The Indian Economy Blog

August 27, 2005

A Case For Privatising Infrastructure

Filed under: Infrastructure — Amit Varma @ 4:06 pm

TN Ninan writes in Business Standard:

Delhi’s power supply controversies tell us more than we realise. There are three complaints: the power tariff hike is unwarranted; the private distribution companies (or discoms) that came in three years ago are making profits without showing efficiency gains; and the overall power situation is still unsatisfactory.

What do these tell us? First, that citizens are now capable of organising themselves in the cities, if there is a specific target that they have in mind (in this case, the private discoms). And their grievance gets amplified and heard when politicians and the media echo their voice. [...] Second, the standards that people come to expect from the private sector are different from those they accept from the government, especially when there are visible performance benchmarks.

Ninan’s article argues “in favour of (and not against) privatising more infrastructure.” He concludes:

First, privatisation frees the politician from making promises that he does not deliver (like enough power supply, or 24×7 water).

Instead, the politician can join the citizen and point his finger at the private sector provider—and demand performance! Second, this automatically pushes the system towards greater efficiency—the private sector is asked to show that it is in fact more efficient and can deliver better results.

Third, it brings out the hidden subsidies in the system and encourages rational user charges. This helps reduce waste (you won’t waste electricity if you’re paying for it), it takes away the load on the Budget (most states are virtually bankrupt), and it cuts out the urban mafias that today organise the theft of power and water.

In Mumbai, after the recent floods, the anti-privatisation brigade protested vehemently against Reliance Energy, even though their defence was convincing, and it would have been irresponsible for them to restore power in areas that were still flooded. In fact, if anything, the aftermath of the flood underscored the importance of privatising municipal services in Mumbai: the impact of the floods was vastly exacerbated by the failure in garbage disposal, which would certainly have worked better if it had been privatised.

3 Comments »

  1. The attitude that waving a privatization stick improves service, and guarantees affordable
    utilities fails to conceed that the devil is in the details, regardless of whether the a utility is
    implemented publicly or through private enterprise.

    Specifically, all developed countries have had the foundations of public infrastructure built
    using public funds (and in most cases infrastructure continues to be publicly funded). Hence
    the claim that public spending cannot result in effective, and economical infrastructure is specious,
    which is not to say that private enterprise is incapable of producing social benefit by an equal
    measure–it’s just to say that we have no long term data to backup the principle of privatizing
    public infrastructure.

    Infact to propose that privatized infrastructure will solve the ills of publicly run companies is to
    ignore notable cases such as Bechtel running the water supply in Cochabamba.

    Comment by axe — August 27, 2005 @ 10:11 pm

  2. I am skeptical about relying on the private sector to completely build infrastructure. This is one of those areas where several things can prevent (socially) adequate investment if we rely on the private sector
    – externalities : how do you privatize all the benefits from building a national highway system (reduced transaction costs of doing business, greater labor mobility etc.)
    – private discount rates may be very high given uncertainty of subsequent govt. action (they build a free bridge next to your toll bridge. This happened in NOIDA)
    – contracting problems with the multitude of govt. agencies

    The good news is that set of things deemed ‘public infrastructure’ is shrinking – technology allows multiple providers of phone services and perhaps even electricity.

    Comment by Amitabh — September 2, 2005 @ 12:30 pm

  3. Sir, Can you tell me how or how not can privatising help improve efficiency of our naval dockyards(repai facilities),if undertaken

    Comment by Chetan — November 5, 2005 @ 9:55 am

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