Country Case Study—India

The Bank has tried to adjust its transport program to changing portfolio needs as India’s economic growth has soared.

Gradual Incorporation of Private Participation in Indian Port Development

As Indian development policies evolved from having an emphasis on self-sufficiency in the 1980s to participating more fully in international trade in the 1990s, concerns arose about the country's trunk transport system and the obstacles it posed to trade development. Most international trade passed through 11 major ports run by Port Trusts, which provided their own services under close central government supervision. Near doubling of trade tonnage over the 1980s put the ports under severe pressure. To relieve the problem, increasing attention was given to inviting private participation, introducing modern management, and relieving government budgetary constraints. In 1994 the Ministry of Surface Transport, with responsibility for port oversight, issued a statement of intention to seek private participation. In 1996 it issued guidelines enabling the Port Trusts to lease facilities to private operators (and lease equipment owned by them) and to award competitive BOT contracts for construction of new facilities on port lands. Perceived weak private sector response to these new opportunities led to the offer in 1997 of various tax incentives and less-restrictive limits on foreign financial participation. It also led to the creation of a Tariff Authority for Major Ports, which was supposed to reassure potential private investors that they would not find the services they offered being undercut by the Port Trusts' own services.

The prime candidate for a first experiment with private participation had always been the JNP Trust, whose facilities had been constructed in the 1980s. Being new, it had no Dock Labor Board, avoided the more extreme labor tensions characteristic of the traditional ports, and had relatively modern equipment. A scheme had been drawn up in 1994 to concession the JNP Container Terminal to the private sector. Doubt among Port Trust members, however, after consultations with all affected parties, combined with the advent of a new Minister of Surface Transport more sensitive to labor concerns, led to replacement of this approach with a concession for construction and operation of a new container terminal at the adjacent Nhava Sheva site. The tender for this was launched in December 1995.

In the meantime the Port Trust leased additional equipment from private sources, as permitted under the 1996 guidelines. The tender was won by P&O Ports (Australia), with whom a 30-year concession for a two-berth container terminal of 600 meters quay length was signed in 1997.

Nhava Sheva began operation slightly ahead of schedule, in April 1999, and almost immediately attracted increasing amounts of traffic away from the JNP Container Terminal. By early 2001 the facility was regularly handling more than 60,000 20-foot container equivalent per month, whereas JNP traffic had fallen to less than 40,000. But the Port Trust's strategy of introducing private participation through competition rather than takeover (of its terminal) and its extensive efforts to build consensus among the port interests, including labor, as to how to respond to the competition succeeded in spreading the management improvements introduced by the concessionaire at least to some degree to the public sector operations as well.

By 2003 Nhava Sheva was regularly handling 100,000 20-foot container equivalents per month, and JNP's throughput had doubled to 80,000. Nhava Sheva succeeded in maintaining more even and predictable levels of service (such as preberthing delays and ship turnaround time) and generally higher operating efficiency. JNP improved its practices and increased productivity compared with earlier years. Whether Nhava Sheva had beneficial effects on performance of the neighboring traditional Mumbai port is more questionable, but while the latter's scores on the standard indicators of port efficiency remain generally in the lower half among India's major ports, they have shown some improvement since 1999.

Despite continuing weaknesses in India's management of port services—especially overcentralization of authority in Delhi, but lack of effective coordination in planning among different (national and state) ports and between them and other modes (in addition to the remaining very difficult port labor issues)—the Nhava Sheva experiment has led to further private investments: by PSA at Tuticorin in 1998; by P&O at Chennai, Cochin, and Gujarat state's private Mundla port; by APM for a third terminal at Nhava Sheva; by Dubai Ports International at Visakhapatnam; and, most recently, for a potential hub port on an island off Cochin. An important move toward decentralization and increased local authority was the establishment of the Ennore port, newly completed at Chennai in 2001, as a corporate body instead of a traditional port trust.

The Economy and the Transport System
India’s economy is the third largest in Asia, after Japan and China. GDP per capita, at purchasing power parity, is estimated at $3,100. India’s population of 1.1 billion is growing at 1.4 percent per year, and the population is about 70 percent rural and 30 percent urban. About two-thirds of the population depends on agriculture for their livelihood, and about 25 percent of the population lives below the poverty line.

Transport demand in India has been growing quickly. During 1967–87, total demand for intercity freight transport grew at an average annual rate of 5.3 percent, while GDP grew at an average of 4.2 percent. During the 1990s, freight transport demand grew at 10 percent per year, while the economy grew by 6 percent to 7 percent. Since 2000, transport demand has been accelerating. In recent years this demand has shifted among transport modes, mainly to the advantage of road transport, which today carries 70 percent of land transport demand. The overall length of the road network has more than doubled in the last 20 years. Yet only 60 percent of the villages are connected by all-weather roads, and there are large differences across the states in village connectivity.

There has also been a major expansion of the ports, with several new container terminals developed by private operators. Modernization of facilities and better management also occurred, but to a lesser extent than in the other transport modes. India’s transport system remains old, saturated, and poorly maintained, providing lowquality services. This is because for many years the transport system has been managed from a supply-oriented rather than a market perspective. More than a quarter of the national highways and more than half of the state highways are in bad condition. The trucking industry, in contrast, is mostly privately owned and is highly competitive.

The government in recent years has launched a major program to improve the national highway system. The program intends to balance the needs of modernizing the road system with maximizing the benefits to the whole population. The result is many widened roads but few really modern highways. Minimizing the difficulties with land acquisition and with application of social safeguards to affected people appears to be a key reason for the widening approach. It is not obvious that, given the population already living along the roads, widening existing roads will result in less land acquisition or resettlement than constructing new expressways.

Government efforts to open infrastructure to private investors starting in the 1990s have met with limited success in the transport sector. It has succeeded mainly in the ports and is just starting to have an effect with airports. Although many small road projects have been carried out with the participation of private operators, they represent a fraction of overall road investments.

Bank Assistance to the Transport Sector
India today is the Bank’s largest borrower. Lending for all Bank projects reached $2.9 billion in fiscal 2005, more than double the $1.4 billion of the previous year. The Bank’s assistance is focused on upgrading infrastructure; improving people’s access to social services, especially education and health; and building rural livelihoods. Lending for transport projects in fiscal 2005 reached $1 billion, or almost a third of total Bank lending. Several nontransport projects also include transport components— mainly rural roads.

Bank lending for transport in India has evolved dramatically over the past 20 years. Until the first half of the1980s, most loans were for railways and ports; during fiscal 1981–86, 80 percent of the lending went to projects in these two modes. In the following 5-year period, road lending increased to about half of total transport lending. In the most recent period, fiscal 2001–05, the overall level of lending for transport increased significantly, and the shift toward roads became stronger.

Recent years have seen a rise in the size of the road projects focused on state networks, with several loans exceeding $300 million. At the same time, several of these projects include large components for institutional development. The Bank has supported rural roads through state-specific or multistate rural road projects, as well as through agriculture and rural development projects. In the latter, there were cases where up to 50 percent of the project cost was to improve rural roads. There is some evidence that the country’s rural roads are contributing to poverty reduction. For example, the highest rate of decline in poverty over the past 20–30 years has been in Kerala, which has one of the highest road densities among the Indian states.

The Bank’s last direct loan for railways was in 1988. Since then, the Bank did, however, approve a project that aimed to improve efficiency of rail transport for containers to serve both domestic and international traffic. This 1994 project supported the reform of an offshoot of Indian Railways (IR). It helped the Bank maintain a dialogue with IR and provided a role model for other IR business.

Only one urban transport project has been approved over the past 20 years. The project, currently under way, is comprehensive and ambitious. It aims to improve the efficiency and sustainability of Mumbai’s transport system

The last port project was also approved more than 20 years ago. It helped improve container facilities at the Nhava Sheva port in Mumbai. This successful operation helped modernize container facilities at the port (see sidebar). Resettlement has been an important component in nearly all Indian transport projects.

Bank assistance also included the preparation of several reports that focused on sector policies and strategies and on specific topics such as highway finance and urban transport. The most significant of these is a 2002 report that covers the whole transport sector. Another useful report is a comparison of Indian and Chinese highway development, railway policies, and management.

Performance of Bank Assistance
Six of the eight projects (six road, one logistics, and one rail) closed since 1994 had satisfactory outcomes. Overall, project-financed investments, including projects deemed unsatisfactory, were economically efficient, showing a fairly high rate of return.

There were two projects that failed. First, the states’ road project was a complex project that involved four states with widely varying implementation capacities. The project was satisfactorily implemented in two of the states, Maharastra and Rajasthan. But in the two other states, Uttar Pradesh and Bihar, the performance of the public works department was weak, and implementation failed. Second, the national highway project was unsuccessful because of poor project preparation, weak implementation capability by the road agency, and weak capacity of local contractors and consultants.

Except for the two failed projects, all other projects were considered sustainable. In contrast, most of the projects had only modest institutional development objectives and, as a result, had fairly modest impacts.

Two projects achieved significant institutional development. The container transport project succeeded because, as intended, the state-owned container company became a mixed privatepublic company, with a significant private equity (37 percent, substantially above the original goal). That led to a very good financial performance. Second was the technical assistance states’ road project, because it helped several states substantially strengthen the management of their road systems.

The ongoing projects seem to be attaining their development objective, with all projects being rated as satisfactory. On the other hand, most projects experienced implementation and disbursement delays, which were large in some cases. As a result, implementation in two of the projects has been rated as unsatisfactory.

Issues
The following appear to be key issues for the design of future Bank assistance: (i) the adoption of appropriate design standards and financial mechanisms for the national highway program, which assumes a very large component of PPPs; (ii) the need for better integration of rural roads into the states’ road networks; (iii) the means to continue a dialogue with the railways and eventually resume lending; and (iv) the achievement of an appropriate transport portfolio mix, to ensure that it maximizes the Bank’s impact. The most critical question is the future of urban transport support, where needs are huge and potential rewards high, but projects are complex and resource intensive. An assessment of the ongoing Mumbai project should shed more light on this in due course.

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