretowards developing irrigation potential up to the Ninth Plan.The plan outlay under the Accelerated Irrigation BenefitProgramme for 2005–6 was Rs 4500 crore.

The outlay of the State and Central Governments for ruralroads was Rs 3070 crore in the Eighth Plan period. It was Rs1980 crore and Rs 2140 crore in the next two years, 1997–8and 1998–9. For water and sanitation, the total investmentenvisaged in the Tenth Plan period is Rs 3010 crore, whichthe State and Centre are expected to share in the ratio of47:53.

Public resources are thinly spread over a large number ofcompeting alternative uses. Even though state funding is theonly significant source of infrastructure finance, it is notadequate. As a case in point, at 2000–1 prices, the PlanningCommission estimates that an investment of Rs 107,800crore will be required to provide electricity to all villages in


India. Compared with this, the average annual investmentover the last few years has been merely Rs 8.8 thousand crore.

Central Government Sponsored Schemes

Most poverty alleviation schemes of the government have assetcreation and infrastructure creation components. In February2006, the Finance Minister, in his budget speech, announcedan allocation of Rs 186,960 crore for rural infrastructure, underthe Bharat Nirman Programme. This is the single largestallocation for any sector and is 54 per cent higher than theprevious year.

Schemes directed at creation of infrastructure include theMillion Wells Scheme (MWS) for surface water bodies, IndiraAwas Yojana (IAY) for housing, Jawahar Gram Samridhi Yojanafor school buildings, rural roads and other infrastructure,Swarna Jayanti Swarozgar Yojana to support micro-enterprises.The Employment Assurance Scheme (EAS), Food for Workprogrammes, as also the new National Rural EmploymentGuarantee Scheme (NREGS) provide employment to villagersin the construction of minor local infrastructure such as smallroads, school buildings, and pond digging.

SUBSIDY DESIGN

The design of the subsidy disbursed is crucial to how theinfrastructure is built, financed, and managed. The thrust oncommunity participation has been increasing, yet the financingmechanisms 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 governmentschemes, experience shows that the design has failed to pre-empt misuse of this clause.

The manner in which subsidies are designed continues tobe an issue with public funds. Outright and upfront grantshave often failed to motivate the beneficiaries to use the fundsjudiciously. ‘Smart’ subsidies or those which ensure communitycontribution and where the grant is targetted appropriatelyat an institutional structure ensure more efficient and sustainableuse of the funds. Beyond sunk capital costs, such funds oftenremain with the community as revolving funds. If subsidiesare made contingent to performance, or are structured asoutput-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 andmaintenance of infrastructure, stems from the multiplicity ofroles that the government plays. These roles range acrossregulatory, promotional, financial, and implementational.Notwithstanding the near pure public good attributes of sometypes of infrastructure, the government has been seen to under-perform when it is playing all these roles simultaneously. Mostoften, the implementation role of the government is playedby the DRDAs and increasingly by Gram Panchayats. TheDRDAs largely have low capability for micro-planning andimplementation. PRIs vary in capabilities across states, and

Box 3.1Misdirected Subsidies which Benefit Non-poor more than the Poor

Electricity subsidies to agricultural consumers in IndiaA key government policy in India has been the subsidization of electricity to agricultural consumers as a way of providing support topoor farmers. However, research in two states has shown that the subsidy is often made to the target population by charging the farmeronly a flat tariff for each water pump he has rather than billing for the kWh of electricity consumed. This technique provides greatestsupport to farmers operating larger farms. Expenditure on electricity for large farmers represents 6 per cent of gross farm income; itrises to 13 per cent for small or marginal farmers.

Under-priced electricity services to households in BangladeshBangladesh, like many countries, charges electricity prices to households that are cross-subsidized by other consumer groups and alsosubsidized by the government. This support mostly reaches the better-off owing to low connection rates. Consider the following datafrom the 2000–2001 Household Income and Expenditure Survey:

Connected Households (per cent)Quintile income group Urban Rural Combined

1 (poorest) 46.4 2.9 11.7

5 (richest) 99.1 43.5 54.8

Source: Monari (2002), BBS (2003), WSP (2002).


are also not quite ready to take over efficient management ofprogrammes yet.

CENTRE-STATE COST SHARING

Most of these schemes require 25 per cent contribution fromstates. Experience has shown that state governments are oftenslow in offering their share. In Kerala, the state governmenthas taken a policy decision to transfer all small single villagewater supply schemes to gram panchayats. However, even withsuch a decision, the process has been slow and only a limitednumber of about 1000 such schemes have really been transferred.The state governments often give the alibi of inadequatecapacities of the local authorities to execute these programmes.There is a case for reform-linked incentives and assistance fromthe Centre to the states. Enactment of the 73rd Amendmentdeveloping a framework of user charges, to create space forprivate finance could form the basis for setting up these criteria(Mehta et al. 2003).

PRICING OF INFRASTRUCTURE

The required reforms in infrastructure sectors include restruc-turing of pricing as an essential part of effective management.In irrigation a chasm exists between the cost and pricing ofirrigation, which doesn’t augur well for the development ofirrigation infrastructure. The water rates collected by severalstates served by public works are neither revised regularly tokeep pace with the escalating costs, nor are sufficient to meetthe working expenses, let alone cover fixed investment orearn a rate of return over the investment. Tamil Nadu revisedwater rates thirty years ago, Punjab, Haryana, Kerala did soin the mid-1970s, while Andhra Pradesh, Bihar, Rajasthan,Orissa, and a few others did so in 1981–6. Andhra, Gujarat,and Karnataka tried to implement a new regime which gotheld up due to various reasons. The Committee on Infra-structure Pricing stressed the need to view the strategy forreform of water pricing as part of a larger programme ofmodernization of irrigation systems, and restructuring oftheir management.

Fund utilization of government schemes has historicallybeen seen as patchy and inefficient. Experiences such as RogiKalyan Samiti5 in Madhya Pradesh show that as soon as marketmechanisms such as pricing of services are allowed to function,in synergy with the government intervention, all parties beginto play a more efficient role. The increased accountabilityand transparency of such systems due to the presence of ‘other’players, including the community, is likely to ensure betterutilization of funds (Box 3.2).

Rural Infrastructure Development Fund

The Rural Infrastructure Development Fund (RIDF) waslaunched in 1995–6 to address the inadequacy of publicinvestment in agriculture and rural development, and washoused with National Bank of Agriculture and Rural Devel-opment (NABARD). The initial corpus of Rs 2000 crorewas raised through contributions both from public andprivate 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 crorereposes with the RIDF (Box 3.3).

NABARD describes the success of the RIDF using twocriteria—the high social return and employment generationand the near perfect repayment experience. Both these however,are not direct pointers to the success of the RIDF. Irrigationprojects per se have a high social rate of return in water-constrained or water-uncertain situations. The RIDF onlyfunded completion of such projects, after the larger proportionof cost had already been undertaken. So, ignoring the sunkcosts, the RIDF IRR would obviously show high returns.Similarly for the latter, all loans given were against stategovernment guarantees and the governments had an additionalincentive to repay because the disbursement growth rates werehigher than the debt servicing needed.

The RIDF did relatively little to check quality of infra-structure created or completed with these funds by state gov-ernments. Taking the case of Rajasthan, Morris (2003) showsthat 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 1998–2000, the StateFinance Department had disbursed only Rs 35 lakh till 2001.These funds were actually used to improve the ways and meanssituation of the state. Often the states did not make adequatebudget provisions for infrastructure spending, despite higherloans sanctioned by the RIDF. Inadequate provisions haveled to delays in completion of many projects. Cost overrunsare only around 7.8 per cent but time overruns are rampantacross RIDF funded projects. The cost and time overruns donot account for benefits lost on account of delayed completion,and are underestimations to that extent.

While the RIDF was conceived with the right ends inmind and was funded appropriately from shortfalls in prioritysector lending, it has in effect been reduced to just anotherpool of funds available to state governments. Data does showthat the fund sanctions were weakly linked with the state fiscalsituation, which can be called an improvement over directallocations by the central government.

Given that NABARD is a specialized funding agency withappraisal and monitoring capabilities, RIDF should haveenhanced the governmental system’s understanding of rural

5 The Rogi Kalyan Samiti is a patients’ welfare association comprisinglocal politicians, government officials, doctors, donors, and communityleaders.


Box 3.2Rogi Kalyan Samiti

Rogi Kalyan Samitis (RKS) are registered societies constituted in the government health delivery system in Madhya Pradesh, as aninnovative mechanism to involve the people’s representatives in the management of the hospital with a view to improve its functioningthrough levying user charges. The first RKS was constituted in 1997 in Indore. RKS have been set up at four levels of hospitals includingdistrict hospital, civil hospital, community health centre and primary health centres. It is a community-focused initiative with anexecutive and a general body, which have membership from the local elected representatives, bureaucrats, doctors, donors, and communityrepresentatives. Clear role-definition, transparency and accountability for the management, in addition to the budgetary allocation tothe hospital, have transformed these into vibrant institutions, which cater to the needs of the poor effectively. The Samiti is allowed tolevy fees for hospital services in government hospitals, and this revenue accrues to the Samiti, not the government. The revenue can beapplied to a defined set of activities as decided by individual samiti. Among the various uses are purchasing of consumables such asmedicines, reagents, X-Ray plates, ensuring of regular maintenance, repairs, cleaning, security, and hospital waste management. Thegovernment 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 compelledto purchase consumables from private shops.

Box 3.3Rural Infrastructure Development Fund

K.G. Karmakar

The GOI established a fund to be operationalized by NABARD in the Union Budget 1995–6 called the RIDF which was set up withinNABARD by way of deposits, from Scheduled Commercial Banks operating in India, to the extent of shortfall in their agriculturallending subject to a maximum of 1.5 per cent of the Net Bank Credit. The scheme has been continued with substantial allocations inthe 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 whichcould not be completed owing to resource constraints of the State Governments. Over the years, the coverage under RIDF has beenmade 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 B3.3.1Eligible 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;


22. 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; and31. Construction of Anganwadi Centres.

The annual allocation of funds announced in the Union Budget has gradually increased every year from Rs 2000 crore in 1995–6(RIDF I) to Rs 10,000 crore for 2006–7 (RIDF XII). The aggregate allocations have reached the level of Rs 60,000 crore. Further, aseparate window under RIDF has been created with a corpus of Rs 4000 crore for partly funding the rural road and bridges componentsof the Bharat Nirman Programme in 2006–7.

NABARD, as the manager of the Fund ensures even and equitable distribution of the RIDF corpus to all states. The allocation offunds among the states is made on the basis of the geographical area of the state concerned, the percentage of rural population, thestage of infrastructure development index, and trends in sanction/disbursement under earlier tranches of RIDF. Deviation from thisnorm 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 ProjectSanctioning Committee of the Board of NABARD after detailed technical, financial, and economic appraisal of the projects. The sizeand spread of the projects being large, implementation period of 3 years is provided and need-based extension is also given. The rateof interest applicable on lending to the state government and payable to Commercial Banks on their deposits are also decided by theGOI/RBI. The loan repayment period presently is extended over 7 years, including a grace period of 2 years. Loans are released by therespective Regional Offices of NABARD on a reimbursement basis after satisfactory completion of the prescribed formalities andprogress in implementation of the individual projects. A start-up advance may also be granted to State Governments to facilitateexpeditious commencement of the works.

Table B3.3.2Tranche-wise Sanction, Disbursement, and Completion of Projects (Rs crore)

ProjectNumber of Number of Number of Completion Number of

Amount Sanctioned Ongoing Completed Reports Non-starterTranche Sanctioned Disbursements Projects Projects* Projects Received Projects

RIDF I 1,906.21 1,760.87 4,168 37 4,131 4,117 0

RIDF II 2,666.87 2,397.95 8,334 758 7,576 7,498 0

RIDF III 2,733.82 2,453.53 14,346 333 14,013 13,399 0

RIDF IV 2,903.32 2,482 6,172 739 5,433 4,621 0

RIDF V 3,477.16 3,032.66 12,254 1,478 10,776 9,559 85

RIDF VI 4,525.36 3,850.83 43,354 2,063 41,291 39,648 45

RIDF VII 4,657.65 3,756.82 24,987 12,118 12,869 11,355 1,261

RIDF VIII 6,009.36 4,440.34 21,012 10,492 10,520 7,643 1,783

RIDF IX 5,599.18 3,387.47 19,605 5,772 13,833 7,520 393

RIDF X 8,289.75 2,967.79 59,979 58,870 1,109 850 2,934

RIDF XI 8,514.33 807.08 30,440 30,314 126 0

Total 51,283.01 31,337.34 244,651 122,974 121,677 76,975 6,501

Note: * Includes non-starter projects separately indicated in the last column of the table.Source: Computed by author.


With the close of RIDF XI in 2005–6, the cumulative number of projects sanctioned during the last eleven years (1995–6 to2005–6) stood at 244,651, entailing RIDF assistance of Rs 51,283 crore. Of the total assistance sanctioned 53 per cent has beenaccessed by six states (Andhra Pradesh ranking first (14 per cent), followed by Gujarat and Uttar Pradesh (9 per cent each) and TamilNadu, West Bengal, and Madhya Pradesh (7 per cent each). The balance was availed by the remaining twenty-two states. Tranche-wisedetails of projects sanctioned, amount disbursed, projects completed and so on as on 31 March 2006 are given in Table B3.3.2.

The aggregate disbursements under all the projects sanctioned under RIDF stood at Rs 31,337.34 crore as on 31 March 2006. Allthe projects sanctioned in one tranche do not get completed during the tranche period and the operative period for disbursementunder 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 2006.

Once completed, the projects sanctioned are expected to provide irrigation to 107.92 lakh ha, 2.02 lakh km of roads, 3.69 lakh metresof rural bridges, 70.5 MW of power, 6337 Primary Health Centres, 61,956 schools, and drinking water to 6229 villages and save 22,334lakh units of power. There are non-starter projects6 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 andmany projects were even abandoned midway, thereby locking in scarce public funds. RIDF helped to introduce a project mode in theinfrastructure funding by the state governments. Financing of rural infrastructure under RIDF became project-oriented, based oncompliance 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 realizebenefits over an extended period of time.

RIDF postulates adequate annual budgetary provisions to meet various project expenses and repayment obligations by the projectimplementing departments of the state governments. Further, loans are released under the sanctioned projects after ensuring thequantity of the work completed, on a reimbursement basis. This arrangement creates a sense of accountability and involvement by theimplementing departments. The project approach enables governments to ensure punctual completion of projects, thereby saving ontime and cost overruns.

Through the RIDF mechanism, the endeavour of NABARD has been to inculcate a sense of discipline in project management by theimplementing agencies, by focusing on scientific project appraisal and quality monitoring of works execution. Apart from the monitoringat the state government level, implementation of the sanctioned projects are subjected to close on-site and off-site monitoring by NABARDincluding 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 atthe level of the state governments, with difficulties in land acquisition, obtaining statutory clearances, awarding technical andadministrative 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 ofRIDF sanctions, across geographical boundaries. NABARD has been constantly interacting with the state governments to provideadequate and timely budgetary support, expedite administrative and technical approval as also environmental/forest clearances, ensurenecessary legislation for formation of user groups, such as Water Users’ Associations and for collection of user charges for reducingtheir financial burden and to enhance RIDF effectiveness.

In the Union Budget 2006–7, it was announced that specified projects under Public–Private–Partnership (PPP) Model have nowbeen made eligible to access RIDF Funds. State governments have been requested to provide feedback on the scope available foroperationalizing 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 stategovernments have treated the RIDF, merely as another sourceof funds, does not indicate that much learning has beenacquired. If the RIDF had led to a better understanding ofrisks in financing rural infrastructure, it could have sharedsuch analysis with other financial institutions and there couldhave been greater private sector interest in rural infrastructureinvestments. The risk taking abilities of actors in the system

have not changed substantially and the RIDF has not quitetaken rural infrastructure financing to the next logical level.In some ways, therefore, the RIDF despite having filled a crucialgap, has not fundamentally influenced the paradigm forfinancing rural infrastructure.

Other Public Financial Institutions

SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)

SIDBI has schemes designated for developing IndustrialInfrastructure for Small Scale Industries (SSI) and Integrated

6 A project is classified as non-starter if its implementation doesnot commence within six months from the date of release of start-upadvance from NABARD.


Infrastructure. The former caters to small industrial parks,common facilities, warehousing and market facilities of upto Rs 10 crore and the latter caters to cluster development bycreating or upgrading infrastructure facilities including water,power, telecom, industrial effluent plants, and others of upto Rs 5 crore in rural and backward areas. These schemes hadprovisions of grant funding from the Central and Stategovernments and lending by SIDBI, but do not seem to havemade a dent in infrastructure financing in India. SIDBI couldhave played a role complementary to NABARD–RIDF inthe interests of creating an enabling environment for ruralnon-farm sector enterprises but has mainly confined its workto urban clusters.

HOUSING AND URBAN DEVELOPMENT

CORPORATION (HUDCO)

HUDCO is a national financing agency with a dedicatedfocus on housing for economically challenged sections ofsociety. The non-housing portfolio of HUDCO includessanitation and water supply, sewerage, drainage, solid wastemanagement, roads, and bridges. While the infrastructurefinancing is increasing as a proportion of HUDCO’s portfolio,the concentration is entirely urban. While HUDCO has lentover 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 betterutilized by enhancing its scope to include rural infrastructureas well.

NATIONAL COOPERATIVE DEVELOPMENT

CORPORATION (NCDC)

NCDC was established in 1963 under the Ministry ofAgriculture. It extends term loans to cooperatives for creationof infrastructural facilities like godowns, cold storages,equipment financing, transport vehicles, boats, and othertangible assets and also for establishment/modernization/expansion/rehabilitation/diversification of agro-processingindustries. The scope of the NCDC’s activities has beenextended by an amendment to its Act, to include assistancefor certain notified services in rural areas like water conservation,irrigation and micro irrigation, agri-insurance, agro-credit, ruralsanitation, animal health, and so on.

Construction of Cold Storages and Ice Plants—The NCDCprovided assistance to build 313 cold storages (includingcapacity expansion) with a total capacity of 0.9 million tonnesas on March 2004. Of these, 285 cold storages, with a totalcapacity of 8.46 lakh tonnes, have been completed. TheCorporation has, so far, provided about Rs 139.58 crore forestablishment of cold storages. The assisted cold storages aremainly for storage of potatoes, though items like fruits,tamarind, spices, and milk products are also being stored.

Packing and Grading Sheds and Godowns—The NCDCprovided assistance to cooperatives at the primary level aswell as at the mandi level and for the establishment of fruitand vegetable processing units. As on March 2004, 48cooperative fruit and vegetable processing units were sanctionedout of which 39 have been installed. The NCDC has sanctionedRs 41.3 crore for establishing such units.

Marketing Infrastructure including Retailing—The NCDCprovided a total investment of Rs 37.29 crore to assist 1431cooperatives towards infrastructure and business development.The projects have helped in creating necessary infrastructurein the rural areas. Under the projects, 28 million tonnes ofgodown capacity has been created at the primary society level,besides which 212 strong room/lockers and 352 depositcounters have also been established for mobilising the depositsin the rural areas and starting mini banking activities throughvillage cooperatives.

While the financing efforts of NCDC are welcome,particularly as they go to financing user groups (exactlywhat cooperatives are supposed to ensure) the overallfinancing by NCDC in comparison to the unmet demand israther small.

Private Funding

With public sector resources under pressure due to priorcommitments of the government on salaries, pensions andinterest payments of past borrowings, there is need to raisefunds from private sources for infrastructure creation. Theeconomic reform process has not quite extended to rural Indiayet. Not surprisingly therefore, private funding for ruralinfrastructure has neither been systematically invited nor hasit come forth save some experimental money, largely at thebehest of development organisations. Public financial resourcesand the government’s administrative capacity are overburdened,and private sector participation will help ease the situationin rural infrastructure.

The private sector stayed away from rural infrastructuredaunted by long gestation periods, lack of information on riskprofiles, perception of inadequate financial returns, regulatoryrestrictions, and ambiguity. Other hurdles include relativelylow income density (income per square kilometre, which isdepressed both by lower income per household in rural areasas compared to urban areas as well as lower number of householdsper square kilometre) and high incidence of subsidised (thoughpoorly performing) services leading to unchecked pilferage,as in the case of electricity. While the Government admits tolimitations 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


policy-makers to rethink their approach and strategy and playa proactive promotional role.

Minor irrigation infrastructure has been significantly fundedby private money, supplied through institutional sources andaccessed by individuals. Groundwater, which forms the sourceof a large proportion of minor irrigation supply, is largelyaccessed through dug wells and tube wells, much of which isprivately financed. Factors which contribute to rapid devel-opment of groundwater structures include new agriculturaltechnology, better access to credit, and expansion of ruralelectrification. The down-side of these supportive factors andtheir largely unregulated expansion is that states such asPunjab, Haryana, Rajasthan, and Uttar Pradesh have alreadyover-exploited their groundwater.

There have been private sector initiatives for constructionof household toilets. Overall, however, the private sector’sinvolvement in O&M in the water and sanitation sector isstill very limited. One of the reasons is that maintenance isusually considered a state responsibility. There are no casesof organized large-scale private involvement in water supply.

In health and education, the involvement of the privatesector is widespread at all levels, be it the village ‘medicalpractitioner’, the entrepreneur who runs a one-room ‘English-medium’ school or the large super-speciality hospitals and‘deemed universities’ for professional education. One sectorwhere private investment overtakes that from public sourcesis storage infrastructure for perishable and semi-perishablecommodities. Eighty per cent of the cold storages, accountingfor around 94 per cent of the total capacity countrywide, arefrom the private sector.

Apart from easing the fiscal position, there is a belief thatwith private sector participation, investments will be bettermanaged with likely efficiency and productivity gains. Thereform process for the electricity sector in India has shownthat creating incentives for state-owned enterprises is difficultand the outcomes are far from certain.

Overall, both unfulfilled demand of infrastructure servicesand constrained supply of finance, management and governanceare factors which discourage private capital from rural infra-structure financing. Existing specialized public institutionssuch as the RIDF need to play a pioneering role in catalysingthese investments. We need to take cues from private in-vestments in urban infrastructure for the poor in devisinginnovative solutions to suit specific local requirements. Theseinstitutions can play a larger role in formulating risk profilesand addressing other issues related to investment in rural in-frastructure.

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 enabledelivery of market-based housing finance to low incomehouseholds. ADB offers a combination of long-term loansand technical assistance grants to financial institutions suchas HUDCO, IDFC, ICICI, and NHB who are furtherentrusted with on-lending of these funds to institutions whichwork more closely with poor communities.

The World Bank has also extended several loans to stategovernments for establishing irrigation projects and commandarea development endeavours, rural roads networks andagricultural produce market yards, apart from large powersector projects which also benefited rural areas to some extent.The World Bank has also funded the Karnataka Rural WaterSupply Project in the mid-1990s, while experimentingwith several models related to community participation anduser fees.

Insurance Companies

Insurance companies potentially have large pools of funds,and their long-term maturity matches the investment needsin infrastructure. Currently, except for the gigantic government-owned Life Insurance Corporation (LIC), the total amountof investible funds is still small with private life insurancecompanies. As per the regulations of the Insurance Regulatoryand Development Authority, 15 per cent of the investmentsof any insurance company should be in infrastructure. TheLIC alone had plans to invest Rs 10,000 crore in infrastructurein 2005–6.

Commercial Banks

Commercial bank deficit in sectoral lending to agriculture iscalled forth by the GOI into the RIDF. This, in some ways,is their contribution to rural infrastructure lending, and aconvenient one at that because the risks and transaction costsare very low. The direct lending by commercial banks toinfrastructure in rural areas receives purpose-wise refinancefrom NABARD. In the year 2004–5, the rural infrastructureloans disbursed by NABARD to Commercial Banks, RRBs,Cooperative Banks included minor irrigation of around Rs679 crore, land development of Rs 291.3 crore, storage/marketyards of Rs 32.3 crore across all these banks, and forestrydevelopment of Rs 7.1 crore.

That this is largely all that commercial banks have to offerto rural infrastructure is at one level understandable, becauseinfrastructure financing requires a completely different set ofskills from other types of credit. The existence of an extensiverural banking network, however, makes a worthy case forthese banks to engage in infrastructure financing in rural areas.These banks need to be incentivized to finance infrastructurewith innovative delivery mechanisms closely linked with the


community and to extend finance with working arrangementswith other agencies such as microfinance institutions.

Micro-finance Institutions

Within infrastructure, micro-finance institutions (MFIs) inIndia have experimented with financing largely householdlevel facilities including water and sanitation systems, shelter,and shelter improvement. Some MFIs have successfully lentfor common facilities and revival of community level infra-structure such as lift irrigation infrastructure, in combina-tion with some grant funds to undertake capital repairs.

Association of Sarva Seva Farms (ASSEFA), an NGO inTamil Nadu, has established several types of communityinfrastructure in rural areas of the state. BASIX gave loans tofarmers to revive lift irrigation structures in Andhra Pradesh(Box 3.4). BASIX has also designed a water and sanitationloan product which enables poor households to access pipedwater supply and build toilets. In infrastructure finance therole of MFIs is primarily to finance the household level demand,rather than to finance complete infrastructural facilities atthe village level.

The strength of MFIs is close community contact, as aresult of which they are in a position to be more demand-responsive than other agencies. Also their understandingof the risk profile of customers and appropriate deliverymechanisms is inevitably sharper enabling them to provideinnovative financing schemes for purposes of housing, waterand sanitation, energy, market yards, cold storages, milkchilling plants, and so on.

In India, most MFIs have an NGO background, and tothat extent are well equipped in carrying out the grassrootdevelopmental work to ensure effective solutions for financ-ing rural infrastructure. Moreover, MFIs can act as usefulconduits for ‘soft’ funds for infrastructure financing, withoutcontaminating the user community with effect of subsidies.

Infrastructure creation is complex and often beyond thetechnical 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 repairloans have been given successfully by NGO/MFIs such asASSEFA and IASC. More complicated products however,require combination financing and management, for whichMFIs need to partner with other agencies. Developmentalorganizations such as ASSEFA have designed multipleinfrastructure products, each financed by a combination ofrelevant actors.

It is important to recognize the limitations of microfinancein infrastructure financing, as MFIs typically offer creditwhich is small in size and has a short tenure. The averageterm of a microfinance loan is one year and the total lendingby all MFIs in India by the end of March 2006 is around Rs4000 crore covering around 4 million households. Given theunmet demand for infrastructure finance in India, the currentoutreach and resources of MFIs are miniscule.

The creation of infrastructure on a substantial scale, whichoften requires lumpy investments, is essentially beyond thepurview of microfinance. For financing communityinfrastructure projects beyond the household level facilities,funds with medium to long term tenures are needed. In mostcases, the MFI does not have access to such funds and externalfunds of such tenure would be necessary to avoid the termmismatch. The value that MFIs can add is to develop smallsuccess cases and demonstrate these innovations in ruralinfrastructure financing to the mainstream players.

Community Financing

The common assumption that the poor cannot or will notpay for infrastructure services is increasingly being provenincorrect. There are studies which show that rural customersdedicate a larger proportion of their disposable incomes toinfrastructure services compared with their urban counterparts(Waughray and Moran, 2002). Thus it is possible to convincethe community to contribute, provided there is a locally

Box 3.4Revival of Lift Irrigation Schemes

After the enactment of the Andhra Pradesh Farmer Management Irrigation Systems Act, 1997, the AP Irrigation DevelopmentCorporation (APIDC) handed over nearly 200 defunct lift irrigation schemes (LISs), typically with a command of 1000–2000 acres,to newly elected water users’ associations (WUAs) of farmers. BASIX, a livelihood promotion organization which pioneered the micro-finance movement in India, jointly with PRERNA, an NGO, worked to revive one of these, in Gudebellur village along the banks ofthe 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 aninvestment 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 acresout of the potential 1200 acres. The work was taken by PRERNA to six other LISs. In 2003, the APIDC set up a programme for therevival of all the 200 plus defunct schemes.


trusted organization such as an NGO or a good panchayat.Community contribution is a meaningful strategy, not onlyfrom the perspective of generating additional funds but alsofor better management and governance of community projects.Community contribution brings a sense of ownership and leadsto better management of commonly owned infrastructure.The user community could play a significant catalysing rolein inviting investor confidence by contributing funds. Thecommunity stake ensures that if systems are built appropriatelythe community can hold the other stakeholders accountableand demand proper service.

Community cost sharing needs to be done based on sus-tainable financial rules. While several government programmesdo have community cost sharing modules in their design,often low levels of community contribution are arbitrarilyfixed leading to failure in generating adequate stakes for thecommunity. The concept of community cost sharing has tobe translated into actual strategies, including building partici-patory structures at the local levels. Mandatory contribution bythe community without adequate education and mobilization

can lead to a situation where they use borrowed funds tomeet their contribution and ‘participation’ becomes a burdenrather than a step to empowerment.

On the question of cost recovery through user charges, itis interesting to note the following data from a World Bankstudy in India. The World Bank has made assessments of costsassociated with poor rural water supply services for six states.7

The opportunity cost of time spent in collecting water is Rs12 per household per day while that for time spent due toopen defecation practices stands at Rs 9 per household perday. In addition, the health costs due to diarrhoea andgastroenteritis diseases are likely to be around Rs 300 perhousehold per year. This opportunity cost totals up to Rs 21.8per household per day, close to half the daily income of a BPLhousehold with one income earner. These estimates pointtowards the ease with which the community is likely to opt for

Box 3.5Community 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 indonating the land for setting up the market, provide free labour and locally available materials. A separate market managementcommittee is established with the elected members from the local community to manage the operation and the fees collected from theretail sellers to meet the recurring expenditure. ASSEFA’s assessment suggests that given the high demand and willingness to pay by thefarmers 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 asweddings, family celebration, and community functions. It is engaged for about 100 to 120 days in a year and a commercial charge islevied 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 electedrepresentatives 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 raisedexternal 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 communityformed a School Committee to manage the school. The school committee ensures quality education to the children by appointingqualified teachers and providing pucca infrastructure. To meet the expenditure they have developed a revenue model based on feescollected from the children, extra fees collected from community functions, donations raised, as well as resources tapped from thegovernment. This income also helps to improve or expand the school infrastructure.

7 Figures based on household surveys of World Bank Projectappraisal documents. States covered are Uttaranchal, UP, Karnataka,Kerala, Maharashtra, Tamil Nadu (World Bank, 2006b).


payment of user fees in a scenario where the provision of thewater supply service can eliminate the costs associated withexisting practices. The study shows that the O&M cost recoveryfrom beneficiary communities is generally in the range of 10to 50 per cent for water services. The O&M cost recoveryfor piped water schemes is much higher than for handpumpand standpost schemes (World Bank, 2006b).

ASSEFA’s experience in Tamil Nadu in creating ruralinfrastructure with community contributions and stake isencouraging and shows high demand and willingness to payfor such infrastructure (Box 3.5).

WORKABLE INFRASTRUCTURE FINANCING MODELS

FOR RURAL INDIA

With the liberalization of the Indian economy in the early1990s, the regulatory environment is increasingly supportingexperiments in private financing of infrastructure. The 73rdCAA has cleared the path for empowering local bodies indecision-making and choice. As a result we also see examplesof community participation in infrastructure service provisionand financing. The progress of private sector and communityinvolvement is halting, as the political and economic changesneeded to accommodate and encourage their participationare slow. In this context, we take a closer look at partnershipmodels in infrastructure (mostly urban), along with examplesof similar attempts in India or abroad to explore possibleoptions for financing rural infrastructure.

Kinds of Partnerships/Contractual Arrangements

Contractual arrangements between the public and privatesector take many forms, and these infrastructure partnershipscan 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 existinginfrastructure. This inherently limits the scope of privateinvolvement but also limits the risk associated withproviding the service.

2. Management contracts are better suited for privatizationof stable infrastructure. While retaining ownership, thisarrangement outsources the entire operations andmaintenance to the private sector. Management contractsare also used to gradually move infrastructure towardsprivatization.

3. Leases, while similar to management contracts in mostrespects, also transfer the assets and their streams of income.This effectively increases the private partner’s exposure tothe risks of commercial operation. Leases generally provide

gains in operational efficiency and service but provide littleincentive or framework for expansion of infrastructure.

4. Concessions place the responsibility of investments forexpansion on the private partner while the public partnerretains ownership of the assets. As private partners takeon more and more responsibility, appropriate regulationsare needed, and the terms of agreement need to be clearlydefined.

5. Build-Operate-Transfer (BOT) model and its many varietiesdiffer from concessions in terms of asset ownership. Theprivate partner generally builds and operates the infrastructurefor a significant period of time before transferring the assetto the government. There is flexibility in BOT financialarrangements to mitigate the demand risk for both parties.Depending on the type of infrastructure and regulatoryframework, the public partner agrees to cover a certain levelof demand or a per unit charge for consumption and relatedexpenses, thus varying the exposure to demand generationfor both the private and public partner.

6. Finally, there is divestiture in which the assets are completelyowned by the private partner. While the government isnot exposed to any financial risks thereafter, it must have amature regulatory framework to manage and monitorprivatized infrastructure. Especially in the context ofrural infrastructure, systems must be in place to encourageexpansion 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 sectorstepping in, in any of these forms yet. It is therefore, essentialfor most models to have a strong community involvementcomponent. Active participation brings a better understandingof the end users’ consumption habits, the local context of feecollection, and involvement of the community in the designand maintenance of infrastructure which are essentialcomponents for the success of any rural project. Franchisingmay also be explored as a way for private investments toempower entrepreneurs in the local communities to provideoperations and maintenance for infrastructure. This effectivelyplaces the responsibility of ongoing service quality and costwithin the local community under the broad supervision ofthe infrastructure developer.

PPP Options and their Applicability in Rural Context

Public-private partnerships (PPP) in the rural context are stillin their nascent stages. Therefore, it is too early to label specificmodels that will work and those that will not. Given thecomplexity of the rural context, creating space for privatefinancing and the challenges of sustaining collaborations haveled to mixed results so far. However, it is a worthy exercise to


explore partnerships that might work or have worked forvarious types of infrastructure taking into account theeconomic, social, and political aspects.

Water

For areas that receive low rainfall, large structures such asdams and their associated distribution networks (which tendto be more expansive than rain-fed areas) provide water forthe rural population, thus requiring more financing. Generally,in the local context, water related infrastructure naturally takesthe form of a local monopoly. In the case of extensions fromexisting networks, it can be part of a larger monopoly. In India,most water related infrastructure is financed and managedby the government. There are political implications aroundcollecting cost covering tariffs for providing water relatedservices (Vaidyanathan, 2003).

The case of the Pani Panchayats in Orissa serves as a goodexample of decentralization of operations and managementin water infrastructure. Pani Panchayat was born out of needfor community involvement, maintenance, and collectionsfor water usage. The programme is a local communityframework conceptualized by the state of Orissa to serve theend user through operations and management and tariffcollections. Funds are raised directly from the end-usercommunity in the form of share capital and membership fees,to sustain operations. Though the Pani Panchayats initiallyonly supervise the operations and management of the tertiarysystem (portion of infrastructure directly interfacing withthe end user), as the programme progresses, they will takeon larger portions of the infrastructure and also participatein collections.

It is worth noting that local NGOs played a critical rolein creating awareness on this government initiative in thecommunities and assisted them in the registration andformation of the Pani Panchayats. The partnership betweenthe state government, community end users and NGOsessentially took the form of a management contract. Despitethe teething problems in decentralization and capacity buildingand organization of community based bodies, the productivitygains and corrections in wastage have been significant in theearly years of this scheme (Rath, 2003).

Build Operate Train Transfer (BOTT) is a tri-sectorapproach that consciously includes civil society organizationsin public-private partnerships. To cite an international example,the South African government formulated the BoTT modelthat incorporated the strengths of all three protagonists. Thegovernment provided the funding for infrastructure, theprivate sector brought technical expertise, and the civil societyorganizations provided the community inputs into demandand design, as well as operation and maintenance costs fromthe community. Each BOTT functions as a for-profitorganization. The consortium of the various partners bidsfor contracts to take on these projects from the government(Wadell, 2000). While it has faced its share of challenges incapacity development and fee collection, this approach hastaken a much more holistic approach by inclusion of civilsociety organizations.

Sanitation

Sanitation, unlike water, demonstrates a greater social benefitto the larger community than the direct visible economic impactto each family. In this sector, therefore, awareness campaigns

Table 3.5Allocation of key responsibilities under the PPP options

Option Asset Operations Capital Commerical Durationownership and maintenance investment risk

Service Public Public and Public Public 1–2 yearscontract private

Management Public Private Public Public 3–5 yearscontract

Lease Public Private Public Shared 8–15 years

Concession Public Private Private Private 25–30 years

BOT/BOO Private and Private Private Private 20–30 yearspublic

Divestiture Private or Private Private Private Indefiniteprivate and (may bepublic limited by

licence)

Source: ‘Toolkits for private participation’, 1997.


are required to highlight the importance of sanitation for thegeneral well-being of the community. Gram Vikas, an NGOin Orissa, initiated the Rural Health and EnvironmentProgramme (RHEP) where it serves villages with 80 per centof the families below the poverty line. In the experience ofGram Vikas, in order to generate participation from the villagersin sanitation infrastructure creation, it was essential to builddrinking water provisioning into the project. Gram Vikasoperates by establishing a corpus fund for each village thatrequires each family to contribute around Rs 1000 and thismoney is kept in a bank for future expansions of theinfrastructure in the village.8 The villagers cover 30–40 percent of the cost, while the remaining funds come from externalgrants. The government has considered participating in thisinitiative through discretionary funds. The community isinvolved in the design and decision-making process, as well ascapacity building for operations and maintenance (Box 3.6).

Electricity

Power sector infrastructure requires huge investments inproduction and transmission. Besides the economic constraintsin rural India, transmission and distribution losses (bothtechnical and due to theft), political interference, and thecurrent financial disarray in the SEBs have deterred privateinvestments in rural areas. In order to fulfil demand,alternative stand-alone forms of energy production have beenintroduced despite higher per unit expenses. Though there islittle scope for this stand-alone infrastructure to be integratedinto the eventual extension of traditional grids, that oftenseems to be the only viable alternative.

To gain some learning from international experience inthis regard, one may look at the case of Chile which, in its

attempt to expand electrification outreach, took on anambitious and creative concessions-based engagement. Thisand simultaneous industry wide privatization helped increasethe electrification of rural areas from 53 per cent in 1993 to 76per cent in 2000. While privatizing the state-owned companies,Chile chose to separate generation and transmission from thedistribution utilities. This helped build-in competition intothe distribution of electricity. The distribution utilities weredivided based on their region of operation and concession rights,but these concessions were not guaranteed, and instead wereopen to competition. The National Energy Commission wasformed at the central level to act as the main policy andregulatory body which did tariff setting. The government pushedthe decision-making down to the regional level while focusingmore on funding, monitoring, design implications, and nationalpolicy. At the outset, a special fund was appropriated to encourageentry into rural areas that were most difficult to operate.

Roads

The transportation sector and roads have widely been viewedas an integral component for social and economic growth.Construction of highways, bridges, and routes to urbancentres attract private investments in the form of BOT, BOO(Build Own and Operate) and BOOT (Build Own Operateand Transfer). The rural context requires significant, if notcomplete subsidization for roads due to difficulties in recoveringcost from the community. Availability of resources has beenthe main constraint in maintenance of roads. Some states areadopting a levy of market fee on agriculture produce to generateadditional resources for road maintenance. In this context,private sector maintenance of a 143 km state highway stretchbetween Bhopal and Dewas has seen encouraging results.

There has also been some success in Latin America forrehabilitation and maintenance of roads through servicecontracts by forming localized community based micro-enterprises, which require some capacity building.

Box 3.6Rural 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 accessto basic sanitation, health, and livelihoods. The RHEP’s main offering is a covered toilet and bathing platform in each house, andpiped water supply. Gram Vikas works through an approach in which each household is persuaded to make a contribution of Rs 1000in 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 contributelabour and local material such as sand and gravel. The costs of purchased items like cement and pipes and pumps, are met by GramVikas 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. TheRHEP won the Global Development Network Award for 2003.

8 This amount may seem a large sum for a village family, but it hasbeen done in several villages in Orissa by Gram Vikas. For details pleaserefer to the Gram Vikas website or contact Joe Madaith, the Directorof Gram Vikas.


Prerequisites for Attracting Private Sector Finance

While the past few decades have demonstrated mixed resultsin 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 inducedculture of artificially low tariffs, culture of non-payment forservices, and therefore, relatively high risk perception, havekept private financing at bay. Attracting private investmentsrequires a competitive rate of return for the risks associatedwith the investment.

Smart Use of Subsidies

Subsidies can be used as financial instruments to attract privateinvestments into rural infrastructure by effectively de-riskingthe investment. Governments generally face conflictingobjectives and have to balance the tension between usingsubsidies to reduce tariffs charged to customers and attractingprivate investments (Mehta et al. 2003). Historically subsidiesfor new infrastructure projects relent to budgetary pressureduring financial crisis. Chile’s electrification scheme demonstratesthe effective use of subsidies to create an environment ofcompetition, incentives for entering areas of higher risk, andaccountability 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 infra-structure projects from other engagements. The necessarypolicies should support SPVs when attracting private partnersto rural infrastructure projects.

Move towards Cost Recovery

The government must show a track record of maintainingcost-recovering tariffs to attract private investment. It mustalso demonstrate its commitment to realistic tariff setting andenforcement for payment for services. Often, due to improperdesign of subsidies, the tariffs collected for infrastructureservices do not properly represent the customer’s ability orwillingness 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, confusingthe government’s hesitation to charge with inadequate abilityto pay, history of bad service, and so on. Efforts are requiredto highlight the actual demand of rural communities.Underestimation of demand can be seen as a significant

deterrent to private investment. For the challenges associatedwith underestimation in demand, community involvementand exposure are essential, and it is expected that demanditself will increase with greater exposure to the service.

Regulatory framework

Policy and regulation should help clarify roles of different actorsbetween financing, building, and operating infrastructure, andregulation itself should be separate from all these. Theappropriate government body should help manage policychanges and their impacts on infrastructure projects and ensuretransparency in bidding and other government related activities.The state of Andhra Pradesh has created the InfrastructureDevelopment Enabling Act (IDEA) specifically to expeditedevelopment of infrastructure and to facilitate issues betweenthe public and private partners.

Chile created the National Energy Commission (ComisiónNacional de Energía, CNE) for technical and project monitoringin the privatization of state-owned electricity companies. Chilealso allowed the private sector the autonomy to handle theproject details and operations. While some oversight andregulatory mechanisms are required, excessive involvementcan be seen as a red flag to private investors. Therefore,clarity in the roles of each partner is essential for attractingprivate financing.

Commissions like CNE and policies like the AP–IDEAAct, in the context of rural infrastructure, can provide sectoroversight and policy inputs that encourage public-privatepartnerships and development of rural infrastructure.

Competition

Competition encourages efficiency, transparency, and ac-countability. The non-exclusive concession system for elec-trification in Chile, awarded distribution to utilities, providedappropriate incentives to existing companies to protect theirmarket share and expand even though rural electrificationis costly.

Prerequisites for Attracting Community Finance

Infrastructure is likely to have some element of non-excludability, some social and political attributes attached, andsome history of supply and user behaviour. Participation andfinance from the community will always require setting thestage for collective action. To enable collective action fromthe community for financing infrastructure, direct economicbenefit has to be demonstrated. This demonstration is likelyto remain abstract till the infrastructure is created and to thatextent the community is being asked to experiment.


Community Involvement

Community mobilization is the key to community engagementin infrastructure services. It is a critical component in thedesign, operation, and management of rural infrastructure.Demand driven infrastructure services are likely to be adoptedby large numbers, and are, therefore, more likely to attractcommunity finance. The various sustainable PPP infrastructureprojects that have been successful often have strong representationfrom the community in terms of the design as well as theoperation and maintenance of the infrastructure.

As demonstrated in the RHEP, water and sanitationprogramme being run by Gram Vikas, Orissa, communitybased organizations play a critical role in looking out for theinterests of the community and in mobilizing them. NGO/CBO intervention is, therefore, crucial for engaging thecommunity, with financial and physical contributions.

Norms for user behaviour

Collective action will always be a function of how well thenorms for usership and user behaviour are defined. Thecommunity has to be held jointly responsible (along withthe service provider) for efficient management and judicioususe of the infrastructure services. Once the other institutionalarrangements are in place, community finance will flow andwill ensure not only community participation but alsoaccountability from all parties involved.

Access to Microfinance

Access to microfinance can provide funding options tohouseholds to meet last-mile infrastructure needs. If thepipeline is provided by a subsidy, but the household waterconnections and taps need to be paid for individually by thecommunity, microfinance is the ideal solution. In addition,microfinance can also help stabilize fluctuations in income,enabling the customer to pay for services on time. Manygovernment programmes provide reimbursement, butcommunities 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 theoverall pattern of fund flows into a system. Lack of predictabilityin fund flow, makes it difficult for the project to finalize theirwork programmes, and therefore, inhibits upfront contributions.Microfinance can help deal with such uncertainty.

Stepping-up from O&M cost recoveryto capital contribution

At the first level, the community needs to pay operationsand maintenance charges, and this itself requires significant

awareness building and community mobilization. Any capitalcontribution from the community will follow a stage whereO&M costs are fully recovered.

Sound Institutional Arrangements

Once the user community is playing the role of a shareholderor and is an active participant in the system, the system needsto ensure that their rights as users and responsibilities as ownersare well defined. Their interface with the other actors in thearrangement, such as the government or private sector agencies,needs to be carefully designed. Contracting procedures needto be simplified for greater community involvement, as hasbeen done in the Surat Municipal Corporation or for thecommunity toilets in Pune. In the rural context, this has beentried in Andhra Pradesh, where several of women’s self-helpgroup federations have been awarded contracts for local roadand culvert construction.

Some Lessons from Successful Infrastructure Financing

Ownership and Management

Infrastructure should be managed like a business and shouldbe responsive to consumer demands. Poorly performinginfrastructure services are often marked by low levels offinancial autonomy and consequently, discipline. Privatesector participation in management, financing or ownershipwill, in most cases, be needed to ensure a commercialorientation in infrastructure (Raghuram et al. 1999).

Technology

The use of ‘appropriate’ technologies rather than the ‘best’technology can attract consumers and reduce commercialcosts. In Chile, the electrification programme addressed thechallenges around rural electrification by encouraging bothtraditional distribution as well as stand-alone technologies.The small scale non-network service providers were givensubsidies to create space for private investment to extendelectrification to areas that could not be viably serviced bytraditional distribution.

Involving Community and Other Stakeholders

To optimize outreach of infrastructure services, as also toensure long-term maintenance of the asset, it is imperativeto have representation from diverse stakeholders in the financingpattern of such infrastructure. The pattern of managementand governance are to a large extent derived from the mannerin which the asset is funded. Accountability and transparencyin the systems can be enhanced with a wider ownership base.


Experiences from Ghana and Cambodia show thatsustainability of services requires financial allocations to befirmly linked with empowerment and participation ofbeneficiaries.

Need to Develop an Institutional Base

The more we penetrate the interiors of rural India, the morecrucial the management aspect becomes, due to the nearabsence of institutions to support infrastructure in these areas.In this respect, NGOs play an important role in facilitatinglocal finance mechanisms or acting as intermediaries betweenmicrofinance organizations and the poorest clients.

Policy and Regulatory Framework

Failure to develop a clear separation of roles between the policymaker and the provider may end up compromising both ofthese routes of accountability. Holding the provider accountablefinancially through consumer choice may be compromised ifthe provider is ‘propped up’ by non-transparent subsidies.Similarly, the failure to clearly separate the roles of the policy-maker from the provider tends to draw local politicians intothe delivery of services rather than the establishment ofguidelines for service delivery (WDR, 2004).

Increasingly, the governments need to be responsible morefor creation of policy, regulatory frameworks, and encouragingprivate involvement in the provision of infrastructure services.The stance of the policy-makers needs to reflect the changingreality which necessitates passing on the responsibilities tothe user community and private investors and have themmanage, maintain, and pay for it. Enhancing the involvementof private sector and the community, while appropriatelymanipulating the forces of competition and tools ofdecentralization, can lead to more effective and efficientimplementation of the projects.

THE WAY FORWARD

Institutional Reforms to Attract More Financing

Funds will flow only to those investments where it earns arisk-adjusted market rate of return. This axiom has to beobserved in any institutional arrangement that we design. Thismeans that first, all possible projects should be sorted in thesequence of viability or rate of return. This necessarily meansinvestments will flow into those ventures which cater to asufficient number of customers with the purchasing powerand willingness to pay. Thus it is not a coincidence thatenormous amount of private capital has flowed into cellulartelephone network, because it meets these twin criteria.

For activities such as rural electric supply, where there is asufficient number of customers, but willingness to pay hasbeen distorted by decades of subsidized provision, institutionalchanges would have to be made to rebuild willingness to pay.In the long-run scenario, if revenue improvement could bedemonstrated on a steady basis, then it would be possible toattract private investment. This was attempted in Orissa afterthe unbundling of the OSEB into generation, transmission,distribution corporations and privatizing of the distributioncompanies (discoms). Unfortunately, the Orissa electricitysector, post privatization, has run into great difficulties and asa result the private sector is cautious about discoms. Such afailure is not a conceptual refutation and this strategy shouldbe tried again with the learning gained from the Orissaexperience as a resource. Power distribution gained in theHoshangabad district of Madhya Pradesh demonstrates howinstitutional structures can evolve to make a success story ofa rural power supply project (Box 3.7).

To attract finance (investment and working capital) allactors, including the service providers, and the users need towork jointly towards diminishing the risk profile of theinvestment. This will often require them to be co-financersas well. Robust institutional arrangements between the variousstakeholders are the essential underlying requirement forfinance to flow smoothly.

Institutional arrangements that the government endorsesin each sector will determine user and private sector finance,as is evident from changing institutional arrangements inirrigation (Box 3.8).

Continued and Supporting Role of Public Financing

Public funding cannot be dissociated from infrastructurecreation. It has to be recognized however, that neither doesthe state have a bottomless treasure-chest, nor has the currentset of approaches worked well for infrastructure creation. Thiscalls for both reduction in and reorganizing of the role thatpublic funds play in infrastructure financing. Public fundsare increasingly seeking innovative methods of addressinginfrastructure needs.

The implication of this for rural infrastructure financingis a more creative use of government funds earmarked for suchwork. Instead of the government funds being used as the soleor main source of funds, they should be used as equity or quasi-equity, or even as a guarantee, and most of the financingshould be done using other institutional funds, such as, RIDFfunds or loans from commercial banks. This would significantlyenhance the extent to which scarce government funds couldattract infrastructure investments. For example, a minorirrigation project of say, Rs 50 crore can be either entirelyfunded by the government, (in which case it may take up to


Box 3.7Sustainable Rural Power Distribution Project

The Sustainable Rural Power Distribution Project in the Babai block of Hoshangabad district was implemented by BASIX in 2002–3, with support from the Canadian International Development Agency (CIDA). Under this project, BASIX organized over 80 transformeruser associations, each comprising 5 to 15 farmers owning agriculture pump sets, served by the same distribution transformer. All thetransformers under a single feeder emanating from a 33KV sub-station were organized into such groups. Since the total number ofhours electric supply could not be increased beyond the 6 hour per day that was available to the other feeders, the only thing thatBASIX could promise, in consultation with Madhya Pradesh State Electricity Board (MPSEB), was a better service in terms of quickerattention 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 undeclaredconnections were registered. Eventually, the MPSEB was so pleased with this pilot effort, that it placed a whole sub-station in place ofa feeder, which dramatically improved the voltage delivery to the farmers. This is a small example of the virtuous cycle that can be atrigger 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 organizeall the farmers along the four feeders emanating from the Babai sub-station and then establishing a power users’ mutually aidedcooperative society, federating all the transformers users associations. This federation was registered but the sub station couldnever be handed over to them for management. Had this process gone through, the sub-station would have become a user groupmanaged facility, whose ownership and technical support would have continued from the MPSEB. This would have significantlyimproved the billing to supply ratio and the collection to billing ratio, since these functions would have been in the hands of theusers associations.

In return the farmers would have got steady voltage, preventing frequent motor burn outs, as well as quick response to fuse callsand any infrequent transformer burnouts. Eventually the MPSEB could have increased the number of hours of supply to this substation because of increased remuneration. Indeed in Madhya Pradesh, the Electricity Regulatory Commission gave an order to rationelectricity in ascending order of over dues. Thus those circles which had the highest overdues would have their power cut first. Overtime consumers could learn to start paying for their usage.

Box 3.8Changing Institutional Arrangements in Irrigation

People’s participation in renovation and maintenance of field channels was an established practice during the pre-independenceera. The Command Area Development Programme (CADP) introduced in 1974–5 was an improvement on the existing systemwith 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 involvingstakeholders with renewed emphasis on structures like field channels, focus on intermediate and main drains, and revised terms ofwarabandi, based on usage instead of hours and formation of water users associations. A fresh approach to Participatory IrrigationManagement (PIM), and creation of robust grassroots institutional structures thereby was underlined as essential to any reform inthe sector.

The issue of financing of infrastructure is a function of the overall reform in the sector in question. The reform in irrigation, forexample, needs to tackle water efficiency, water rates, O&M, dilapidation of systems and PIM as a package of measures to improve theoverall system. Although there is some progress in the development of water resources, a lot remains to be achieved in terms ofimproving utilisation, operational efficiency, management, and promotion of a regionally equitable irrigation infrastructure.

ten years to complete) or its financial structure could be suchthat the government puts Rs 5 crore as straight subsidy to reducethe ‘viability gap’, another Rs 5 crore as equity to reduce riskperception, and yet another Rs 5 crore as a guarantee againstshortfalls in collections of user fees in the initial years (till usersdisplay their willingness to pay). With this offer the government

can seek Rs 40 crore (guarantee not counted) from the RIDFor commercial banks, and finish the project in a few years.

Thus the role of public financing both from central andstate governments, till such time that panchayats build strongerfinances, will remain significant. It is our attempt to highlightthat the more governments learn to play this role differently


and leverage their strengths as the policy-maker, the more likelywe are to attract other forms of finance and enable sustainablesolutions for financing of rural infrastructure.

Need to Experiment with Private Financing

The case of electrification in Chile shows how private financecan be used creatively for rural contexts, if the supportivefinance from government is structured well. In the case underdiscussion, the user communities covered 10 per cent of cost,which was paid upfront by a private company and recoveredsubsequently through tariffs. The distribution utilities weredivided across regions, and each region used subsidies (paidfor by the region and the central fund) to encourageelectrification of areas that provided a greater social impact.Regions were encouraged by a special central fund that rewardedthe region based on achievements in rural electrification andthe remaining infrastructure needs.

Panchayat Financing v/s Users’ Association Financing

Some form of local institution is required for on-siteinfrastructure construction, operation, and maintenance.Proximity to the site is an advantage that panchayats anduser bodies have. There are two types of local institutions inrural India—panchayats and user groups, which could beincorporated as cooperatives or even companies.

Panchayats generate revenues through taxes which couldprovide funding, and users’ associations have the ability togenerate revenues through user charges. The overall taxationbase of the local bodies is so poor that they derive over 90per cent of their revenue from grants-in-aid. Thus, unlesstheir tax base and tax collection are significantly enhanced,the general tax revenues of panchayats cannot be a significantsource for infrastructure financing. Even as the tax baseimproves, panchayats should only provide the equity forraising infrastructure loans from specialized sources (see Box2.2). We hope that panchayats would be able to finance ruralinfrastructure in due course of time but it may take severaldecades before we can get there and meanwhile user groupfinancing is a more reliable alternative for local financing.

A more promising route for financing rural infrastructureseems to be through specific user charges levied by a direct serviceproviding entity such as the water users’ association. The twinissues of ability to pay and willingness to pay constantly comein the way of using this route for rural infrastructure finance.But it is being increasingly recognized that the unwillingnessto charge, rather than the willingness to pay, is the mainconstraint. Decades of patronage-based service provision hasled to a situation where such bodies are unwilling to charge

for the services at a reasonable rate which covers all thecost. By linking their viability with user charges, specificinfrastructure users’ associations can be incentivised to recovertheir operating and maintenance costs and, hopefully over aperiod of time, their capital cost (Box 3.9).

Financial Orchestration

Innovative orchestration of financial resources can be doneby combining various sources of funds—public and private.Public funds can be from the centre, state, district, or thepanchayat level. Private funds can be from investors, com-mercial banks, or from the people, who are users of the infra-structure (Box 3.10).

Government of India programmes have been usedinnovatively by some state governments enabling convergenceof resources from different programmes and schemes as wellas greater community participation through own contributionsand creation of ‘financing space’ for other stakeholders.

A privately managed community infrastructure financinginitiative, namely the Community Led Infrastructure FinanceFacility (CLIFF) provides an interesting model of financinginfrastructure. CLIFF uses finance as a tool to bring poorcommunities (and the organizations which support them) rightinto the heart of urban development planning and action.While the initial trigger is financed by CLIFF in one of themany forms mentioned, it ensures the provision of the missinglink in catalysing other sources of funds efficiently. CLIFFprovides venture capital and other financial products directlyto organizations of the urban poor, rather than to government,to support community-led slum upgrading schemes conceivedof in partnership with city authorities. This scheme can onlytherefore, work where poor communities have built thecapacity to manage slum-upgrading initiatives (Box 3.11).

An example of financial orchestration including privateinvestment in Tajikistan is relevant because of the uniquepoverty and risks profile in the country. If the public-privatepartnership approach outlined here could work in one of themore challenging countries in the world, it should beapplicable to rural contexts elsewhere (Box 3.12).

Some of the institutional innovations brought in included:creation of a full-function regional utility, which meant themonolithic national utility was unbundled in a geographicsense (as opposed to the functional sense of separatinggeneration, transmission, and distribution which was theconventional wisdom at the time); creation of a fully fundedsocial protection mechanism, monitored and administeredby a credible third party (in this case the World Bank); andparticipation of IDA, the World Bank’s concessional lendingwindow, in the financing of a project company, with IFC


Box 3.9Shift in Financing Pattern in Rural Water Supply

The Government of India initiated water services first through the Minimum Needs Programme, and then through the AcceleratedRural Water Supply Programme (ARWSP). Initially, rural water supply in India followed a supply-led approach where water access wasa deemed social good. Financial and operational failures in the ARWSP led to a fundamental shift in the sector towards demand-drivenapproaches, which the GOI brought about through decentralization of responsibilities and pilots in the Sector Reform Project (SRP)in 1999. The SRP focused on increasing community participation to bring about a significant shift by integrating the concept ofbeneficiary 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 responsibilityfor 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 implementationand management. It also said that while the central and state budgets will continue to be the major source of funds, the project costsshould be progressively borne by the beneficiary community. However, it is imperative to change the management system to make itmore demand-driven to engage the community in O&M.

Box 3.10Innovative 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 innovativelyto cater to local priorities. Janmabhoomi launched in 1996 is a statewide programme designed to address civic needs of communitiesin a participatory manner. Allocations from central programmes such as Swarna Jayanti Shahri Rozgar Yojana (SJSRY) and NationalSlum Development Programme (NSDP), partial grants from the State government for community infrastructure in both rural andurban areas with a 30 to 50 per cent contribution by the communities themselves formed the core funding. Innovative use of thisscheme was made in a slum settlement in Tirupati, with participation from a thrift and credit group developed with support fromthe Development of Humane Action (DHAN) Foundation. This group mobilized the required resources by accessing loans availablefrom the federation of self-help groups, Sri Padmavathy Abyudaya Sangam (SPMS), to meet its contribution and was able to getthe local authorities to improve roads, install utility connections by laying connecting sewers, storm drains and drinking waternetwork. The community in each street mobilized the necessary resources through this approach. In general, repayment for suchloans has been good.

Box 3.11CLIFF Financial Products, Pune, India

Meeting the challenge of slums, particularly in large cities, generally requires collective housing and infrastructure solutions, as opposedto separate individual/household solutions. Consequently, CLIFF has been designed as a venture capital facility supporting flagshipcommunity-led slum development projects rather than providing credit to individual households. CLIFF therefore, offers the followingforms 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 financegets fully repaid to Nirman from income streams, which can then be recycled to pre-finance further projects. Nirman is a not-for-profit company, promoted by the SPARC (Society for Promotion of Area Resource Centers), and acts as the financial and constructionarm 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 theyare developed and implemented.


• 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 tounderwrite some of the risk taken by banks when lending to projects. Loan financing will be recycled as projects are completed andrevenues received, thereby establishing Nirman as a sustainable, long-term financing facility in India.

Box 3.12Pamir Private Power Project in Tajikistan

This project is restoring reliable electricity supply to a poor and isolated population in eastern Tajikistan that was almost completelycut off from power supplies after the country’s independence from the former Soviet Union in 1991. This restoration has beenachieved through an innovative combination of private investors and multilateral financial institutions. It has been backed by adonor-funded social protection programme to ensure that the electricity remains affordable. At the same time, the government ofTajikistan has undertaken reforms necessary for the new framework to work. The total cost of $26 million was financed through amix of 45 per cent equity and 55 per cent debt provided by the International Finance Corporation (IFC) and InternationalDevelopment Association (IDA). IFC provided $3.5 million in equity financing; the remainder, $8.2 million, came from the AgaKhan Fund for Economic Development (AKFED), the principal private sector partner in the venture.

bringing a 30 per cent equity stake, to introduce a capitalmarket orientation and links with the private sector.

The essence of orchestrating finances for infrastructurecreation is to understand the value that different actors bringto different contexts. The type of financial instruments usedby different actors is a function of their relative strengths andrisk taking abilities.

Evolution of Institutional and Financing Arrangementsin Rural Infrastructure

We all know that there exist limitations in institutions andfinancial arrangements which make operation and maintenanceof infrastructure projects fraught with many deficiencies. Lackof institutional mechanisms also gives rise to lack of ownershipof these projects. The infrastructure sector is filled with contractand contractor relationships which are temporary. Here we havesuggested an evolutionary development of communityarrangement along with financial institutions which can makecommunities tackle with ownership issue.

Financing arrangements are inextricably linked to theunderlying institutional arrangements in rural areas. As thesupply-side institutional arrangements evolve towards greaterparticipation from a larger number of stakeholders, and towardsa reduced and largely facilitating role of the government, theinvolvement of users also increases. The arrangements amongstthe service providers and their interface with the users constitutethe institutional mechanism for infrastructure creation andprovision. This mechanism determines the financing patternthat can be configured.

The sources which can be accessed to finance at each stage(Figure 3.1) move from complete state subsidy to increasinglevels of mainstream commercial capital and communityfinance. Increasing levels of user community contribution,and facilitating finance from the government will help de-risk rural infrastructure projects to attract private sectorfinance. Infrastructure financing solutions for rural areas willhave to be designed creatively, with each set of actors providingthe right space to others.

The institutional and financing arrangements for ruralinfrastructure have been captured in Figure 3.1. The view isevolutionary, starting from stage one, where the state is thefinancier, builder, operator, regulator, and patron of a groupof unorganized powerless users, to stage four, where thegovernment is only the regulator and provider of ‘viabilitygap’ financing, whereas users are well-organized into a bodywhich is representative and which finances and operatesthe infrastructure facility. Bihar Hill Area Lift IrrigationCorporation, Central Power Distribution Company of AndhraPradesh Ltd., Village Electricity Committees, and AnakapalleRural Electricity Supply Co-operative, A.P. are good examplesof 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 Nagpurtribal areas of Bihar (now Jharkhand state), to lift water fromthe numerous rivulets in the area, each ‘lift’ irrigating 500–2000 acres. Intake wells were built in the middle of the river


GOVERMENTREGULATOR

VIABILITY GAP/CATALYTIC FINANCING+

PRIVATE ENTITYCOMMERCIAL LONG-TERM DEBT FINANCING

BUILDER/OPERATOR+

USERSOPERATION MANAGED BY USER ASSOCIATION

FEE COLLECTION COVER O & M& POSSIBLY PARTIAL CAPITAL COSTS

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CONTRIBUTORS TOFINANCING USERS BEINGBILLED FOR O & M COSTS

LIMITEDREPAYMENT

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NO REPAYMENTCULTURE

Figure 3.1 Evolution of Institutions and Financial Arrangements for Rural Infrastructure

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T

INDIVIDUAL

and 6” cast iron pipes carried water from there to a high point,using an electric pump, and thereafter it was released in thecommand area through gravity flow. These schemes were fullyfinanced and constructed by the government, and were operatedby government employees. Due to frequent power failures,despite having separate dedicated feeders and transformers, theschemes were not reliable. Operator absenteeism coupled withfavouritism in supply of water to those who paid off informally,

led the remaining farmers to break the pipes and pumps inmany places. By the middle of the 1980s, all the few hundredof these schemes were defunct.

Central Power Distribution Company of A.P. Ltd.

The infrastructure of the Central Power Distribution Com-pany of A.P. Ltd. (APCPDCL) has been financed by the

Stage IV

Stage III

Stage II

Stage I


government and the distribution company (Rao, 2004). Therecent efforts of the distribution company, APCPDCL, towardscustomer service and billing programmes have begun to real-ize efficiency gains in distribution, better collections, and in-creases in revenue. Some steps taken by the APCPDCL inthis direction are:1. Shift to a customer centric/responsive approach: the

establishment of Customer Service Centres, with satelliteCall Centres in remote rural areas, Vidyut Adalats fordissemination of Citizen Charters (clear service metricsset a standard for customer service and ensured timelyresolution of billing conflicts) in rural areas and issueresolution, Farmer Meetings for irrigation related issuesand demand side management.

2. Leveraging technology for billing efficiency: the use ofspot billing eliminates many complications around billinginvolving issues like transparency, up to date billing, cashflow due to collections, and simplification of billing process(Table 3.6).

3. Access to convenient payment methods: eSeva, paymentcollection 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 start-

up support if transmission tariff is set by the governmentwhile the user charge is set by the distribution company).

4. Release of the potential of community institutions indepoliticizing collections.

are examples of mobilizing community to handle billing,collections, and basic maintenance of distribution. In case ofthe VECs in Orissa, these were organized by the Xavier Instituteof Management, as a pilot project with the regional distributioncompanies. The VECs were given responsibilities of billing,collection, routine maintenance, and identifying and regularizingillegal connections. The model worked well initially but hasnot been sustained since private discoms have wound up.

The project in Karnataka used Gram Panchayats to handlemeter reading, billing, and collections with the flexibility tosubcontract these tasks. The experience of this transition hasbrought some important learning to light. Shifting O&M tothe Gram Panchayat requires significant attention for capacitybuilding and active involvement from distribution entities.Collection issues around irrigation for smaller consumers ofenergy still persist. The use of technology enables simplificationin billing, improves transparency, accountability, and reductionin long-run costs (The SARI/Energy Programme—ResourceCentre, 2004).

Anakapalle Rural Electric Supply Cooperative, A.P.

The Anakapalle Rural Electric Cooperative Society Ltd.(ARECS) in the Vishakapatnam District of Andhra Pradeshwas formed in 1974 with a mission ‘to make electrical energyavailable to its members to promote the economicdevelopment in the area’. In 1976, the cooperative took overdistribution operations and maintenance from the StateElectricity 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 thenecessary start-up equity to transfer the distributioninfrastructure to the cooperative. As this equity came in theform of a twenty-five-year loan from the Rural ElectrificationCorporation that was eventually repaid by the cooperative, itcan be seen as largely catalytic in nature. The communityinvestment, in the form of shares in the cooperative, combinedwith the start-up contributions from the state governmentprovided sufficient equity to take on these loans (Rao, 2006).

ARECS was able to establish a culture of payment forservice and responsive customer support. A 50 per centdecrease in line loss from inception till today and a substantialincrease in user demand, with the change in managementfrom state government to an institution of the people, stronglysuggest that the rural customer base responded favourably tocustomer service and was more willing to pay user fees. Thisinstitution also used loans to fund the successful expansionof distribution infrastructure. The expansion and outreachthat the ARECS achieved in a span of twenty years resulted

Table 3.6Progress of Central Power Distribution

Company of AP Ltd 2000–3

2000 2001 2002 2003

Government Subsidy +

Additional Support(in Rs Billion) 30.64 29.35 30.05 18.82

T&D Losses (per cent) 36.90 33.90 29.60 26.13

Revenue (in Rs Billion) 49.56 60.68 64.18 81.29

Metered Sales (per cent) 38.01 38.28 40.84 43.67

Source: Rao (2004).

Village Electricity Committees,Gram Vidyuth Prathinidhi

Village Electricity Committees (VECs) of Orissa and GramVidyuth Prathinidhi of the Karnataka State Electricity Boardare good examples of Stage III of institutional evolution. These


from an amalgamation of community ownership, a supportivegovernment framework, and debt financing (see Box 6.1.5).

CONCLUSION

There is basic agreement on the fact that public resources arescarce, and also that they have not been used with a highdegree of effectiveness till now. On the other hand, both dueto the semi-public good nature of infrastructure and also thelack of precedence of complete private sector financing, it isunlikely that private funds will flow to rural infrastructurefinancing substantially. Also, while NGOs and MFIs are agood medium for devising and delivering rural infrastructuresolutions to the community, they are not geared for large-scale financing given their limited resource base andorganizational constraints.

Private capital has barely started flowing to the urbaninfrastructure sector in India, and it will take a long time beforeit finds its way to rural infrastructure. The constraints to flowof private capital are largely institutional, a term by which wemean the ‘rules of the game’ or norms, codified under laws,regulations, and specific contracts, by which all the stakeholdersrelated to an infrastructure project, transact, and interact witheach other. This can be something as simple as a norm that‘services used must be paid for’ to something as complex as acontract that ‘the return on equity exceeds the weightedannual average of LIBOR over 10 years, plus 500 basispoints’. Establishing and enforcing such norms is the area ofinstitutional reforms. This is happening, albeit slowly, with manyups and downs. Once satisfactory institutional arrangementsare devised for urban projects, these will slowly diffuse to ruralprojects as well, though we should not underestimate the moredifficult political economy of rural India.

The complexity of demand and supply gap, willingness topay, and ability to pay for infrastructure services require financialorchestration which implies blending different sources of funds,such as government capital subsidy, community contribution,and private equity. Greater provision of rural infrastructurewill require a paradigm shift towards recognizing the value thatother players bring apart from the government—panchayats,private sector, and the user community. It will be necessaryto define their roles and responsibilities and bring them pro-actively on board for creation and maintenance of ruralinfrastructure.

The government needs to create the space for financialorchestration and enable development of a collaborativeframework to build and operate infrastructure in rural areas.Given the relative strengths and weaknesses of each set ofinstitutions in delivering finance for rural infrastructure, it isimperative that we look for solutions in the ‘middle-ground’.Even conceptually, the state and the market mechanisms aretwo extreme modes of functioning, and either of these, bythemselves, cannot ensure development with equity. Solutionswith the strengths of each side, which are balanced by civilsociety, are likely to be efficient, equitable, and sustainable.

We have also suggested a progressive model which can begainfully applied to various infrastructure projects (Figure3.1). This kind of evolution of institutional and financingarrangements requires several years of practice before it canbe mastered and thus the initial projects need to be structuredto offer a ‘soft landing’ to the institutions which agreeto pioneer this. Once a number of pilots are successfullyimplemented, the lessons can be built into a supportiveregulatory policy, and institutional strategic framework.Several examples abound right here in India and the task isto build on their successes.


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03 financing

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