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Build it later, define it first

June 18, 2007 13:24 IST

What is infrastructure?

If you think this is a strange question, you may wish to consider the following: there are six official entities that attempt to define 'infrastructure,' statutorily or otherwise. 

First off the block is the Income Tax Department which defines infrastructure under section 80IA. The Department of Economic Affairs in the ministry of finance has its version that relates to the viability gap funding (VGF) mechanism. Next is the RBI, through various circulars.

There is then the Insurance Regulatory and Development Authority (IRDA) which takes a shot at it. Finally, there are the groupings that emerge in outputs from the Planning Commission and the Prime Minister's Committee on Infrastructure.

While we are at it, do not forget that elements from the private sector wake up from time to time (most noticeably in February, before the Budget announcements), and demand that various projects in tourism, healthcare, education and real estate be declared officially as infrastructure.

Why, you may well ask, do these differing lists and versions exist? Remember, India is a pluralistic society and every governmental outfit has an ostensible reason to come up with its own list.

The finance ministry has the strongest reason, as always!  It gives tax breaks and dishes out VGF. The IRDA has to define infrastructure as it seeks to deploy 15 per cent of the long-term funds available with insurance companies as its contribution towards alleviating the asset-liability mismatch inherent in this sector.

The RBI is the mai-baap of the banking sector and has its definition of infrastructure to circumscribe commercial banks' exposure to infra-projects, as well as define conditions for External Commercial Borrowings (ECBs) by infrastructure companies.

The Prime Minister's Committee on Infrastructure and the Planning Commission have their hands full monitoring the progress (or otherwise) of this sector, evolving policy and configuring interventions, and therefore, have their own groupings and long lists.

The private sector, as usual, salivates for tax breaks, tax holidays and access to funding under the 'official' definition. And indeed, based on representations and prevailing wisdom, the list does get widened from time to time. In this year's Budget, for example, the FM added port steerage and dredging services as well as cross-country gas pipelines to be within the ambit of the Income Tax definition of infrastructure.

But why should a single, scientific, unified list and definition be desirable? Here are seven reasons why:

  • It would lead to focused thinking in organising and classifying a sector that historically has not been as methodically organised as the manufacturing sector.
  • Huge amounts of investment, particularly from the private sector (domestic and foreign), are expected to pour in -- about $70 billion in the 11th Plan period as part of the overall requirement of $350 billion. It would help these investors to have one list of 'official' infrastructure projects so that the conditions surrounding investment decisions, whether relating to tax, VGF, ECBs or credit exposure norms, can be less fuzzy.
  • The debate and confusion on whether social sector investments in healthcare, education, housing, tourism, agri cold-chains et al are to be included in the definition of infrastructure, can be settled once and for all.
  • The irrationality of something appearing on one government list and not on another would be removed. Simultaneously, all state governments can be persuaded to adopt this unified list, as most infra-investments are at the state level.
  • Infrastructure watchers have long been clamouring that a statistic called the GCFI (Gross Capital Formation in Infrastructure as a percentage of the GDP) be quickly organised and disseminated as a key economic indicator of progress. A clear definition of infrastructure will bring clarity to this overdue statistic.
  • The infrastructure sector spans three types of economic activity -- asset creation, asset maintenance and asset-related services. A clear listing of which kind of activities are entertained by the government to be officially classified as infrastructure would indeed be useful.
  • Investors in and financiers of infrastructure SPVs are a confused lot. Earlier, financiers got tax breaks as per Section 10(23-G). That has since been removed. Now there is the pain of pass-through benefits removed (or partially restored) a la the recent Budget pronouncements on pass-through benefits for venture funds. A clear list would considerably help investor confidence.

Economists have written voluminous tomes on how to define infrastructure. Two quick points are in order:

  • In developed countries, the definition has changed with time. Early definitions relate to the core areas of transportation, water supply, energy, waste, sanitation and so on. Later, other non-core areas like industrial parks, agriculture, communication et al tend to get added.
  • Infrastructure projects can be categorised using one or more of the following dimensions: wide differences in economic returns vis-à-vis project returns; full user-pay-charges or subsidy-driven structures; federal, state or third tier subject; asset specificity; lumpiness of one-time investment, usually with a long gestation period; content infrastructure (for example, power generation) where competition is possible to some extent; carriage infrastructure (for example, roads and pipelines) which are typically natural monopolies; and, projects requiring large land acquisition and related resettlement and environmental issues.

Using a combination of these perspectives, a possible unified and harmonised list for the country can begin to get structured across the five groups suggested below:

  • Group A: Rural Infrastructure: Irrigation, rural connectivity (roads, power, IT), cold chains and mandis, drinking water.
  • Group B: Core Infrastructure: Transportation (roads, railways, airports, sea ports, inland waterways); energy (generation, transmission, distribution).
  • Group C: Urban Infrastructure: Water, sanitation, sewerage, LRT/MRT/MTS, city-energy distribution, terminals and logistics parks.
  • Group D: Land-Intensive: SEZs, industrial parks, new townships, industrial cluster development, IT parks.
  • Group E: Social Infrastructure: Healthcare, education, leisure and entertainment, retail, tourism, housing, exhibition and convention centres, hospitality.

Such an initial classification, duly modified after debate and discussion, could lead to targeted policy pronouncements as well as a long-listing of projects/services/enablers under each group that could be the beneficiaries of governmental support and largesse. Ideally, this task of preparing a harmonised universal classification should be done by the finance ministry which gives tax breaks as well as administers VGF. It could equally well be done by the Planning Commission.

"The time has come to get on with it," says my young friend and colleague, Joseph Akkarapatty, who has done significant work in this area and helped me think through this issue.

The author is the Chairman of Feedback Ventures. He is also the Chairman of the CII's National Council on Infrastructure. The views expressed are personal.

Vinayak Chatterjee
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