Correct pricing of infrastructure services is vital. Infrastructure assets, by their very nature, provide critical services ranging from roads to water. The “price” for access to the asset is an important factor for two fundamental reasons.
First, consumers must get access to essential services at a price that is “fair” so as not to discourage their use. Second, from the asset owner’s perspective, it is essential that it earns returns that justify the investment. While for a consumer the lowest possible price is desirable, from a practical point of view, given the limited availability of government budget for creating infrastructure assets, not all infrastructure can be provided at low rates or for free.
Given this, determining the fair value of “user charges” is crucial to finance and grow infrastructure, bearing in mind that poorly priced assets do not necessarily lead to their most efficient use. The end user must “value” the asset to ensure that it is efficiently used, and not squandered away. Free services can often be overused leading to dire consequences, especially for limited natural resources such as irrigation water (as in the case of farmers in the Green Revolution belt).
The correct level of “user charges” also matters because the need is not only to provide just infrastructure but to provide high-quality infrastructure to end users. To ensure that, as infrastructure assets are used, funds must be available for maintenance and investments so that a high quality of service is provided throughout the life of the asset. While “user charges” may not always be able to take care of all the investment costs during the life of the asset, a significant component must be met using these charges.
A city metro network is a good example. While the “farebox”, in other words user charges, alone usually do not lead to investment returns commensurate with the investments required for a city metro network, they are a critical component of financing some of the substantial operational investments required during the life of the asset. Therefore, it is important to price the services from a metro service at an optimum level to ensure that a high-quality asset can be made available to the public at a reasonable cost.
Determining the right level of “user charges” also matters to ensure that infrastructure sectors that need investments receive the necessary amounts. Besides sectors that require significant government funding — such as schools and healthcare to some extent — other sectors (like power generation and toll roads) need private capital to be involved in one capacity or the other.
Sectors that can create clarity around cash flows, regarding both the quantity and the certainty of cash flows, will attract larger investments. A better defined “user charge” regime implies more clarity for investors, and this, in turn, means more significant flow of investments. Alternatively, poorly priced assets usually lead to misuse of the asset, lack of investments in improving the asset and eventually break-down and failure of the asset to deliver full value to the end user.
At the other end of the spectrum, assets that have extremely high “user charges” are also not sustainable. There are two primary issues with such mispricing. Firstly, the end user is just not able to afford the tariffs that are charged for the use of an infrastructure asset and hence is discouraged from using it. Investing in assets with the hope of charging excessive tariffs ends up creating assets that eventually end in financial distress. The Dabhol debacle is a prime example, where, among other factors, extremely high tariffs were simply unsustainable in the long run.
Secondly, extremely high pricing for infrastructure assets creates mistrust among the end users. This mistrust translates into the inability to charge users for the use of infrastructure assets even in cases where the charges are deemed to be fair and reasonable. Therefore, poor pricing of infrastructure assets creates financial distress among investors and renders future infrastructure creation more difficult in the face of public backlash.
Pricing the use of infrastructure assets deserves significant attention from the government. Balancing investor returns with low user charges requires excellent planning, execution and policy framing in the context of the infrastructure creation that India needs and the economic growth such infrastructure can unleash.
(Taponeel Mukherjee heads Development Tracks, an infrastructure advisory firm. Views expressed are personal. He can be contacted him at [email protected] or @Taponeel on Twitter)