In infrastructure, you get what you pay for

In the past, tariff determination in infrastructure sectors was the exclusive domain of government and was subject to political considerations. Electoral compulsions did not allow governments to set tariff to reflect the cost of services. Certain segments of consumers were either exempted from the payment of tariff or heavily subsidised. Although the subsidies were politically driven and determined by governments they were not paid out of the Budget but were borne either by the service providers or by other consumers. In the electricity sector, for instance, many states provided power either free of cost or at heavily subsidised rates to the farmers; and levied inordinately high tariffs on commercial and industrial users. The SEBs incurred substantial losses on account of these subsidies. In UP alone, the loss on account of subsidies was estimated at Rs 897 crore (excluding return on capital base) in 2001-02 by UPPCL. In the telecom sector, access charges and low user groups were subsidised by national and international call charges, and by the high user groups. As the economy was liberalised, governments realised that infrastructure services cannot be commercialised and private investment in infrastructure attracted unless tariffs are brought in line with costs and efficiencies improved. Governments also realised that given electoral compulsions, tariff rationalisation was best left to an independent agency, with the necessary expertise, outside government. This was the genesis of independent regulation. And it is only natural that tariff determination should have been mandated by all regulatory legislation as the primary regulatory function. All the regulators have addressed this function with diligence and imagination. Electricity regulators in Orissa, Rajasthan, AP, Maharashtra, Delhi, UP, Karnataka, and Gujarat have passed tariff orders in recent years. The process of tariff determination has been transparent and consultative, involving all the stakeholders. The regulators have sought to promote efficiencies in the sector, reduce T&D losses, gradually reduce cross subsidies and design a tariff structure which is non-discriminatory, simple and easy to understand. An element of performance based tariff has been introduced in some states, wherein the return to the utility has been linked to improvement in efficiencies. For instance, the OERC in its tariff order 1997/98 has allowed a T&D loss of 35 percent against the estimated loss of 46.6 percent to GRIDCO, and subsequently, has given an incentive of one percent increase in the rate of return for every percent of loss reduction below 35 percent. Other commissions such as Maharashtra, Gujarat or A.P. have also adopted a similar performance based approach to tariff design. In the telecom sector too, TRAI has proposed a low level of price regulation where competition is high, and cost based prices where competition is low. It has allocated cost of services across four categories of charges namely rental fee, charges for local calls, charges for long distance calls, and charges for international calls. Its 1999 tariff order seeks to align the tariff with the cost of supply on a gradual basis. The tariff rebalancing exercise also reduced long distance call charges, while increasing the charges for local calls. Even with this exercise, there is still a gap between the rates and the associated costs in this sector. In fact, STD calls in India cost 4-15 times more than STD calls in the US. In the port sector, the TAMP through its tariff orders has initiated several measures by way of tariff reform such as uniform costing principles for tariff fixation, introduction of an efficiency linked tariff scheme, prescription of a time limit beyond which berth hire charges will not accrue, penal interest on delayed payments by users as well as on delayed refunds by the ports, limitation on the extent of cross subsidisation, and standard accounting norms. The trends in tariff setting, however, raise a few broad issues. For instance, in the electricity sector, the practice of annual tariff setting does not reveal to a potential investor the approach that a regulator would take in the future, and this has led to uncertainty. In Delhi, for instance, where the regulator has passed a tariff order only for the year 2001, and has expressed its inability to determine tariff for a longer period, bidders for the proposed distribution companies are asking for a tariff determination for a longer period so that they could make their investment decisions. Regulators should consider adopting the principle of `multi year tariff'. This would facilitate the investors in their decision making, and help the regulators to focus on other regulatory activities, instead of spending all their time on the annual tariff exercise. Tariff increase has to be linked with improvements in the quality of services. Except in the port sector, the regulators are yet to do so. In the telecom sector, TRAI has set quality of service standards, but these are yet to be linked with tariff revisions or backed up by penalties. In other countries, this has been attempted. For example, in Sri Lanka, the telecom tariff determination has been linked to improvements in the quality of services and this earned the regulator legitimacy. Tariff reforms are essential to improve the financial viability of service providers and attract new investment in infrastructure. In the short run, some consumers will no doubt be adversely affected, but in the ultimate analysis they would be benefited as the supply of infrastructure services will increase as also the quality services, leading to greater consumer satisfaction. We will otherwise continue to be plagued by power cuts, voltage dips, dead telephones, and low teledensity.