state-level strategies for augmenting transport

State Strategies for Transport: Kerala NKS & JSW

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State-Level Strategies for Augmenting Transport Infrastructure:

Notes for Kerala*

By

N.K. Singh

Chairman, Management Development Institute

Former Member, Planning Commission of India

Jessica Wallack

Professor, University of California, San Diego

December 2005

The contrast between India’s much-hyped potential and the practical reality of

doing business and adjusting with incomplete, congested, unreliable and otherwise

inadequate infrastructure remains a staple complaint among foreign business interests,

domestic business, policymakers, visitors, and citizens alike. The Economist’s

assessment that “If this is a race [between China and India], India has already been

lapped,” for example, focuses on the contrast between the two countries’ roads, airports,

electricity, and other infrastructure.1 Fortune magazine’s more recent statement that India

is an “idiot savant,” achieving the great heights while failing on the basics dwells on the

same thing.2 The last seven budget speeches, a small but prominent sample of official

priorities, have all called for drastic measures to be taken by national and state

governments to upgrade infrastructure. Finance Minister Chidambaram quantifies the

effect of inadequate infrastructure as two percentage points of growth lost.3

Kerala’s infrastructure shows varied performance compared to other states. (Table 1) The

Cochin airport, India’s first privately owned airport is rated “one of India’s best” in

international tourist guides (though it served just under 2% of the total international

* The authors would like to thank Sridhar Kundu for excellent research assistance. Many of the data used here were drawn from those compiled by Indiastat.com. 1 Economist (March 5, 2005). “A Survey of India and China.” 2 Fortune n. 19 (November 2005). (Europe Edition). Cover story. 3 Cited in “GDP Could be 2 Percentage Points Less Due to Lack of Infrastructure,” The Hindu, October 27, 2005.


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passenger traffic and 2.25% of cargo traffic in early 2005).4 The state has a second

international airport (serving under 1% of international passenger traffic and just under

3% of international cargo traffic) at Trivandrum. Kerala’s major port, Cochin, though one

of the India’s smallest ports in terms of tonnes of cargo handled, is comparatively

efficient in terms of turn-around time. Its average turn-around time of 2.33 days in 2004-

5 was second only to Ennore and well-below the India average of 3.42 days.5 Traffic

through the port is expected to triple when the International Container Transhipment

Terminal commissioned at Vallarpadom Island is complete. There are also 17 minor and

intermediate ports along the 590 km coastline.

Table 1, however, also highlights disparities between modes of transport. Ground

transport, however, is relatively underdeveloped.6 Cochin is well-connected by rail to

most of India, but traveling elsewhere can be difficult. The road network is denser than

many states’ networks, and much higher than the national average, but these figures do

not indicate the roads’ quality or congestion. According to the Kerala government’s

Economic Review 2003, National Highways are too narrow and not upgraded, rural roads

connectivity “does not mean the same here as in other states,” and roads are poorly

maintained. The Thiruvananthapuram-Kalikiyikkavila stretch of NH 47, for example, was

singled out as being “almost like a road.”7

Figures 1a and 1b show the percentage of highways that were passable and that are

surfaced, respectively, in comparative perspective as of 2001-2. Kerala is below the all-

India average on both counts.8 Over 97% of urban roads are passable, however,

compared to an all-India average of just over 92%.

4 Data for passengers are from April 2005. Cargo data (measured in tones) for November 2004-March 2005. Both from Airports Authority of India. 5 Source : Lok Sabha Unstarred Question No. 507, dated 27.07.2005. 6 Frommer’s India guide 2004. 7 Government of Kerala (2004). Economic Review 2003. Paragraph 10.6. 8 Source: Basic Road Transport Statistics of India, 1999-00, 2000-01 and 2001-02


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Figure 1a

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Highway Quality

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TABLE 1: TRANSPORT NETWORKS

STATE LAND AREA

POPULATION DENSITY

ROAD DENSITY

RAIL DENSITY

INLAND WATERWAYS

MAJOR PORTS

MINOR PORTS

INTERNATIONAL AIRPORTS

SIGNIFICANT PASSENGER AIRPORTS

(KM) (PERSONS PER SQ KM)

(KM PER 100 SQ KM, 1997)

(KM PER 100 SQ KM, 2003-4)

(KM NAVIGABLE, 2001)

(NUMBER)

(NUMBER)

(NUMBER) (NUMBER)

Andaman & Nicobar Islands

8249 43.18 15.97 0.00 23 1

Andhra Pradesh 275069 276.70 64.72 1.89 499 1 12 1 2 Arunachal Pradesh 83743 13.10 16.83 0.00 0 Assam 78438 339.61 87.23 3.21 3839 0 1 3 Bihar 94163 880.16 50.81 3.59 1325 0 2 Chandigarh 114 7902.75 1537.72 7.02 0 1 Chhattisgarh 136034 152.87 2.65 0.85 0 Dadra & Nagar Haveli 491 449.06 108.55 0.00 0 Daman & Diu 112 1412.54 0.00 2 Delhi 1483 9305.46 1792.45 12.00 0 1 1 Goa 3702 363.05 224.51 1.86 214 1 5 1 1 Gujarat 196024 258.49 46.37 2.70 277 1 40 1 3 Haryana 44212 476.86 63.7 3.67 0 Himachal Pradesh 55673 109.16 54.23 0.48 0 Jammu&Kashmir 222236 45.31 9.65 0.04 0 3 Jharkhand 79714 337.57 2.44 0 1 Karnataka 191791 274.96 75.09 1.55 1309 1 9 2 3 Kerala 38863 819.25 374.92 2.70 2360 1 13 2 3 Lakshadweep 32 1893.59 3.13 0.00 10 Madhya Pradesh 308000 196.06 45.13 1.57 0 2 Maharastra 307713 314.42 117.62 1.79 - 2 53 1 5 Manipur 22327 106.98 49 0.00 0 1 Meghalaya 22429 102.82 37.81 0.00 0


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TABLE 1: TRANSPORT NETWORKS

STATE LAND AREA

POPULATION DENSITY

ROAD DENSITY

RAIL DENSITY

INLAND WATERWAYS

MAJOR PORTS

MINOR PORTS

INTERNATIONAL AIRPORTS

SIGNIFICANT PASSENGER AIRPORTS

(KM) (PERSONS PER SQ KM)

(KM PER 100 SQ KM, 1997)

(KM PER 100 SQ KM, 2003-4)

(KM NAVIGABLE, 2001)

(NUMBER)

(NUMBER)

(NUMBER) (NUMBER)

Mizoram 21081 42.27 22.91 0.01 0 Nagaland 16579 119.95 110.72 0.08 0 Orissa 155707 235.74 168.72 1.47 1180 1 2 1 Pondicherry 492 1979.33 485.86 2.24 1 Punjab 50362 402.72 127.78 4.17 0 1 1 Rajasthan 342239 165.01 37.89 1.70 0 3 Sikkim 7096 76.17 25.85 0.00 0 Tamil Nadu 130058 477.56 158.78 3.23 - 3 14 1 4 Tripura 10491.69 304.16 140.46 0.61 0 1 Uttar Pradesh 238566 696.05 86.77 3.59 - 0 2 Uttaranchal 53484 158.54 0.65 0 West Bengal 88752 903.88 85 4.18 4593 2 0 1 All India 3287263 312.95 74.93 1.92 12 185 Sources: Ministry of Railways, Ministry of Shipping, Airports Authority of India


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The transport network constrains the state’s potential as a tourist and investment

destination. Travel guides warn of the difficulty of travel at the same time they extol the

state’s amenities, including ayurvedic spas and natural beauty. Nearly a third of

businesses surveyed as part of the 2004 World Bank - CII investment Climate Survey

rated Kerala’s transport network as a major obstacle to doing business in that state,

contributing to an overall negative impression of the state as an investment destination in

the same survey.9

Kerala faces three sets of policy challenges. The first two are common across states: First,

to take advantage of national-level policy changes and gear state policies to maximize

returns from Union initiatives. In part, this is a matter of competing with other states to

attract the private investors now allowed entry into infrastructure, and in part is a matter

of ensuring coherence between State and Union policies. The second is to develop an

enabling institutional framework to evaluate and coordinate public and private investment

in transport infrastructure. The third set of issues concerns Kerala’s specific

circumstances. Kerala’s transport infrastructure is particularly important for tourism, and

this needs to be incorporated into development priorities without excluding social and

industrial development considerations. Kerala also has several opportunities that other

states do not have: remittances as a source of finance for infrastructure, and extensive

inland waterways to develop.

The remainder of the paper is organized around recommendations to address these three

challenges. We focus here on issues related to the transport sector, as others at this

conference will address other aspects of Kerala’s institutional and physical infrastructure

as well as recommendations for achieving the state’s economic potential. Appendix 1

summarizes our recommendations.

Emerging Opportunities

Kerala’s first challenge is to take advantage of the opportunities created by national

policy changes to ensure that it is well-connected internally as well as to the rest of the 9 World Bank and CII (2004). India Investment Climate Assessment 2004: Improving Manufacturing Competitiveness, November 2004.


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Indian market. National policy changes such as additional funding for infrastructure

(most recently the Rs 10,000 crore SPV), legal changes in the role that the private sector

can play, and institutional changes that make infrastructure more attractive investment for

private investors, have obvious benefits for states’ transport networks.

Though the National Highways Development Plan has not affected most of Kerala’s 1523

km of National Highway, thirty-four km of national highway (from Angamaili to Aluva

and the Thrissur - Kochi section of NH 47) have been upgraded as part of the North-

South Corridor. A NHAI project connecting Cochin port to major highways is expected

to be finished in December 2006.10 There is still much room for more attention, however:

the Economic Review 2003 refers to the “so-called National Highways” as many have not

been upgraded. The Pradhan Mantri Gram Sadak Yojana (PMGSY), which began as an

effort to provide “last mile” connectivity has evolved (with substantial budget expansion

to Rs 60,000 crores) into a project to provide “farm to market” connections across India,

including in Kerala.11 The National Maritime Development Plan envisions US$22 billion

in investment over the next 10 years, of which some portion will inevitably be used for

Kerala’s coastline and inland waterways.12 The development of the Container Terminal

(ICTT) in Vallarpadam, which will be country's first global hub terminal, will

dramatically change Kerala’s role in Indian trade. Kerala has also benefited from Indian

Railways’ spending on new trains, passenger amenity works for the Thiruvananthapuram

division, track upgrades and gauge conversion, and other projects in the state.

Taking full advantage of the national-level changes and new availability of private and

public finance, however, requires state-level action to attract investors who could choose

any one of India’s states. Kerala’s policies, institutions and governance can also attract

public and private investment in several ways.

10 Projects listed on www.nhai.org 11 The budgetary allocation for PMGSY, a program started by the former NDA government, was doubled when the current UPA government came into power and increased by 70% in the latest budget cycle. The Programme is being executed as a Centrally Sponsored Scheme under the Ministry of Rural Development, in which the central government formulates policy guidelines and standards and provides funding, while states plan and execute the road works. 12 Figure cited in the “India to Invest $22 bn under Maritime Development Plan,” The Hindu, October 27, 2005. The NMDP includes an inland waterways development fund of Rs. 500 crore to provide soft finance for inland vessels, as well as plans to develop and implement a dredging policy for inland waterways


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Priorities:

Streamlining land acquisition issues. Disputes over land acquisition and preparation

(including shifting of utilities, environmental clearances, etc.) in particular, have been a

continuous problem in developing Indian transport infrastructure. Andrews Kurth, an

international law firm and investment advisor, for example, noted that “The major

constraints for [investors in road infrastructure], however, are problems in acquiring land

and obtaining environment and forest clearances, each of which requires the assistance of

state/local governments,” in a March 2005 talk given on “Project Finance in India 2005:

Overcoming Hurdles to Growth.”13 Delays in the Golden Quadrilateral completion have

been attributed to land acquisition issues. Although land acquisition and utility removal

risks are generally not borne by the investors – the government guarantees unencumbered

right-of-way – they nevertheless create uncertainty about the timing of investments.

Similar disputes in civil aviation also turn investors off. In addition to disputes over

Mumbai and Delhi airports, disputes over the Bangalore airport were picked up

negatively in the international press.14 Whether or not the perceptions or assignment of

blame are accurate, anecdotes broadcast in internationally respected publications are

likely to affect investors’ perceptions. Last year’s protests over land acquisition for

expansion of the Thiruvananthapuram airport, and demands that the compensation

amount be nearly doubled are unlikely to inspire confidence in Kerala.15 Proactive steps

to reduce investor wariness, and to credibly work out these disputes before they become

public are important.

Clarifying the state government counterpart for private investors or developers. The

myriad permits, clearances, and other interactions with central and state governments

necessary for developing infrastructure are offputting to investors. While states cannot

affect the fact that India is a federation with several levels of government involved in

policies, it can clarify the relevant state actors by setting up single window clearance for

projects and naming a particular department to serve as the main interface with private

13 Presentation, dated 3/18/2005, available at: http://www.akllp.com/Page.aspx?Doc_ID=2870 14 In “The Bangalore Paradox,” an article in the April 23rd 2005 Economist, for example, implied that the hold-up in Bangalore was due to party differences between center and state governments. 15 “Residents stall land acquisition,” The Hindu December 05, 2004.


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developers in public-private partnerships. Kerala already has single-window clearance

boards for industrial projects; the same model could extend to infrastructure projects.

The Infrastructure Corporation of Andhra Pradesh, Ltd discussed in Andhra Pradesh’s

2001 Infrastructure Enabling Act and created in May 2005 is a good legal model, though

it has not been fully tested in practice. The law provides a basis for the Corporation’s

independence and authority, including its own Fund for administration, participation by

the Secretaries to the related state government Departments, and formal powers to give

directions to Government Agencies and request information from the same.16

‘Streamlining’ the legal and regulatory aspects of infrastructure development may be a

matter of political management as much as policy change. Even countries with clear

policy frameworks – such as the U.S.’s eminent domain regime – see cases end up in

court, protests, and public relations nightmares for those seeking to acquire land for

development.17 While clarifying and following the rules for land acquisition for

infrastructure projects is a first step, it will not succeed unless there are mechanisms to

develop consensus over the amount to be compensated as well as the principles for

choosing a particular piece of land. States could appoint or elect an independent board to

assess land’s market value guided by a clear, published formula. The formula ensures

some benchmark, while allowing the board some judgment offers the flexibility to take

additional specific factors that may not be in the general formula into account for

valuation. Public meetings regarding project design and benefits might also convince land

owners to participate and increase the peer pressure from others who would benefit from

the infrastructure. This is also an area where it is particularly important to reduce

corruption: people may be willing to sell land for a public purpose, but rebel when they

feel that the land will simply enrich an official or two.

Clear procedures for contract negotiation, allocation of risks, and dispute resolution

in case of events not clearly covered in the contract. Although many laws under which

disputes are raised are national, state laws regarding forest use, land acquisition, and 16 Sections 4,11, 57, of the Andhra Pradesh Infrastructure Development Enabling Act, 2001. 17 The recent U.S. Supreme Court decision in Kelo vs. New London takes a strong stand on the right to acquire land for public purposes, as it allows private developers to use “eminent domain” to acquire property and redevelop it if it benefits the city’s economy. Many developers shied away from actually using these new rights, however, because of the negative media coverage of such land acquisition.


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environment regulation are also important. Clarifying the steps investors can take to

resolve disputes, reducing corruption, and making the process more efficient are

priorities.

The legal framework in Andhra Pradesh’s Infrastructure Development Enabling Act is a

good model. Section 19 of the Act provides for transparent developer selection in almost

all cases: when there are several bidders competing, when there is a single bidder, when

the state offers a project to the private sector, and when a private developer presents

projects to the state. An Appendix provides some guidance for types of contracts, while

Sections 28-31 and an Appendix inventory the types of risks that should be discussed and

disclosed during the initial contract formation. These guidelines alone are likely to reduce

the number of disputes that require resolution. The Act also enables the state to establish

a Conciliation Board with the powers of a Civil Court to serve as the initial forum for

resolving disputes. Parties are precluded from initiating arbitral or judicial proceedings

during the conciliation proceedings, eliminating forum-shopping and lessening the

burden on the judicial system. (Section 49(1)).18

Improving law enforcement, which affects social returns as well as the economic

returns from infrastructure. One area where Kerala could take action would be in

controlling access to highways. Encroachment on highways is common here and in other

states, reducing the speed at which vehicles can safely travel. Commercial development

along the edge of the highway is an amenity; commercial development on the highway

creates an obstacle course. As of 2003, Kerala ranked fourth among Indian states in terms

of road accidents.19

The “Control of National Highways (Land and Traffic) Bill” was passed in the end of

2002, but the Administrations empowered to “prevent unauthorised occupation of

highway land and regulate traffic/access thereon, as also to impose penalty for

unauthorised occupation of highway land [as well as] unauthorised re-occupation of

highway land.” Kerala and other states can and should support this national initiative and

new institutions.

18 This board has not yet been established, however, nor have the terms and conditions of appointment, remuneration, etc. been prescribed by the government. 19 Figures cited in Economic Review 2003.


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Weak enforcement of traffic laws and weight limits also contribute to accelerated road

damage.20 The Motor Vehicles Act, 1988 specifies fixed axle load and gross vehicle

weight limits, but these are rarely enforced. The costs of enforcement would be smaller

for Kerala than many other states: it would require manpower, but Kerala’s geographical

location leaves little room for diversion of traffic (and the business it creates) to alternate

routes through states that do not enforce the limits. The benefits, in terms of better roads

and lower maintenance costs, would likely outweigh the cost. The costs in terms of traffic

diversion would also decrease as states coordinate to set a common tax regime, as was

discussed in a recent meeting of State Transport Ministers in Jaipur.21

Law and order also includes labor laws. Kerala’s labor laws have not been seen as

particularly oppressive – only 5.9% of respondents in the 2004 Investment Climate

survey ranked labor laws as a growth bottleneck, but the rules for particular sectors may

be more important than the average climate. Labor laws for ports are one such area

affecting transport: under the current regime, working conditions of port labor are

governed by the Dock Workers (Regulation and Employment) Act of 1948, which is

highly protective of workers’ rights and offers them complete job security. Dock

workers’ unions are also affiliated with political parties, increasing their ability to block

policy changes that they perceive as harmful to their interests. Kerala could work with

labor unions to be intermediaries, develop minor ports, and focus lobbying and

facilitation on connecting major and minor ports to other transport. The state need not

tackle all labour laws at once to be effective, either: Gujarat, for example, recently moved

to prohibit strikes in industries that transmit and generate electricity.22

Coordinating state initiatives with national infrastructure initiatives. In addition to

maximizing returns from its location, Kerala can make investments more appealing by

connecting state infrastructure with PPP with the national government. The value or

earnings potential of particular projects often depends on other projects undertaken by

state governments. In roads, for example, states’ decisions about the location of state

20 World Bank (2004). ibid 21 “Transport Ministers to Meet in Jaipur,” WebIndia123.com, November 23, 2005. 22 Jog, Sanjay, (2005). “Gujarat Bans Strike in Power Sector,” Financial Express, November 6, 2005.


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highways affect prospects for tolling on sections of national highways. States can also

affect the social returns from national highways by encouraging business owners to

develop rest areas, provide towing services, and other amenities to make travel safer and

more enjoyable.

Connectivity also affects port performance as traffic increases.23 The four-laning of NH-

47 near Cochin port, expected to be complete by 2006, for example, will improve the

state’s attractiveness as an entry point into southern Indian markets. Likewise, the

viability of inland waterways in Kerala ultimately depends on the state dealing with ports,

security, and connectivity to modes of transport along the waterways. Finally, state can

also leverage central projects to develop Kerala to attract tourism. The Cochin Port Trust

recently obtained approval from the Union Ministry of Shipping to undertake a cruise

ship terminal at Kochi, for example. This is a clear opportunity for the Kerala Tourism

Development Corporation and other state to attract tourists by developing amenities at the

site.24

Lastly, investors are just one of the audiences to please in order to take full advantage of

the current national policy stance toward infrastructure. Of the many interactions with the

central government, lobbying for priority in infrastructure funding and central sector

projects is high-return. The Ministry of Tourism’s 2005 selection of several Kerala

beaches as sites for developing eco-tourism (along with 12 other sites chosen from

countless potential areas) is a testament to some success in lobby for funds. Creative

thinking about lobbying techniques, however, is important to distinguish the state from

other petitioners.

Given the total number of Members of Parliament from Kerala, its relative clout for

effective lobbying with the Central Government is more limited unless it the advantage of

being tied to the ruling coalition. The state ranks twelfth in the percentage of members of

Parliament with ties to the state. (Figure 2)

23 Slight increases in average pre-berthing and turnaround times at JNPT and 7 other of the major ports over the last year, for example, have been attributed to the poor road and rail container evacuation facilities. 24 Paul, John, (2005). “Central Nod for Cruise Terminal Project in Kochi,” The Hindu October 26, 2005.


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Figure 2

Representation in National Parliament

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Political circumstances aside, lobbying for institutional change, or changes that alter the

jurisdictions or provide more channels for states to influence/communicate with the

central government are an indirect way of achieving more influence. Another way to

improve the lobbying position is to establish the state government as a trusted provider of

information. This would exploit the advantages of being “local” and having lower costs

of gathering information about project returns in their areas than the central government.

The “trusted” part requires that state data gathering be politically independent, and done

by some party with a professional or other incentive to tell the truth.

Public Expenditure Management

Public expenditure management reform aims at putting procedures in place to manage

expenditures, public investments, and subsidies to obtain highest social returns.

Obtaining the most from available resources is particularly important as state and central

government deficits climb. Kerala’s deficit as a percentage of Gross State Domestic


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Product, at 6.27% in fiscal year 2004, is almost a percentage point above the national

average.25 Although Kerala’s ratio of taxes to GSDP, at 8.3% in fiscal year 2003, is

among India’s highest – suggesting relatively strong capacity to service debt – the state

must be careful not to accumulate liabilities faster than it can pay them off. There is no

reason that the state should have a balanced budget or surplus, particularly given its

poverty and its need to invest in infrastructure and other projects, but this level of deficit

is unsustainable unless the return on such projects exceeds the cost of capital.

Public expenditure management is a national priority, but states like Kerala can also lead

by example in the following areas:

Developing an improved institutional framework for making coherent, quick

decisions about investment across modes of transport. It requires better public

expenditure management as well as including improving accountability for project

implementation and quality. The Kerala Industrial Infrastructure Development

Corporation, the nodal agency for using export promotion funds given by the central

government from export tax proceeds, is an example of such coordination. The agency

has overseen projects as diverse as a quality control at a seafood plant, an electronic

weighbridge at Cochin port, and an airport-seaport road to achieve a goal of promoting

the state’s exports. The strategy of evaluating projects against an overall goal, such as

improving transport, rather than against narrower categories such as “roads,” “ports,” or

other specific modes of transport, would be useful outside of export promotion.

“Coordination” has its limits, however: competition between competing modes of

transport, or transport providers provides incentives for improved performance. The

Cochin Refinery’s move to set up a Single Buoy Mooring facility at the minor port of

Manakkodam to allow them to handle larger crude oil tankers, for example, motivated

Cochin port to develop the outer harbor and increase the draft of the channel at the

25 Based on data from Central Statistical Organization and A Study of Budgets of 2004-05, Reserve Bank of India and Past Issues.


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existing oil berth to accommodate the tankers. It would have lost more than 60% of its

cargo otherwise.26

The key challenge is to integrate the parts of the state government geared toward state-

funded projects with the part interacting with the private sector, all against the

background of centrally-funded projects being planned at another level of government.

The challenge of coherent policymaking will only become greater as further

decentralization to local bodies occurs. The urban local bodies and panchayati raj

institutions already have an important role to play in maintaining and monitoring

conditions of local infrastructure. The challenge is to develop ways to build local

governments’ capacity as well as improve citizens’ ability to hold these governments

accountable. The citizens who use local roads are the people with the strongest

incentives to do so and the lowest costs of gathering information about infrastructure

quality, but they are often unable to translate this knowledge into policies. Local bodies

are typically underfunded, have poor accounting practices that are not particularly

transparent about the use of funds, and may not always be accountable to broader local

interests. Moving forward with current initiatives to develop local body accounting

systems and databases on expenditures, revenues, and project implementation would be

an important step. There have been various funds set aside in the Tenth Plan and by the

Eleventh and Twelfth Finance Commissions, but the databases have not been collected

by state governments or the responsible Union Ministries.27 Kerala has been one of the

leading states in decentralizing responsibilities and finances to the local governments;

capacity-building needs to accompany the new roles.

Kerala can also take the lead in being more deliberate in government subsidization of

infrastructure. There will always be a need for subsidies and government support in

India, but the questions are how best to target it and manage it. At the state level, the

26 Not before the Cochin port labor union had resorted to political lobbying to have the state government denotify Manakkodam as a minor port, as well as a boycott of the oil refinery’s tankers, however. 27 The Tenth Plan included funds for an Urban Information System to be developed by the Ministry of Urban Development, for example, which had not been developed as of the time of writing. Both Eleventh and Twelfth Finance Commissions noted the need to develop databases of local finances and urged states and local bodies to develop the data.


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subsidy question comes up mainly in development of roads and road transport. With

roads, the question is how to balance the social obligation of providing universal

connectivity even to rural areas with the need to relieve bottlenecks in high-traffic urban

areas. Bus routes, similarly, vary in their profitability, and some socially desirable or

“lifeline” routes to remote areas may not attract private sector service. Specific

accounting for the costs of providing socially necessary services would make the implicit

subsidies apparent – enabling policymakers to assess their impact, cost-effectiveness, and

merit compared to other uses of public funds.

Numerical accounting of project returns and strict cost-benefit analysis may not always

be possible. Roads appraisal, for example, often relies on quantification of direct road

user benefits, a test on which many rural roads would fail since traffic is initially low and

benefits come later in the form of socioeconomic opportunities that may or may not

increase traffic. In these cases, the best that can be done is to compare alternate uses of

the funds and invite beneficiary participation in choosing between the two.

There may be a call to subsidize buses, for example, to reduce private vehicle use.

Whether these should be public or private busses, however, is a different matter. The

Kerala State Road Transport Corporation has expanded service dramatically, but losses

have increased at the same time.28 (Table 2) Do the social benefits from covering these

routes justify the expense? Kerala could take advantage of the large fleet of private buses

by allowing these operators to bid for a subsidy to serve remote areas or uneconomic

routes. If there is enough competition, the bidding will reveal the minimum subsidy

needed to ensure service, while at the same time ensuring that the needs of rural areas are

met.

28 As described in Kerala’s Economic Review 2003, KSRTC recently implemented a comprehensive turn-around strategy including organizational restructuring advised by CRISIL, introduction of a new management information system, reduction of uneconomic routes, replacement of old buses, reduction of staff, and other changes.


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Table 2

Indicator 1965 2005

Schedules 661 4232

Buses 901 4704

Routes 553 4896

Route length (km) 17822 14,22,546

Service (lakh km/day) 1.67 12.41

Passengers (lakhs) 3.8 31.45

Revenue Receipts (crore) 6.31 776.68

Expenses (crore) 6.14 923.04

Revenue-Expenses 0.17 146.36 Data from KSRTC website, last updated 25 June 2005.

Reorienting funds toward maintenance is also a priority. Maintenance, especially of

roads, has been a weak point in all states, and Kerala is no exception. Under half – just

44% - of the state’s required maintenance expenditure of Rs. 320 crores was actually

spent in 2000.29 World Bank (2004) reports that only 1/3 of road maintenance needs are

met in India, even though directing more expenditures to this area could have high

returns: spending 1 rupee on maintenance can have 7 rupees worth of net benefits for

road quality. 30 The gains from maintenance of inland water canals are of similar

magnitude.

To some extent, the bias towards capital expenditure rather than maintenance at the state

level stems from incentives created by the transfer system. The “plan” – “non-plan”

division of funds, for example, and central sector schemes often favor new investments

over less glamorous maintenance. Rural roads projects, for example, have limited central

funding for maintenance. Maintenance funds to service the contract will be budgeted by

29 World Bank (2002). India’s Transport Sector: The Challenges Ahead. Washington, DC: World Bank. Table 1.3 30 The 10th Plan, for example, cites a study by the World Bank showing that US$45 billion invested in main roads in 85 countries over the last two decades has eroded due to lack of preventive maintenance that would have cost less than US$12 billion10th Plan, v.2, p.951


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the State Government and placed at the disposal of the State Rural Roads Development

Agency (SRRDA) in a separate Maintenance Account.31

Nevertheless, it would be hard to lay all of the blame on transfer design. Available funds

are not always used well. Designing maintenance contracts and implementing

performance-based management of contractors is also necessary.32 The Kerala State

Transport Project (aided by a loan from the World Bank) has moved in this direction for

Highways and Major District Roads, but rural roads remain outside of the system.

Implementation also needs to be improved, particularly at the local government level.

Panchayats and municipalities oversee over 75% of Kerala’s road network. Kerala’s

performance in utilizing PMGSY and Central Road Funds (CRF) funds is one indicator

of the need for more attention to implementation. (Figures 3 and 4) While Kerala’s

performance in utilizing PMGSY funds is better than about half of the Indian states, the

fact that 25% of funds available to build clearly necessary infrastructure indicates an area

for improvement. Only 65.45% of the CRF Funds that accrued to Kerala between 2002-3

and 2004-5 have been released, below the national average of 89.45%. Utilization of

funds is an imperfect indicator of states’ implementation capacity, as many other factors

including some under the control of the central government can affect the released versus

accrued amounts, but gap between available and utilized is telling.

31 (From PMGSY Briefing Book, December 2004). 32 It is interesting that 35% of the World Bank loan is described as being for “Public Administration, Law, and Justice (Sub-national government administration).” The remainder is described as a transport/roads/ports sector loan. See http://web.worldbank.org/external/projects/ for Project ID P072539.


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Figure 3

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Figure 4

Utilization of CRF Funds, 2002-2005

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Source : Lok Sabha Starred Question No. 326, dated on 17.08.2005.


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It is not clear what the roots of the delays are, but one possibility is the lack of contractors

interested in and able to carry out public works. The state has a poor payment record: in

FY 1999-2000, for example, Rs. 528 crores was pending, compared to a total budget of

Rs. 379 crores. Payments on plan works were 18-24 months delayed, and non-plan works

were delayed 6-12 months.33 With this kind of payment record, contractors have little

incentive to work with the Kerala government. Lack of capacity to implement roads

projects at the local level could be another factor contributing to the accumulation of

unused funds.

Developing databases with which to evaluate alternate projects and allocate funds

would also be an important part of informed decision-making. World Bank (2004) writes

“it is very difficult to see how rational decisions are made with the present level/quality

of information on highways and highway finance.” (p. v). A recently (May 2005)

released report from the Parliamentary Standing Committee on Road Transport and

Highways found that the situation has not changed: there are still few data on traffic,

tender rates, and asset conditions for state and national highways, much less for district or

rural roads.

Augmenting “projectization” skills is an immediate priority. The funds for

infrastructure development are available, bankable projects, or even projects made

bankable with sustainable government support, are scarce. Project evaluation is a new

skill to be learned. A move toward business-oriented accounting, in which fixed assets’

value as well as depreciation/ maintenance costs would reduce public agencies’ cost of

borrowing. Road agencies’ budgeting has little in common with commercial accounts and

is difficult to compare across states or evaluate for informing private sector participation.

Lastly, and most importantly, increasing transparency and accountability for

expenditure performance, are essential part of sustaining good public expenditure

management. Finance Minister Chidambaram summarizes the challenge in a quote from a

March 2005 interview:

33 Figures cited in World Bank (2002). Volume 2, Chapter 1, Paragraph 16.


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“There is much to be done in terms of reform of delivery mechanisms, spending,

auditing and accounting, and the legal system. You must be able to stand up and

say, ‘I spent Rs 1000 cr and have got a 1,000 km rural road.’…. that connection

between outlay and outcome has to be established.”34

Auditing by the Comptroller and Auditor General of India (CAG) is obligatory, but

generally occurs only after the project is completed. There is no ongoing monitoring of

funds that could limit misuse of project funds before it becomes a larger problem.

Enabling voters to serve as fire-alarms could be a cost-effective way of ensuring that

projects stay on track.

Priorities for Kerala

Tourism Development

Kerala’s tourist inflow has grown steadily over the past five years, accelerating to over

6% growth per year in 2002 and 2003 before setting back to 2-3% growth in 2004.

Foreign tourism, in particular has increased, with annual growth rates in the double digits

for 2002-4 (averaging over 17% for the three year period). Earnings from tourism have

growth 2-4% faster than the number of visitors, indicating a shift in the composition of

visitors toward travelers with more disposable income. How can this growth rate be

increased and sustained? Recent performance has been strong, but the growth rate of

foreign tourism has historically been volatile – it was actually negative in 2001 and just

under 4% in 2000.35

Kerala has unparalled potential as a destination for medical and health tourism, in

addition to its appeal as a destination for luxury-seekers and backpackers alike. The

question of whether the state should try to cater to all of these groups, or whether it

should specialize, is important to consider. What are the returns from lifting bottlenecks

for the various types of tourists – this is a question not only of what could be earned from

34 Interview of 3/4/05 in Business Standard. The statement was part of his answer to “On a scale of 10, where would you put yourself?” 35 Data from “Tourism Statistics 2004,” Government of Kerala.


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the tourists (a criteria that obviously favors the medical/health tourism and luxury

travelers) but also what kind of investment would be required to attract them.

Medical and health tourists would seek efficient and relatively luxurious transportation

directly from an international airport or port to the treatment site, for example. Flexibility

in connections to other destinations and ability to sight-see along the way to the

destination would not be as important. It may be most efficient to encourage “medical

clusters” to develop in coastal urban areas, as well as the more secluded rural areas to

ensure that direct routes are profitable. Backpackers, on the other hand, might see the

journey as part of the adventure, and would welcome frequent stops, opportunities to

connect to other routes, and administrative amenities such as flexible ticketing.

Also, what is Kerala’s comparative advantage in the tourism world? At first glance, it

appears that alternative health facilities are a strong point to be developed.

When these questions have been answered, a comprehensive tourism strategy may look

like KINFRA’s export promotion strategy: having a dedicated fund, then allocating it to

projects across a wide range of infrastructure to achieve an overall goal of attracting

people to the state and enabling them to move around within it. The fund could be used to

provide low-interest loans refinancing for nearly-viable commercial projects, counterpart

funding for central-government-funded projects, or to fund feasibility studies or market

analysis, among other uses.

Also, tourism development is more than just having the transport in place. First, it has to

be accessible. Travel seems to be relatively accessible: Kerala ranked fourth among states

in the number of IATA-approved booking agencies for the sale of airline tickets (behind

Maharashtra, Delhi, and Tamil Nadu) in 2001.36 It ranked third, behind Bihar and West

Bengal, in the number of commissioned Railway reservation stations per 100 sq km land

36 It ranked 8th among states, however, in the number of Passenger Sales Agents for Indian Airlines. The number of agencies, though not necessarily states’ relative position, is likely to have changed since 2001 with the substantial growth in civil aviation. Source : Lok Sabha Starred Question No. 511, dated 23.4.2001. Downloaded from Indiastat.com


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area.37 Second, there also have to be amenities along the roads – shops, restrooms, gas

stations, etc. The Kerala government’s Vazhiyoram initiative seems like a step in the

right direction in several ways – it addresses this need and it also relies on private

initiative. It encourages landholders along the edge of the important roads to develop

these centers and provides various subsidies (2% of construction cost below some cap)

and incentives for them to do so.

Harnessing Remittances

Remittances have steadily escalated and surpassed government expenditure in the late

1990s. These have contributed to growth, but through consumption that then spills over

into new economic activity. K. Pushpangandan’s 2003 study “Remittances, consumption

and economic growth in Kerala: 1980-2000,” finds, for example, that the durable goods

accumulated by the households in the 1980s contributed to growth of informal repair,

maintenance, and servicing industries for these goods in the 1900s. Remittances have

interacted with growth in tourism, trade and transport to contribute growth of hotels and

restaurants.38

The remittances have also tended not to be passed through domestic banks, raising a

second challenge for harnessing these for investment in infrastructure.

One way to attract these funds would be to start a dedicated infrastructure fund, overseen

by private managers, that people could invest small amounts in. The level of remittances

is such that they are unlikely to be consumed; some kind of vehicle for small-scale

investors to get involved with developing their state’s infrastructure might be welcome.

Developing Inland Waterways

37 Kerala ranks twelfth among states with 37 commissioned Railway reservation stations, however, and 14th in terms of railway stations per lakh population. Data from Lok Sabha Unstarred Question No. 575, dated 03.03.2005., downloaded from Indiastat.com 38 Available from the Center for Development Studies at http://www.cds.edu/download_files/343.pdf


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Kerala’s road traffic, growing at 10-11% per year, places pressure on the state’s

roadways. Unfortunately, the obvious options for relieving this, such as building up

railways as an alternative mode of transport, cannot be done by the state itself.

Kerala has the unique advantage, however, of having numerous potentially navigable

inland waterways that could be developed for passenger use as well as the current cargo

uses. According to official statistics, Kerala has 1,687 km of inland waterways, or 11.6%

of the country’s total. The West Coast Canal along, connecting Hosdurg in the north and

Poovar, near Thrivananthapuram in the south, is 560 km long. A 2004 NATPAC study

places the true figure of navigable waterways at 1,800 km.39 A recent estimate states that

coastal shipping and inland navigation could cover more than a quarter of the state’s

transportation needs.40 These canals were damaged and silted up by the tsunami, but the

underlying features will return after dredging.

Faced with this potential the question is how to prioritize and where to obtain funds.

First, the prioritization of dredging should be explicitly done in conjunction with

industrial and tourism development plans. The clearer and more credible are government

plans for improving various stretches of the inland waterways, the stronger are signals to

the private sector to develop tourist amenities or industrial areas that can be accessed via

the waterways.

On the second question, some stretches of Inland Waterways may be feasible projects for

the private sector. Tolling regimes similar to roads could easily be developed for the

“intersections” or stretches linking already developed areas. Also, Kerala could consider

lobbying to have greater stretches declared “National Waterways” and thus eligible for

development under the NMDP.

Conclusion

The first five links that appear when one types “Kerala” into Google deal with tourism.

“God’s own country” is clearly publicly recognized as one of India’s premier tourist

39 Cited in Kumar, K.G., (2004). “The Potential of Inland Waterways,” The Hindu Business Line August 30, 2004. 40 Kumar, V.S., (2005). “IWT in Kerala – Waterways-Minor Ports Link is the Way Forward.


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destinations. The state is also a potential manufacturing center and access point for all of

southern India: Kochi port’s expansion, along with the development of the Vallarpadam

ICTT, will dramatically change the state’s economy. Kerala’s current potential is built on

a strong history of socioeconomic development – the state is India’s cleanest, healthiest,

and most literate.

That said, potential is still potential: it is still to come in the future. This paper’s

recommendations regarding transport development, summarized in Appendix One below,

are one part of a strategy to ensure that the “potential” becomes reality.


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APPENDIX 1: SUMMARY OF RECOMMENDATIONS

Seize Emerging Opportunities:

Take advantage of the opportunities created by national policy changes to ensure that Andhra Pradesh is well-connected internally as well as to the rest of the Indian market.

Improve state-level investment climate by: Streamlining land acquisition issues. Clarifying government counterpart for private partnerships and investors. Developing clear procedures for contract negotiation, allocation of risks, and dispute resolution in

case of events not clearly covered in the contract. Enforcing law and order, especially along highways and in road use. Ensuring flexibility in labor regime, especially in key areas such as port labor.

Work with central government to maximize benefits from national programs, including: Coordinate state investment projects with central projects to achieve highest returns and ensure an

integrated transport network. Take advantage of weight in Parliament to lobby for allocation of funds and projects. Cooperate with other states to develop new institutional channels for communicating with relevant

central ministries and government.

Public Expenditure Management:

Public expenditure management to maximize returns from scarce resources is a state and national priority.

Develop institutions for coordinating decisionmaking across levels of government, and between state

and privately-funded infrastructure. Develop goal-oriented public expenditure management, funding projects as they contribute to this

goal rather than evaluating them only against other projects in the same sector. Take advantage of decentralization: build local governments’ capacity as well as improve citizens’

ability to hold these governments accountable. Be more deliberate in government subsidization of transport infrastructure. For example: KRSTC

route service may be better provided by the private sector with minimum subsidy bidding to ensure route coverage.

Reorient funds toward maintenance. Implementation bottlenecks are as important as resource constraints and attention to identifying and

resolving these is as important as acting to secure more funds. Develop databases with which to evaluate alternate projects and allocate funds Augment “projectization” skills. Increase transparency and accountability for expenditure performance.

Tourism Development

Consider needs of a variety of tourists ranging from medical/health, ecotourism, luxury travel, and

backpackers. Each of these groups have different needs and expectations. What is Kerala’s comparative advantage and what are the highest-return groups to attract?


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Create multi-sector Tourism Fund to integrate decisionmaking and encourage consideration of public and private projects in light of their contribution to developing tourist amenities.

Increase accessibility of transport network, especially ease of booking tickets.

Harness Remittances

Set up privately-managed fund with a small initial investment level to encourage people to save the remittances they receive through the formal financial system.

Develop Inland Waterways

Prioritize de-silting and rehabilitation in conjunction with industrial and tourism development

strategies Identify intersections or other potentially high-return areas that could be rehabilitated privately. Lobby central government for inclusion of more waterways as National Waterways as a means of

attracting additional funds and institutional support.

state-level strategies for augmenting transport

Documents