3 FINANCING OF RURAL
INFRASTRUCTURE
Vijay Mahajan, Preeti Sahai, and Sandeep Pasrija
INTRODUCTION
E
conomic growth and human development are
strongly determined by the prevailing infrastructure
development scenario. Rural infrastructure in India
in terms of its roads, electricity supplies, telecom facilities,
irrigation systems, water supply and sanitation, market yards,
schools and health centres is woefully short of demand. It is
almost totally publicly funded, and the governments at the
centre and the states, have severe budgetary constraints. The
local governments—zilla parishads and panchayats in case of
rural areas—are largely dependent on central and state
government disbursals, and are thus hardly ever in a fund
surplus situation to spare money for infrastructure investment.
Rural communities themselves are impoverished and
unorganized, so community financing of infrastructure is not
possible beyond an occasional piau (communal source of
drinking water) or dharamshala (resthouse or shelter). In this
context the role of private capital in filling the need gap
acquires tremendous importance. Seventy per cent of Indians
live in villages and rural infrastructure is a key determinant
of rural development and economic and social well-being.
In this paper we try to understand the prevailing financing
options for rural infrastructure and attempt to identify viable
alternatives towards bridging the gap. For our purpose we
extend the standard elements of infrastructure (roads, irrigation,
water and sanitation, telecom, and electricity) to include agro-
processing and marketing facilities within the ambit of rural
infrastructure needs. This is driven by the fact that the positive
impact of these services on agriculture-based economic activity
in rural areas is significant, the user group for them is large
and the investment required is lumpy.
In the initial sections of the chapter we lay out the basic
attributes of the rural infrastructure sector in terms of its
economic, social as well as political aspects, features, and
compulsions in order to draw implications for existing financing
practices. This is followed by a brief assessment of the demand–
supply gap that exists in rural infrastructure segregated by
service, that is, water and sanitation, roads, irrigation, electricity,
telecom, agro-processing, and marketing. Detailed discussions
of prevailing funding options and avenues are followed in
the subsequent sections by an examination of viability of new
options in the resource generation.
ATTRIBUTES OF RURAL INFRASTRUCTURE AND
INTERLINKAGES WITH FUNDING ISSUES
Economic Parameters and Decentralization
Possibilities across Services
Institutional and financing arrangements relevant for service
provisioning will be derived from the nature of the infrastructure
in question, in terms of its public good versus private good
characteristics (a rural road tends to be public in nature, an
in-house electric connection is a private good); and the scale
of the service—whether the service helps a single community
or many communities. Even for most ‘heavy capital investment’
intensive infrastructure, some part of the recurring expenditure
can be paid by the consumers. It is critical that policy-makers
recognize the need to balance cost sharing strategies with
objectives of maximizing outreach to the poor. ‘As a rule, the
potential for private sector interest in providing infrastructure
increases as the activity shifts from public to private. A shift
from smaller to more extensive coverage also tends to transcend
community-based solutions’ (World Bank, 2006a).
We characterize rural infrastructure based on parameters
such as investment required, extent of incremental expenditure,
consumers’ willingness to pay, and scale economies (Table 3.1).
48 India Infrastructure Report 2007
Categorization of Rural Infrastructure
Health Education
Scale Economies Low Low
Initial Investment Moderate Low
Recurring Expenditure1 Moderate Low
Willingness to pay High Moderate
to High
Source: Computed by author.
Health and education delivery can be decentralized to the
local level. However, resource needs for research, training to
different cadres of health/education workers, curriculum
development and so on are significant and require centralized
infrastructure. Similarly, promotional activities required to
run both health and education facilities are significant and
require large administrative machinery to deliver. Information
Technology (IT) related services typically require huge basic
infrastructure to extend services. For water services, it is
less the connection to a physical network and more the access
to organizational and professional skills that drives utility
expansion.
Measured by scale economies, electricity falls somewhere
between IT and water. Unlike telecom, electricity can be
decentralized to local levels, without being necessarily connected
to a larger regional or national network. This is a viable
solution for remote areas, where establishing transmission links
from a larger network is prohibitively costly, given the size of
the rural market. Private entrepreneurs in India are already
selling power generated micro-hydel and wind-based renewable
energy generation systems to large grids. The next step could
be to enable them to distribute power in localized rural areas.
Rural power distribution was prioritized by several pioneering
projects of the Rural Electrification Corporation, using rural
electric supply cooperatives. One of these, in Ankapalle in
Vishakhapatnam district of Andhra Pradesh, is an example
of a robust community institution owning and managing an
important rural infrastructure facility. (See Box 6.1.5)
Social Attributes
That the term ‘infrastructure’ was traditionally used
interchangeably with ‘social overhead capital’ sets the tone for
1 Expenditure on continued provision of the service includes expense
on salaries of doctors and teachers, maintenance of the power plant,
maintenance of the water structures and so on.
Table 3.1
Energy Water and IT/Telecom Roads Canal
Sanitation Irrigation
Moderate Moderate V. High V. High V. High
to High
Moderate Moderate V. High V. High V. High
to High
High Moderate Moderate Low Low
High High Moderate Nil High
to High
how it has been viewed by policy-makers and stakeholders
alike as a need that must largely be addressed by the
government. In India, even sixty years after independence the
government plays an overwhelming role in financing, building,
and maintaining infrastructure.
Public infrastructure faces disuse and apathy at the hands
of its target segment, its users. There are often no clear
incentives to maintain public infrastructure at the local level.
In addition, factors which have created an institutional
environment for low maintenance of infrastructure include
the non-excludability of public infrastructure, concern for social
justice leading to absence of or low user fees, and ownership
and operation by a public bureaucracy. The government mostly
limits its role to infrastructure creation, without creating a
local institutional set-up with user participation, which has a
stake in the maintenance, use and other issues such as billing,
recovery of payments and so on. Thus, in the interest of more
effective infrastructure services, the ‘rules of the game’ will
have to be redefined.
Political Attributes of Infrastructure
Allocation of resources for infrastructure creation is as much
a subject of political decision-making as anything else. Such
allocation is often based on parameters that go beyond the
infrastructure deficiency of an area, or its people, or even the
efficiency of resource use. Infrastructure requires large, lumpy
investments, and politicians use this as an opportunity to
bestow visible patronage on their constituents. The elected
representatives to the government often waive user charges
for political mileage and gains from their voter base. This
creates distorted responses on the part of the consumers and
also adversely affects their attitude to infrastructure, and
willingness to pay for it. This offers perverse incentives to the
users to misuse infrastructure services and get away with
inadequate or no payments. Electricity and water, for example
have been the focus of competitive populism (Vaidyanathan,
 Financing of Rural Infrastructure 49

2003). Raising water rates is considered as an electoral disaster, Table 3.2

regardless of the political party doing it. Similarly, waiving Access to Water and Sanitation Services by the Rural Population
electricity bills, or announcing free power for farmers is an 1992 1997 2002
infamous yet popular pre-election promise.
% Population with no access to Water 34 23 8
% Population with access to Sanitation 6 10 20
DEMAND–SUPPLY GAP IN RURAL INFRASTRUCTURE Source: NSSO (1999), NSSO (2003).
Rural areas are often perceived to generate low demand for
infrastructure services, thus imposing a major constraint on than 100 million households, who need to be provided
the viability of rural infrastructure projects. While demand sanitation facilities.
for connections is often lower than comparable urban areas, According to the Bharat Nirman Plan, by 2009 around 33
many studies show that a high number of rural customers are million people across 55,067 habitations have to be provided
often willing to pay and to consume more than is commonly access to water.
expected. Precise quantitative measures of rural demand will
be difficult because estimating demand is complex. If Roads
willingness and/or ability to pay are measured before a service
is introduced, they may lead to underestimation of the The demand for rural roads can be better understood by the
potential demand. The impact of education or information demand for vehicles. In the period 1990–7, rural roads grew
about the service is much higher when the service is visible, by around 15 per cent, whereas the estimated growth in demand
and to this extent most estimations account for demand for scooters was 56 per cent, and that of bicycles was 28.5
inadequately (Econ One Research, 2003). per cent. The availability of road infrastructure is, in general
The ensuing section attempts a rough estimation of the poor for smaller villages with less population (Table 3.3).
demand-supply gap in different sectors and some broad Table 3.3
diagnosis of how the system has addressed the respective Village Connectivity by Size of Village
infrastructure sector needs over time. This section gives some
idea, not only of the gap, but also the current outreach Population Connectivity in 1995 (%)
of infrastructure services. The full picture, however, is not Less than 1000 37.5
complete without understanding the quality of service 1000 to 1500 75.9
delivery. The actual demand is likely to be higher than what Greater than 1500 91.7
these figures convey to the extent that infrastructure was
Source: Bery et al. (2004).
created but lies defunct or underused due to partial or
discriminatory access.
As per the Tenth Plan document, there are around 100,000
unconnected habitations with population of more than 500
Water and Sanitation persons. The average distance from a village to an all-weather
road is 2 km, and on an average 52 per cent people living
The Rajiv Gandhi National Drinking Water Mission, states
away from the main village do not have access to all-weather
that (as of 2005) about 96 per cent of rural habitations can be
roads (Bery et al. 2004).
categorized as ‘fully covered’ by drinking water provisioning
services, and 35 per cent of population has access to sanitation
facilities.2 An evaluation by UNICEF in 2004 assesses that Irrigation
only around 40 per cent of the below poverty line (BPL) families The water use efficiency in Indian agriculture is one of the
use constructed toilets compared with 80 per cent of the above lowest in the world, at around 30 per cent to 40 per cent, as
poverty line (APL) households using the same. against an ideal of 60 per cent. The utilization of created
To project this to the current scenario, with a population potential is poor at around 86 per cent for all types of irrigation
of approximately 1100 million, 75 per cent rural population, schemes. This gap between the potential created and
and 65 per cent of this population un-served by sanitation utilized has widened over time from around 5 per cent in
facilities, we have around 536 million people to cover. Assuming the first three Plans to about 11 per cent from the Seventh
a household of 5.5 persons, this translates to a little less Plan onwards.3

2 3 Some of this is also due to higher estimates of potential adopted

Figures based on the Comprehensive Action Plan, 1999, baseline
assessment. for certain projects (Desai, 1991)
50 India Infrastructure Report 2007

Table 3.4 approximately 54.6 million households that are currently not
Existing and Potential Irrigation Capacity in India, 1997–8 electrified but are above the poverty line, will not receive any
Major Minor Minor Total subsidy to provide an electricity connection.
and (Surface (Ground Tariffs have been set too low to justify investments. This
Medium Water) Water) factor has also increased the risk of investment in power
Ultimate Potential 58.5 17.4 64.0 139.9 generation. The policies and regulations have also been largely
(million ha) reactive to private response and this has slowed the process.
Irrigation Potential 58 72 73 While the attention of private investments is largely urban
Created (per cent) and industrial in nature, higher levels of investment are likely
Created Irrigation 33.9 12.5 46.7 93.2 to benefit rural India, both directly and indirectly. Transmission
Capacity (ha) and distribution losses, largely attributed to technical challenges,
Utilized Potential 86 88 92 illegal use, heavy subsidies around power used for irrigation,
(per cent) and challenges in appropriate fee collection have pulled the
Irrigation Potential 29.2 11.0 43.0 83.2 State Electricity Boards into losses.
Utilized (million ha)
Maximum Irrigation 24.6 4.9 17.3 46.7 Telecommunication
Potential that can be
created (million ha) Rural teledensity increased from 0.02 per cent to 1.92 per
cent in the last 50 years (1948–98). Village-level telephone
Source: Central Water Commission (P&P Directorate) and Planning connectivity, carried out through Village Public telephones
Commission (2002). (VPT) for rural India is missing in 58,648 (roughly 10 per
cent) villages. Compared to this government plans to raise
As of 1997–8, the 83 million hectares of irrigated area the teledensity in rural areas from the current 1.9 per cent to
served only about 46.5 per cent of the landholdings, which 15 per cent by 2007 and has proposed Rs 8000 crore subsidy
means that at the current rate, further irrigation potential of for creating necessary infrastructure. With this kind of subsidy
around 95.5 million hectares will have to be created to provide support, it will be possible to install 20,000 base stations in
for the remainder 53.5 per cent of landholdings. Given rural areas to cover about 80–90 per cent of the villages,
assessments of ultimate potential, only around half of this according to TRAI. According to the TRAI, if the present USO
requirement (46.7 million hectares) can be addressed through Policy continues then India would achieve rural teledensity
creation of new potential. Further, to the extent that there of only 3 per cent by 2007.4
is underutilized potential, the figures will diminish further
(Table 3.4). Agro-Processing and Marketing Infrastructure
Major and medium projects require an average investment
of Rs 1 lakh per hectare of irrigated area, and the sum Agricultural Markets
required will therefore be around Rs 246,000 crore, just to As of March 2003, there were 7323 regulated wholesale
exploit full potential of major and medium projects. At agricultural produce markets in India, up from 57 in 1939.
around Rs 10,000 per hectare, for minor irrigation, the In addition, there were 27,046 rural periodic markets.
additional funds required are Rs 22,200 crore (Planning On an average 21 villages are served by one rural market
Commission, 2002). with the state-wise figure ranging between one rural market
for one village in Kerala to 667 villages in Himachal Pradesh.
Electricity The need to develop haats or weekly bazaars has been
emphasized upon by the Expert Committee on Strengthening
Rural electrification is defined broadly to cover for creation and Developing of Agricultural Marketing (GoI, 2001).
of the physical infrastructure for electricity. However, the access The report recognizes that since these markets constitute
of individual households to electricity is questionable even if the ‘first contact point with commercial circuits for the
these targets are met. The Rajiv Gandhi Gram Vidyutikaran producers’ and ‘80 per cent of the household incomes of
Yojana (RGGVY) aims to electrify 125,000 villages, connect the rural masses is estimated to be spent at these markets’,
all the estimated 2.34 crore unelectrified households below their development, therefore, ‘with proper operational,
the poverty line (BPL), offer 90 per cent subsidy for providing pricing and technical efficiency constitute the foundation of
connections and augmenting the network in all the
4
already electrified 0.46 million households by 2010. The http://www.telecomindustrystocks.com/IiI/News/061206.asp

integrated market system for distribution of agricultural and
allied produce.’
Storage
The three main agencies in the public sector, which are engaged
in building large scale storage capacity: the State Warehousing
Corporation (SWC), Central Warehousing Corporation
(CWC) and Food Corporation of India (FCI). The CWC
and SWC have enhanced capacity from 8 warehouses handling
7000 tonnes in 1957–8 to over 1800 warehouses handling
over 23 million tonnes in 2000–1. The FCI has created storage
capacity of over 35 million tonnes.
The storage capacity, at its present level is sufficient only
for 10 per cent of the total production of fruits and vegetables.
The capacity requirement for post-harvest management of
perishables is estimated to be over five times that of the current
capacity. The Expert Committee on Strengthening and
Developing of Agricultural Marketing (GoI, 2001) assesses
the need for creation of 15,000 additional cold storages with
a capacity of 45 million tonnes. This would require an
investment of the order of Rs 27,000 crore.
Processing Infrastructure
This enables local value addition and supports self-employment.
The fruit and vegetable processing industry in India has
increased capacity three-fold from 0.7 million tonnes to 2.1
million tonnes between 1990 and 2001. This processing
infrastructure for fruit and vegetable is highly decentralized,
and most units operate in cottage/homes and the small scale
sector. Dairy related micro infrastructure, for example, entails
not just the processing units such as bulk coolers, chilling
plants, pasteurising facilities, and packaging facilities, but also
milk collection cans, fat testing machines, milk vans operating
on milk routes, and marketing facilities.
The financing of such infrastructure is likely to be different
from other larger infrastructure in that there is scope for
significant private finance. An integrated approach to creating
such infrastructure and attracting private finance is needed
to add significant value for different sectors such as dairy,
horticulture, and agriculture of different types of commodities.
RURAL INFRASTRUCTURE FINANCING
Funding from Governmental Sources
Around 70 per cent of the population of India lives in rural
areas, and therefore, Indian planning has a history of interven-
ing in and focussing on the problems of the rural sector. It
was around the mid-1970s that the concept of basic mini-
Financing of Rural Infrastructure 51
mum needs came into the policy frame, with an explicit
acknowledgement of the worsening rural poverty situation
and large scale unemployment (Das, 2002). During the Sixth
Plan, issues relating to basic infrastructure were sought to be
addressed in a rather more cohesive and direct manner than
before under the Minimum Needs Programme.
The infrastructure investments in rural areas are mired in
hidden and explicit subsidies and heavy losses. The approach
to investment in rural infrastructure was traditionally that of
complete state support as such investment was viewed as
economically unattractive and also too complicated for the
private sector to consider.
While on the one hand, public investment was the only
source of finance for rural infrastructure; on the other even
these have been declining as a proportion of both total
government expenditures and as a proportion of GDP. During
the post-reform period, between 1993–4 and 2001–2, not
only has the share of budgetary expenditure on all social services
and poverty alleviation programmes declined from 2.08 to
1.87 per cent, but also the share of rural development in all
social services and poverty alleviation programmes has fallen
from about 32 to 25 per cent (Das, 2002).
The expansion and improvement of irrigation infrastructure
occupies a central place in India’s agricultural strategy.
Investment in the major and medium irrigation programmes
comes almost entirely from public sources, whereas for minor
irrigation programmes a significant share comes from institutional
and private sources as well. Between 1977–8 and 1994–5,
capital investments in major and medium irrigation schemes
went up 7.5 times at current prices and 4 times at constant
prices, whereas the irrigation potential increased only by
30 per cent (Vaidyanathan, 2003). Investment in irrigation
constitutes 55 per cent of total agricultural investment—the
single largest component of the investment by the public
sector. The government has spent over Rs 120,000 crore
towards developing irrigation potential up to the Ninth Plan.
The plan outlay under the Accelerated Irrigation Benefit
Programme for 2005–6 was Rs 4500 crore.
The outlay of the State and Central Governments for rural
roads was Rs 3070 crore in the Eighth Plan period. It was Rs
1980 crore and Rs 2140 crore in the next two years, 1997–8
and 1998–9. For water and sanitation, the total investment
envisaged in the Tenth Plan period is Rs 3010 crore, which
the State and Centre are expected to share in the ratio of
47:53.
Public resources are thinly spread over a large number of
competing alternative uses. Even though state funding is the
only significant source of infrastructure finance, it is not
adequate. As a case in point, at 2000–1 prices, the Planning
Commission estimates that an investment of Rs 107,800
crore will be required to provide electricity to all villages in
52 India Infrastructure Report 2007

India. Compared with this, the average annual investment
over the last few years has been merely Rs 8.8 thousand crore.
Central Government Sponsored Schemes
Most poverty alleviation schemes of the government have asset
creation and infrastructure creation components. In February
2006, the Finance Minister, in his budget speech, announced
an allocation of Rs 186,960 crore for rural infrastructure, under
the Bharat Nirman Programme. This is the single largest
allocation for any sector and is 54 per cent higher than the
previous year.
Schemes directed at creation of infrastructure include the
Million Wells Scheme (MWS) for surface water bodies, Indira
Awas Yojana (IAY) for housing, Jawahar Gram Samridhi Yojana
for school buildings, rural roads and other infrastructure,
Swarna Jayanti Swarozgar Yojana to support micro-enterprises.
The Employment Assurance Scheme (EAS), Food for Work
programmes, as also the new National Rural Employment
Guarantee Scheme (NREGS) provide employment to villagers
in the construction of minor local infrastructure such as small
roads, school buildings, and pond digging.
SUBSIDY DESIGN
The design of the subsidy disbursed is crucial to how the
infrastructure is built, financed, and managed. The thrust on
community participation has been increasing, yet the financing
mechanisms have not efficiently built in the crucial aspects
of co-financing either from the community or other sources.
To the extent that co-financing is required in government
schemes, experience shows that the design has failed to pre-
empt misuse of this clause.
The manner in which subsidies are designed continues to
be an issue with public funds. Outright and upfront grants
have often failed to motivate the beneficiaries to use the funds
judiciously. ‘Smart’ subsidies or those which ensure community
contribution and where the grant is targetted appropriately
at an institutional structure ensure more efficient and sustainable
use of the funds. Beyond sunk capital costs, such funds often
remain with the community as revolving funds. If subsidies
are made contingent to performance, or are structured as
output-based aid, their effectiveness is likely to be much higher
(Box 3.1).
MULTIPLICITY OF ROLES
One of the issues with public funds, for creation and
maintenance of infrastructure, stems from the multiplicity of
roles that the government plays. These roles range across
regulatory, promotional, financial, and implementational.
Notwithstanding the near pure public good attributes of some
types of infrastructure, the government has been seen to under-
perform when it is playing all these roles simultaneously. Most
often, the implementation role of the government is played
by the DRDAs and increasingly by Gram Panchayats. The
DRDAs largely have low capability for micro-planning and
implementation. PRIs vary in capabilities across states, and

Box 3.1
Misdirected Subsidies which Benefit Non-poor more than the Poor

Electricity subsidies to agricultural consumers in India

A key government policy in India has been the subsidization of electricity to agricultural consumers as a way of providing support to
poor farmers. However, research in two states has shown that the subsidy is often made to the target population by charging the farmer
only a flat tariff for each water pump he has rather than billing for the kWh of electricity consumed. This technique provides greatest
support to farmers operating larger farms. Expenditure on electricity for large farmers represents 6 per cent of gross farm income; it
rises to 13 per cent for small or marginal farmers.

Under-priced electricity services to households in Bangladesh

Bangladesh, like many countries, charges electricity prices to households that are cross-subsidized by other consumer groups and also
subsidized by the government. This support mostly reaches the better-off owing to low connection rates. Consider the following data
from the 2000–2001 Household Income and Expenditure Survey:

Connected Households (per cent)

Quintile income group Urban Rural Combined
1 (poorest) 46.4 2.9 11.7
5 (richest) 99.1 43.5 54.8
Source: Monari (2002), BBS (2003), WSP (2002).

are also not quite ready to take over efficient management of
programmes yet.
CENTRE-STATE COST SHARING
Most of these schemes require 25 per cent contribution from
states. Experience has shown that state governments are often
slow in offering their share. In Kerala, the state government
has taken a policy decision to transfer all small single village
water supply schemes to gram panchayats. However, even with
such a decision, the process has been slow and only a limited
number of about 1000 such schemes have really been transferred.
The state governments often give the alibi of inadequate
capacities of the local authorities to execute these programmes.
There is a case for reform-linked incentives and assistance from
the Centre to the states. Enactment of the 73rd Amendment
developing a framework of user charges, to create space for
private finance could form the basis for setting up these criteria
(Mehta et al. 2003).
PRICING OF INFRASTRUCTURE
The required reforms in infrastructure sectors include restruc-
turing of pricing as an essential part of effective management.
In irrigation a chasm exists between the cost and pricing of
irrigation, which doesn’t augur well for the development of
irrigation infrastructure. The water rates collected by several
states served by public works are neither revised regularly to
keep pace with the escalating costs, nor are sufficient to meet
the working expenses, let alone cover fixed investment or
earn a rate of return over the investment. Tamil Nadu revised
water rates thirty years ago, Punjab, Haryana, Kerala did so
in the mid-1970s, while Andhra Pradesh, Bihar, Rajasthan,
Orissa, and a few others did so in 1981–6. Andhra, Gujarat,
and Karnataka tried to implement a new regime which got
held up due to various reasons. The Committee on Infra-
structure Pricing stressed the need to view the strategy for
reform of water pricing as part of a larger programme of
modernization of irrigation systems, and restructuring of
their management.
Fund utilization of government schemes has historically
been seen as patchy and inefficient. Experiences such as Rogi
Kalyan Samiti5 in Madhya Pradesh show that as soon as market
mechanisms such as pricing of services are allowed to function,
in synergy with the government intervention, all parties begin
to play a more efficient role. The increased accountability
and transparency of such systems due to the presence of ‘other’
players, including the community, is likely to ensure better
utilization of funds (Box 3.2).
5 The Rogi Kalyan Samiti is a patients’ welfare association comprising
local politicians, government officials, doctors, donors, and community
leaders.
Financing of Rural Infrastructure 53
Rural Infrastructure Development Fund
The Rural Infrastructure Development Fund (RIDF) was
launched in 1995–6 to address the inadequacy of public
investment in agriculture and rural development, and was
housed with National Bank of Agriculture and Rural Devel-
opment (NABARD). The initial corpus of Rs 2000 crore
was raised through contributions both from public and
private sector banks with shortfalls in agricultural lending.
In each successive year, the RIDF received additional corpus,
and as of September 2006, a total corpus of Rs 60,000 crore
reposes with the RIDF (Box 3.3).
NABARD describes the success of the RIDF using two
criteria—the high social return and employment generation
and the near perfect repayment experience. Both these however,
are not direct pointers to the success of the RIDF. Irrigation
projects per se have a high social rate of return in water-
constrained or water-uncertain situations. The RIDF only
funded completion of such projects, after the larger proportion
of cost had already been undertaken. So, ignoring the sunk
costs, the RIDF IRR would obviously show high returns.
Similarly for the latter, all loans given were against state
government guarantees and the governments had an additional
incentive to repay because the disbursement growth rates were
higher than the debt servicing needed.
The RIDF did relatively little to check quality of infra-
structure created or completed with these funds by state gov-
ernments. Taking the case of Rajasthan, Morris (2003) shows
that of the 179 schemes sanctioned between RIDF I to VI,
76 were reportedly completed, yet on a physical inspection,
several of these were found to be actually unfinished. Also,
from an advance of Rs 9.5 crore in 1998–2000, the State
Finance Department had disbursed only Rs 35 lakh till 2001.
These funds were actually used to improve the ways and means
situation of the state. Often the states did not make adequate
budget provisions for infrastructure spending, despite higher
loans sanctioned by the RIDF. Inadequate provisions have
led to delays in completion of many projects. Cost overruns
are only around 7.8 per cent but time overruns are rampant
across RIDF funded projects. The cost and time overruns do
not account for benefits lost on account of delayed completion,
and are underestimations to that extent.
While the RIDF was conceived with the right ends in
mind and was funded appropriately from shortfalls in priority
sector lending, it has in effect been reduced to just another
pool of funds available to state governments. Data does show
that the fund sanctions were weakly linked with the state fiscal
situation, which can be called an improvement over direct
allocations by the central government.
Given that NABARD is a specialized funding agency with
appraisal and monitoring capabilities, RIDF should have
enhanced the governmental system’s understanding of rural
54 India Infrastructure Report 2007

Box 3.2
Rogi Kalyan Samiti

Rogi Kalyan Samitis (RKS) are registered societies constituted in the government health delivery system in Madhya Pradesh, as an
innovative mechanism to involve the people’s representatives in the management of the hospital with a view to improve its functioning
through levying user charges. The first RKS was constituted in 1997 in Indore. RKS have been set up at four levels of hospitals including
district hospital, civil hospital, community health centre and primary health centres. It is a community-focused initiative with an
executive and a general body, which have membership from the local elected representatives, bureaucrats, doctors, donors, and community
representatives. Clear role-definition, transparency and accountability for the management, in addition to the budgetary allocation to
the hospital, have transformed these into vibrant institutions, which cater to the needs of the poor effectively. The Samiti is allowed to
levy fees for hospital services in government hospitals, and this revenue accrues to the Samiti, not the government. The revenue can be
applied to a defined set of activities as decided by individual samiti. Among the various uses are purchasing of consumables such as
medicines, reagents, X-Ray plates, ensuring of regular maintenance, repairs, cleaning, security, and hospital waste management. The
government budgetary allocation to the hospital is used to meet the wage bill. This has led to substantial improvements in service delivery,
in the sanitation and work environment of the hospital, and a reduction of cost of health care to the poor, who were earlier compelled
to purchase consumables from private shops.

Box 3.3
Rural Infrastructure Development Fund
K.G. Karmakar

The GOI established a fund to be operationalized by NABARD in the Union Budget 1995–6 called the RIDF which was set up within
NABARD by way of deposits, from Scheduled Commercial Banks operating in India, to the extent of shortfall in their agricultural
lending subject to a maximum of 1.5 per cent of the Net Bank Credit. The scheme has been continued with substantial allocations in
the successive Union Budgets and NABARD has partnered various State Governments in the creation of rural infrastructure. Initially,
the mandate under the Fund was to support projects in the irrigation sector where substantial investments had been made but which
could not be completed owing to resource constraints of the State Governments. Over the years, the coverage under RIDF has been
made more broad based in each tranche and at present, a wide range of 31 sectors under RIDF XII are being financed (Table B3.3.1).

Table B3.3.1
Eligible Activities under RIDF XII
1. Rural Roads;
2. Rural Bridges;
3. Minor Irrigation Projects/Micro Irrigation;
4. Soil Conservation;
5. Flood Protection;
6. Watershed Development/Reclamation of waterlogged areas;
7. Drainage;
8. Forest Development;
9. Market Yard/Godown, Apna Mandi, rural haats and other marketing infrastructure;
10. Cold storage, Public or Joint sector cold storage at various exit points;
11. Seed/Agriculture/Horticulture Farms;
12. Plantation and Horticulture;
13. Grading and certifying mechanisms such as testing and certifying laboratories, etc.;
14. Community irrigation wells of irrigation purposes for the village as a whole;
15. Fishing harbour/jetties;
16. Riverine Fisheries;
17. Animal Husbandry;
18. Modern Abattoir;
19. Medium Irrigation Projects;
20. Mini Hydel Projects;
21. Drinking Water;
 Financing of Rural Infrastructure 55

22. Infrastructure for Rural Education Institutions;

23. Public Health Institutions including mobile health clinics;
24. Construction of toilet blocks in existing schools, where necessary, specially for girl students, so as to improve the amenities
available in schools;
25. ‘Pay & use’ toilets in rural areas;
26. Major Irrigation Project (only those projects already sanctioned and under execution);
27. Village Knowledge Centres;
28. Desalination plants in coastal areas;
29. Small Hydel Projects (up to 10 MW);
30. Infrastructure for Information Technology in rural areas; and
31. Construction of Anganwadi Centres.

The annual allocation of funds announced in the Union Budget has gradually increased every year from Rs 2000 crore in 1995–6
(RIDF I) to Rs 10,000 crore for 2006–7 (RIDF XII). The aggregate allocations have reached the level of Rs 60,000 crore. Further, a
separate window under RIDF has been created with a corpus of Rs 4000 crore for partly funding the rural road and bridges components
of the Bharat Nirman Programme in 2006–7.
NABARD, as the manager of the Fund ensures even and equitable distribution of the RIDF corpus to all states. The allocation of
funds among the states is made on the basis of the geographical area of the state concerned, the percentage of rural population, the
stage of infrastructure development index, and trends in sanction/disbursement under earlier tranches of RIDF. Deviation from this
norm becomes inevitable when sufficient number of projects are not received from some of the states in time.
The GOI approves the list of eligible activities for project formulation by the state government to be financed under each tranche.
Projects received from various departments through the Finance Department of the state governments, are sanctioned by the Project
Sanctioning Committee of the Board of NABARD after detailed technical, financial, and economic appraisal of the projects. The size
and spread of the projects being large, implementation period of 3 years is provided and need-based extension is also given. The rate
of interest applicable on lending to the state government and payable to Commercial Banks on their deposits are also decided by the
GOI/RBI. The loan repayment period presently is extended over 7 years, including a grace period of 2 years. Loans are released by the
respective Regional Offices of NABARD on a reimbursement basis after satisfactory completion of the prescribed formalities and
progress in implementation of the individual projects. A start-up advance may also be granted to State Governments to facilitate
expeditious commencement of the works.

Table B3.3.2
Tranche-wise Sanction, Disbursement, and Completion of Projects (Rs crore)
Project
Number of Number of Number of Completion Number of
Amount Sanctioned Ongoing Completed Reports Non-starter
Tranche Sanctioned Disbursements Projects Projects* Projects Received Projects
RIDF I 1,906.21 1,760.87 4,168 37 4,131 4,117 0
RIDF II 2,666.87 2,397.95 8,334 758 7,576 7,498 0
RIDF III 2,733.82 2,453.53 14,346 333 14,013 13,399 0
RIDF IV 2,903.32 2,482 6,172 739 5,433 4,621 0
RIDF V 3,477.16 3,032.66 12,254 1,478 10,776 9,559 85
RIDF VI 4,525.36 3,850.83 43,354 2,063 41,291 39,648 45
RIDF VII 4,657.65 3,756.82 24,987 12,118 12,869 11,355 1,261
RIDF VIII 6,009.36 4,440.34 21,012 10,492 10,520 7,643 1,783
RIDF IX 5,599.18 3,387.47 19,605 5,772 13,833 7,520 393
RIDF X 8,289.75 2,967.79 59,979 58,870 1,109 850 2,934
RIDF XI 8,514.33 807.08 30,440 30,314 126 0
Total 51,283.01 31,337.34 244,651 122,974 121,677 76,975 6,501
Note: * Includes non-starter projects separately indicated in the last column of the table.
Source: Computed by author.
56 India Infrastructure Report 2007

With the close of RIDF XI in 2005–6, the cumulative number of projects sanctioned during the last eleven years (1995–6 to
2005–6) stood at 244,651, entailing RIDF assistance of Rs 51,283 crore. Of the total assistance sanctioned 53 per cent has been
accessed by six states (Andhra Pradesh ranking first (14 per cent), followed by Gujarat and Uttar Pradesh (9 per cent each) and Tamil
Nadu, West Bengal, and Madhya Pradesh (7 per cent each). The balance was availed by the remaining twenty-two states. Tranche-wise
details of projects sanctioned, amount disbursed, projects completed and so on as on 31 March 2006 are given in Table B3.3.2.
The aggregate disbursements under all the projects sanctioned under RIDF stood at Rs 31,337.34 crore as on 31 March 2006. All
the projects sanctioned in one tranche do not get completed during the tranche period and the operative period for disbursement
under the tranche is extended based on the requests of the state governments. Out of the total 2.45 lakh projects sanctioned so far,
121,677 projects were completed by the end of 31 March 2006.
Once completed, the projects sanctioned are expected to provide irrigation to 107.92 lakh ha, 2.02 lakh km of roads, 3.69 lakh metres
of rural bridges, 70.5 MW of power, 6337 Primary Health Centres, 61,956 schools, and drinking water to 6229 villages and save 22,334
lakh units of power. There are non-starter projects6 which account for 2.6 per cent of the total projects sanctioned (2.45 lakh).
Prior to RIDF, infrastructure projects were funded out of the budget resources by the State Governments in a sporadic manner and
many projects were even abandoned midway, thereby locking in scarce public funds. RIDF helped to introduce a project mode in the
infrastructure funding by the state governments. Financing of rural infrastructure under RIDF became project-oriented, based on
compliance with technical feasibility and economic viability in conformity with the policies and priorities of the State Governments.
The Governments started viewing RIDF projects as investment activities to create productive assets which were expected to realize
benefits over an extended period of time.
RIDF postulates adequate annual budgetary provisions to meet various project expenses and repayment obligations by the project
implementing departments of the state governments. Further, loans are released under the sanctioned projects after ensuring the
quantity of the work completed, on a reimbursement basis. This arrangement creates a sense of accountability and involvement by the
implementing departments. The project approach enables governments to ensure punctual completion of projects, thereby saving on
time and cost overruns.
Through the RIDF mechanism, the endeavour of NABARD has been to inculcate a sense of discipline in project management by the
implementing agencies, by focusing on scientific project appraisal and quality monitoring of works execution. Apart from the monitoring
at the state government level, implementation of the sanctioned projects are subjected to close on-site and off-site monitoring by NABARD
including select major projects monitored independently by reputed institutions like ORG-MARG, TCS, L&T, CES Ltd., and so on.

CHALLENGES AHEAD
Despite reasonable success, the RIDF also had its fair share of constraints as is to be expected in rural infrastructure projects, mostly at
the level of the state governments, with difficulties in land acquisition, obtaining statutory clearances, awarding technical and
administrative approvals and inadequate budgetary provisions which had, at times, slowed down the pace of project implementation.
Inadequate capacity of the smaller states in project formulation, execution, and monitoring, has also resulted in skewed distribution of
RIDF sanctions, across geographical boundaries. NABARD has been constantly interacting with the state governments to provide
adequate and timely budgetary support, expedite administrative and technical approval as also environmental/forest clearances, ensure
necessary legislation for formation of user groups, such as Water Users’ Associations and for collection of user charges for reducing
their financial burden and to enhance RIDF effectiveness.
In the Union Budget 2006–7, it was announced that specified projects under Public–Private–Partnership (PPP) Model have now
been made eligible to access RIDF Funds. State governments have been requested to provide feedback on the scope available for
operationalizing projects under the PPP framework. NABARD is in the process of exploring prototypes in select areas on a pilot basis.

Note: Views expressed here are those of the author of the box.

infrastructure financing issues. But the manner, in which state
governments have treated the RIDF, merely as another source
of funds, does not indicate that much learning has been
acquired. If the RIDF had led to a better understanding of
risks in financing rural infrastructure, it could have shared
such analysis with other financial institutions and there could
have been greater private sector interest in rural infrastructure
investments. The risk taking abilities of actors in the system
6A project is classified as non-starter if its implementation does
not commence within six months from the date of release of start-up
advance from NABARD.
have not changed substantially and the RIDF has not quite
taken rural infrastructure financing to the next logical level.
In some ways, therefore, the RIDF despite having filled a crucial
gap, has not fundamentally influenced the paradigm for
financing rural infrastructure.
Other Public Financial Institutions
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)
SIDBI has schemes designated for developing Industrial
Infrastructure for Small Scale Industries (SSI) and Integrated

Infrastructure. The former caters to small industrial parks,
common facilities, warehousing and market facilities of up
to Rs 10 crore and the latter caters to cluster development by
creating or upgrading infrastructure facilities including water,
power, telecom, industrial effluent plants, and others of up
to Rs 5 crore in rural and backward areas. These schemes had
provisions of grant funding from the Central and State
governments and lending by SIDBI, but do not seem to have
made a dent in infrastructure financing in India. SIDBI could
have played a role complementary to NABARD–RIDF in
the interests of creating an enabling environment for rural
non-farm sector enterprises but has mainly confined its work
to urban clusters.
HOUSING AND URBAN DEVELOPMENT
CORPORATION (HUDCO)
HUDCO is a national financing agency with a dedicated
focus on housing for economically challenged sections of
society. The non-housing portfolio of HUDCO includes
sanitation and water supply, sewerage, drainage, solid waste
management, roads, and bridges. While the infrastructure
financing is increasing as a proportion of HUDCO’s portfolio,
the concentration is entirely urban. While HUDCO has lent
over Rs 260,000 crore for infrastructure projects in urban areas,
it currently provides finance only for shelters in rural areas.
The expertise and resources of an apex institution can be better
utilized by enhancing its scope to include rural infrastructure
as well.
NATIONAL COOPERATIVE DEVELOPMENT
CORPORATION (NCDC)
NCDC was established in 1963 under the Ministry of
Agriculture. It extends term loans to cooperatives for creation
of infrastructural facilities like godowns, cold storages,
equipment financing, transport vehicles, boats, and other
tangible assets and also for establishment/modernization/
expansion/rehabilitation/diversification of agro-processing
industries. The scope of the NCDC’s activities has been
extended by an amendment to its Act, to include assistance
for certain notified services in rural areas like water conservation,
irrigation and micro irrigation, agri-insurance, agro-credit, rural
sanitation, animal health, and so on.
Construction of Cold Storages and Ice Plants—The NCDC
provided assistance to build 313 cold storages (including
capacity expansion) with a total capacity of 0.9 million tonnes
as on March 2004. Of these, 285 cold storages, with a total
capacity of 8.46 lakh tonnes, have been completed. The
Corporation has, so far, provided about Rs 139.58 crore for
establishment of cold storages. The assisted cold storages are
mainly for storage of potatoes, though items like fruits,
tamarind, spices, and milk products are also being stored.
Financing of Rural Infrastructure 57
Packing and Grading Sheds and Godowns—The NCDC
provided assistance to cooperatives at the primary level as
well as at the mandi level and for the establishment of fruit
and vegetable processing units. As on March 2004, 48
cooperative fruit and vegetable processing units were sanctioned
out of which 39 have been installed. The NCDC has sanctioned
Rs 41.3 crore for establishing such units.
Marketing Infrastructure including Retailing—The NCDC
provided a total investment of Rs 37.29 crore to assist 1431
cooperatives towards infrastructure and business development.
The projects have helped in creating necessary infrastructure
in the rural areas. Under the projects, 28 million tonnes of
godown capacity has been created at the primary society level,
besides which 212 strong room/lockers and 352 deposit
counters have also been established for mobilising the deposits
in the rural areas and starting mini banking activities through
village cooperatives.
While the financing efforts of NCDC are welcome,
particularly as they go to financing user groups (exactly
what cooperatives are supposed to ensure) the overall
financing by NCDC in comparison to the unmet demand is
rather small.
Private Funding
With public sector resources under pressure due to prior
commitments of the government on salaries, pensions and
interest payments of past borrowings, there is need to raise
funds from private sources for infrastructure creation. The
economic reform process has not quite extended to rural India
yet. Not surprisingly therefore, private funding for rural
infrastructure has neither been systematically invited nor has
it come forth save some experimental money, largely at the
behest of development organisations. Public financial resources
and the government’s administrative capacity are overburdened,
and private sector participation will help ease the situation
in rural infrastructure.
The private sector stayed away from rural infrastructure
daunted by long gestation periods, lack of information on risk
profiles, perception of inadequate financial returns, regulatory
restrictions, and ambiguity. Other hurdles include relatively
low income density (income per square kilometre, which is
depressed both by lower income per household in rural areas
as compared to urban areas as well as lower number of households
per square kilometre) and high incidence of subsidised (though
poorly performing) services leading to unchecked pilferage,
as in the case of electricity. While the Government admits to
limitations of budgetary support as the sole source of funding,
and is taking steps to invite private funds for infrastructure,
these steps are mainly for large industrial infrastructure.
Attracting private capital for rural infrastructure requires the
58 India Infrastructure Report 2007
policy-makers to rethink their approach and strategy and play
a proactive promotional role.
Minor irrigation infrastructure has been significantly funded
by private money, supplied through institutional sources and
accessed by individuals. Groundwater, which forms the source
of a large proportion of minor irrigation supply, is largely
accessed through dug wells and tube wells, much of which is
privately financed. Factors which contribute to rapid devel-
opment of groundwater structures include new agricultural
technology, better access to credit, and expansion of rural
electrification. The down-side of these supportive factors and
their largely unregulated expansion is that states such as
Punjab, Haryana, Rajasthan, and Uttar Pradesh have already
over-exploited their groundwater.
There have been private sector initiatives for construction
of household toilets. Overall, however, the private sector’s
involvement in O&M in the water and sanitation sector is
still very limited. One of the reasons is that maintenance is
usually considered a state responsibility. There are no cases
of organized large-scale private involvement in water supply.
In health and education, the involvement of the private
sector is widespread at all levels, be it the village ‘medical
practitioner’, the entrepreneur who runs a one-room ‘English-
medium’ school or the large super-speciality hospitals and
‘deemed universities’ for professional education. One sector
where private investment overtakes that from public sources
is storage infrastructure for perishable and semi-perishable
commodities. Eighty per cent of the cold storages, accounting
for around 94 per cent of the total capacity countrywide, are
from the private sector.
Apart from easing the fiscal position, there is a belief that
with private sector participation, investments will be better
managed with likely efficiency and productivity gains. The
reform process for the electricity sector in India has shown
that creating incentives for state-owned enterprises is difficult
and the outcomes are far from certain.
Overall, both unfulfilled demand of infrastructure services
and constrained supply of finance, management and governance
are factors which discourage private capital from rural infra-
structure financing. Existing specialized public institutions
such as the RIDF need to play a pioneering role in catalysing
these investments. We need to take cues from private in-
vestments in urban infrastructure for the poor in devising
innovative solutions to suit specific local requirements. These
institutions can play a larger role in formulating risk profiles
and addressing other issues related to investment in rural in-
frastructure.
Multilateral Agencies
Multilateral aid agencies such as the Asian Development Bank
(ADB) have schemes designed to lend to specialized institutions
at the apex level, which on-lend to retail institutions to enable
delivery of market-based housing finance to low income
households. ADB offers a combination of long-term loans
and technical assistance grants to financial institutions such
as HUDCO, IDFC, ICICI, and NHB who are further
entrusted with on-lending of these funds to institutions which
work more closely with poor communities.
The World Bank has also extended several loans to state
governments for establishing irrigation projects and command
area development endeavours, rural roads networks and
agricultural produce market yards, apart from large power
sector projects which also benefited rural areas to some extent.
The World Bank has also funded the Karnataka Rural Water
Supply Project in the mid-1990s, while experimenting
with several models related to community participation and
user fees.
Insurance Companies
Insurance companies potentially have large pools of funds,
and their long-term maturity matches the investment needs
in infrastructure. Currently, except for the gigantic government-
owned Life Insurance Corporation (LIC), the total amount
of investible funds is still small with private life insurance
companies. As per the regulations of the Insurance Regulatory
and Development Authority, 15 per cent of the investments
of any insurance company should be in infrastructure. The
LIC alone had plans to invest Rs 10,000 crore in infrastructure
in 2005–6.
Commercial Banks
Commercial bank deficit in sectoral lending to agriculture is
called forth by the GOI into the RIDF. This, in some ways,
is their contribution to rural infrastructure lending, and a
convenient one at that because the risks and transaction costs
are very low. The direct lending by commercial banks to
infrastructure in rural areas receives purpose-wise refinance
from NABARD. In the year 2004–5, the rural infrastructure
loans disbursed by NABARD to Commercial Banks, RRBs,
Cooperative Banks included minor irrigation of around Rs
679 crore, land development of Rs 291.3 crore, storage/market
yards of Rs 32.3 crore across all these banks, and forestry
development of Rs 7.1 crore.
That this is largely all that commercial banks have to offer
to rural infrastructure is at one level understandable, because
infrastructure financing requires a completely different set of
skills from other types of credit. The existence of an extensive
rural banking network, however, makes a worthy case for
these banks to engage in infrastructure financing in rural areas.
These banks need to be incentivized to finance infrastructure
with innovative delivery mechanisms closely linked with the
 Financing of Rural Infrastructure 59

Box 3.4
Revival of Lift Irrigation Schemes

After the enactment of the Andhra Pradesh Farmer Management Irrigation Systems Act, 1997, the AP Irrigation Development
Corporation (APIDC) handed over nearly 200 defunct lift irrigation schemes (LISs), typically with a command of 1000–2000 acres,
to newly elected water users’ associations (WUAs) of farmers. BASIX, a livelihood promotion organization which pioneered the micro-
finance movement in India, jointly with PRERNA, an NGO, worked to revive one of these, in Gudebellur village along the banks of
the Krishna river in Mahabubnagar district of AP.
BASIX gave a loan to the WUA for repairs of the electric pumps and channels and reconnection of electricity. The result, with an
investment of Rs 2 lakh, was the revival of the LIS worth Rs 2 crore! In the first year, 1998, the farmers could irrigate about 650 acres
out of the potential 1200 acres. The work was taken by PRERNA to six other LISs. In 2003, the APIDC set up a programme for the
revival of all the 200 plus defunct schemes.

community and to extend finance with working arrangements
with other agencies such as microfinance institutions.
Micro-finance Institutions
Within infrastructure, micro-finance institutions (MFIs) in
India have experimented with financing largely household
level facilities including water and sanitation systems, shelter,
and shelter improvement. Some MFIs have successfully lent
for common facilities and revival of community level infra-
structure such as lift irrigation infrastructure, in combina-
tion with some grant funds to undertake capital repairs.
Association of Sarva Seva Farms (ASSEFA), an NGO in
Tamil Nadu, has established several types of community
infrastructure in rural areas of the state. BASIX gave loans to
farmers to revive lift irrigation structures in Andhra Pradesh
(Box 3.4). BASIX has also designed a water and sanitation
loan product which enables poor households to access piped
water supply and build toilets. In infrastructure finance the
role of MFIs is primarily to finance the household level demand,
rather than to finance complete infrastructural facilities at
the village level.
The strength of MFIs is close community contact, as a
result of which they are in a position to be more demand-
responsive than other agencies. Also their understanding
of the risk profile of customers and appropriate delivery
mechanisms is inevitably sharper enabling them to provide
innovative financing schemes for purposes of housing, water
and sanitation, energy, market yards, cold storages, milk
chilling plants, and so on.
In India, most MFIs have an NGO background, and to
that extent are well equipped in carrying out the grassroot
developmental work to ensure effective solutions for financ-
ing rural infrastructure. Moreover, MFIs can act as useful
conduits for ‘soft’ funds for infrastructure financing, without
contaminating the user community with effect of subsidies.
Infrastructure creation is complex and often beyond the
technical capacity of the target community, which necessitates
the involvement of other stakeholders such as energy companies,
water and sanitation experts, local governments, and so on.
Simple products such as house construction and house repair
loans have been given successfully by NGO/MFIs such as
ASSEFA and IASC. More complicated products however,
require combination financing and management, for which
MFIs need to partner with other agencies. Developmental
organizations such as ASSEFA have designed multiple
infrastructure products, each financed by a combination of
relevant actors.
It is important to recognize the limitations of microfinance
in infrastructure financing, as MFIs typically offer credit
which is small in size and has a short tenure. The average
term of a microfinance loan is one year and the total lending
by all MFIs in India by the end of March 2006 is around Rs
4000 crore covering around 4 million households. Given the
unmet demand for infrastructure finance in India, the current
outreach and resources of MFIs are miniscule.
The creation of infrastructure on a substantial scale, which
often requires lumpy investments, is essentially beyond the
purview of microfinance. For financing community
infrastructure projects beyond the household level facilities,
funds with medium to long term tenures are needed. In most
cases, the MFI does not have access to such funds and external
funds of such tenure would be necessary to avoid the term
mismatch. The value that MFIs can add is to develop small
success cases and demonstrate these innovations in rural
infrastructure financing to the mainstream players.
Community Financing
The common assumption that the poor cannot or will not
pay for infrastructure services is increasingly being proven
incorrect. There are studies which show that rural customers
dedicate a larger proportion of their disposable incomes to
infrastructure services compared with their urban counterparts
(Waughray and Moran, 2002). Thus it is possible to convince
the community to contribute, provided there is a locally
60 India Infrastructure Report 2007

Box 3.5
Community Financing in Building Infrastructure

COMMUNITY MANAGED RURAL MARKET PLACES, TAMIL NADU

ASSEFA has been engaged in development of rural markets to serve about ten to fifty villages. The communities participate in
donating the land for setting up the market, provide free labour and locally available materials. A separate market management
committee is established with the elected members from the local community to manage the operation and the fees collected from the
retail sellers to meet the recurring expenditure. ASSEFA’s assessment suggests that given the high demand and willingness to pay by the
farmers and retailers a financially viable model is possible.

LOCAL MULTI-PURPOSE COMMUNITY HALL, TAMIL NADU

The hall has been built in Manithotam, Tamil Nadu. It is owned by the local community and is used for multiple purposes such as
weddings, family celebration, and community functions. It is engaged for about 100 to 120 days in a year and a commercial charge is
levied for its use. This is also initiated by ASSEFA in different locations as revenue generation for the local community.

A COOPERATIVE DAIRY COMPANY, TAMIL NADU

ASSEFA has facilitated the establishment of dairy infrastructure such as chilling plant and milk processing plants in Kanchipuram,
Vellupuram, Chinnasalem districts in Tamil Nadu. The surplus milk is collected daily by 3000 to 5000 women and is processed,
packaged, and sold in the semi/urban areas on a profitable basis. A Section 25 Company has been established with locally elected
representatives on the Board of Directors. Qualified persons have been employed to manage the operation with a professional approach.
Such initiatives have been established in 5 areas, each benefiting about 3000 to 5000 rural women. The local community has raised
external loans for upgrading/expansion of the company to benefit more women under this venture.

SCHOOL INFRASTRUCTURE, TAMIL NADU

ASSEFA has established over 400 rural schools in different parts of Tamil Nadu. The parents of children from the local community
formed a School Committee to manage the school. The school committee ensures quality education to the children by appointing
qualified teachers and providing pucca infrastructure. To meet the expenditure they have developed a revenue model based on fees
collected from the children, extra fees collected from community functions, donations raised, as well as resources tapped from the
government. This income also helps to improve or expand the school infrastructure.

trusted organization such as an NGO or a good panchayat.
Community contribution is a meaningful strategy, not only
from the perspective of generating additional funds but also
for better management and governance of community projects.
Community contribution brings a sense of ownership and leads
to better management of commonly owned infrastructure.
The user community could play a significant catalysing role
in inviting investor confidence by contributing funds. The
community stake ensures that if systems are built appropriately
the community can hold the other stakeholders accountable
and demand proper service.
Community cost sharing needs to be done based on sus-
tainable financial rules. While several government programmes
do have community cost sharing modules in their design,
often low levels of community contribution are arbitrarily
fixed leading to failure in generating adequate stakes for the
community. The concept of community cost sharing has to
be translated into actual strategies, including building partici-
can lead to a situation where they use borrowed funds to
meet their contribution and ‘participation’ becomes a burden
rather than a step to empowerment.
On the question of cost recovery through user charges, it
is interesting to note the following data from a World Bank
study in India. The World Bank has made assessments of costs
associated with poor rural water supply services for six states.7
The opportunity cost of time spent in collecting water is Rs
12 per household per day while that for time spent due to
open defecation practices stands at Rs 9 per household per
day. In addition, the health costs due to diarrhoea and
gastroenteritis diseases are likely to be around Rs 300 per
household per year. This opportunity cost totals up to Rs 21.8
per household per day, close to half the daily income of a BPL
household with one income earner. These estimates point
towards the ease with which the community is likely to opt for
7 Figures based on household surveys of World Bank Project

patory structures at the local levels. Mandatory contribution by appraisal documents. States covered are Uttaranchal, UP, Karnataka,
the community without adequate education and mobilization Kerala, Maharashtra, Tamil Nadu (World Bank, 2006b).

payment of user fees in a scenario where the provision of the
water supply service can eliminate the costs associated with
existing practices. The study shows that the O&M cost recovery
from beneficiary communities is generally in the range of 10
to 50 per cent for water services. The O&M cost recovery
for piped water schemes is much higher than for handpump
and standpost schemes (World Bank, 2006b).
ASSEFA’s experience in Tamil Nadu in creating rural
infrastructure with community contributions and stake is
encouraging and shows high demand and willingness to pay
for such infrastructure (Box 3.5).
WORKABLE INFRASTRUCTURE FINANCING MODELS
FOR RURAL INDIA
With the liberalization of the Indian economy in the early
1990s, the regulatory environment is increasingly supporting
experiments in private financing of infrastructure. The 73rd
CAA has cleared the path for empowering local bodies in
decision-making and choice. As a result we also see examples
of community participation in infrastructure service provision
and financing. The progress of private sector and community
involvement is halting, as the political and economic changes
needed to accommodate and encourage their participation
are slow. In this context, we take a closer look at partnership
models in infrastructure (mostly urban), along with examples
of similar attempts in India or abroad to explore possible
options for financing rural infrastructure.
Kinds of Partnerships/Contractual Arrangements
Contractual arrangements between the public and private
sector take many forms, and these infrastructure partnerships
can largely be classified based on the levels of risk, regulations,
and the nature of the infrastructure.
1. Service contracts, as short-term engagements, usually
outsource specific operations or maintenance of existing
infrastructure. This inherently limits the scope of private
involvement but also limits the risk associated with
providing the service.
2. Management contracts are better suited for privatization
of stable infrastructure. While retaining ownership, this
arrangement outsources the entire operations and
maintenance to the private sector. Management contracts
are also used to gradually move infrastructure towards
privatization.
3. Leases, while similar to management contracts in most
respects, also transfer the assets and their streams of income.
This effectively increases the private partner’s exposure to
the risks of commercial operation. Leases generally provide
Financing of Rural Infrastructure 61
gains in operational efficiency and service but provide little
incentive or framework for expansion of infrastructure.
4. Concessions place the responsibility of investments for
expansion on the private partner while the public partner
retains ownership of the assets. As private partners take
on more and more responsibility, appropriate regulations
are needed, and the terms of agreement need to be clearly
defined.
5. Build-Operate-Transfer (BOT) model and its many varieties
differ from concessions in terms of asset ownership. The
private partner generally builds and operates the infrastructure
for a significant period of time before transferring the asset
to the government. There is flexibility in BOT financial
arrangements to mitigate the demand risk for both parties.
Depending on the type of infrastructure and regulatory
framework, the public partner agrees to cover a certain level
of demand or a per unit charge for consumption and related
expenses, thus varying the exposure to demand generation
for both the private and public partner.
6. Finally, there is divestiture in which the assets are completely
owned by the private partner. While the government is
not exposed to any financial risks thereafter, it must have a
mature regulatory framework to manage and monitor
privatized infrastructure. Especially in the context of
rural infrastructure, systems must be in place to encourage
expansion of the infrastructure to remote areas (Table 3.5).
In the rural context, due to uncertainty of demand and
high risk perception, it is difficult to see the private sector
stepping in, in any of these forms yet. It is therefore, essential
for most models to have a strong community involvement
component. Active participation brings a better understanding
of the end users’ consumption habits, the local context of fee
collection, and involvement of the community in the design
and maintenance of infrastructure which are essential
components for the success of any rural project. Franchising
may also be explored as a way for private investments to
empower entrepreneurs in the local communities to provide
operations and maintenance for infrastructure. This effectively
places the responsibility of ongoing service quality and cost
within the local community under the broad supervision of
the infrastructure developer.
PPP Options and their Applicability in Rural Context
Public-private partnerships (PPP) in the rural context are still
in their nascent stages. Therefore, it is too early to label specific
models that will work and those that will not. Given the
complexity of the rural context, creating space for private
financing and the challenges of sustaining collaborations have
led to mixed results so far. However, it is a worthy exercise to
62 India Infrastructure Report 2007

Table 3.5
Allocation of key responsibilities under the PPP options
Option Asset Operations Capital Commerical Duration
ownership and maintenance investment risk
Service Public Public and Public Public 1–2 years
contract private
Management Public Private Public Public 3–5 years
contract
Lease Public Private Public Shared 8–15 years
Concession Public Private Private Private 25–30 years
BOT/BOO Private and Private Private Private 20–30 years
public
Divestiture Private or Private Private Private Indefinite
private and (may be
public limited by
licence)
Source: ‘Toolkits for private participation’, 1997.

explore partnerships that might work or have worked for
various types of infrastructure taking into account the
economic, social, and political aspects.
Water
For areas that receive low rainfall, large structures such as
dams and their associated distribution networks (which tend
to be more expansive than rain-fed areas) provide water for
the rural population, thus requiring more financing. Generally,
in the local context, water related infrastructure naturally takes
the form of a local monopoly. In the case of extensions from
existing networks, it can be part of a larger monopoly. In India,
most water related infrastructure is financed and managed
by the government. There are political implications around
collecting cost covering tariffs for providing water related
services (Vaidyanathan, 2003).
The case of the Pani Panchayats in Orissa serves as a good
example of decentralization of operations and management
in water infrastructure. Pani Panchayat was born out of need
for community involvement, maintenance, and collections
for water usage. The programme is a local community
framework conceptualized by the state of Orissa to serve the
end user through operations and management and tariff
collections. Funds are raised directly from the end-user
community in the form of share capital and membership fees,
to sustain operations. Though the Pani Panchayats initially
only supervise the operations and management of the tertiary
system (portion of infrastructure directly interfacing with
the end user), as the programme progresses, they will take
on larger portions of the infrastructure and also participate
in collections.
It is worth noting that local NGOs played a critical role
in creating awareness on this government initiative in the
communities and assisted them in the registration and
formation of the Pani Panchayats. The partnership between
the state government, community end users and NGOs
essentially took the form of a management contract. Despite
the teething problems in decentralization and capacity building
and organization of community based bodies, the productivity
gains and corrections in wastage have been significant in the
early years of this scheme (Rath, 2003).
Build Operate Train Transfer (BOTT) is a tri-sector
approach that consciously includes civil society organizations
in public-private partnerships. To cite an international example,
the South African government formulated the BoTT model
that incorporated the strengths of all three protagonists. The
government provided the funding for infrastructure, the
private sector brought technical expertise, and the civil society
organizations provided the community inputs into demand
and design, as well as operation and maintenance costs from
the community. Each BOTT functions as a for-profit
organization. The consortium of the various partners bids
for contracts to take on these projects from the government
(Wadell, 2000). While it has faced its share of challenges in
capacity development and fee collection, this approach has
taken a much more holistic approach by inclusion of civil
society organizations.
Sanitation
Sanitation, unlike water, demonstrates a greater social benefit
to the larger community than the direct visible economic impact
to each family. In this sector, therefore, awareness campaigns
 Financing of Rural Infrastructure 63

Box 3.6
Rural Health and Environment Programme in Orissa

Gram Vikas operates the RHEP in 12 districts of Orissa covering 105 villages, working with the marginalized groups to improve access
to basic sanitation, health, and livelihoods. The RHEP’s main offering is a covered toilet and bathing platform in each house, and
piped water supply. Gram Vikas works through an approach in which each household is persuaded to make a contribution of Rs 1000
in a village corpus fund, which is put in a bank fixed deposit and the interest from that is used for meeting the maintenance costs.
Only after 100 per cent of households make a contribution to the corpus, does the work begin. In this, the villagers contribute
labour and local material such as sand and gravel. The costs of purchased items like cement and pipes and pumps, are met by Gram
Vikas through donor funds. The villagers then take over the management of the system with occasional help from Gram Vikas.
Additional work such as setting up a fish tank or planting trees to add to and protect the village forest is done around this work. The
RHEP won the Global Development Network Award for 2003.

are required to highlight the importance of sanitation for the
general well-being of the community. Gram Vikas, an NGO
in Orissa, initiated the Rural Health and Environment
Programme (RHEP) where it serves villages with 80 per cent
of the families below the poverty line. In the experience of
Gram Vikas, in order to generate participation from the villagers
in sanitation infrastructure creation, it was essential to build
drinking water provisioning into the project. Gram Vikas
operates by establishing a corpus fund for each village that
requires each family to contribute around Rs 1000 and this
money is kept in a bank for future expansions of the
infrastructure in the village.8 The villagers cover 30–40 per
cent of the cost, while the remaining funds come from external
grants. The government has considered participating in this
initiative through discretionary funds. The community is
involved in the design and decision-making process, as well as
capacity building for operations and maintenance (Box 3.6).
attempt to expand electrification outreach, took on an
ambitious and creative concessions-based engagement. This
and simultaneous industry wide privatization helped increase
the electrification of rural areas from 53 per cent in 1993 to 76
per cent in 2000. While privatizing the state-owned companies,
Chile chose to separate generation and transmission from the
distribution utilities. This helped build-in competition into
the distribution of electricity. The distribution utilities were
divided based on their region of operation and concession rights,
but these concessions were not guaranteed, and instead were
open to competition. The National Energy Commission was
formed at the central level to act as the main policy and
regulatory body which did tariff setting. The government pushed
the decision-making down to the regional level while focusing
more on funding, monitoring, design implications, and national
policy. At the outset, a special fund was appropriated to encourage
entry into rural areas that were most difficult to operate.

Electricity
Power sector infrastructure requires huge investments in
production and transmission. Besides the economic constraints
in rural India, transmission and distribution losses (both
technical and due to theft), political interference, and the
current financial disarray in the SEBs have deterred private
investments in rural areas. In order to fulfil demand,
alternative stand-alone forms of energy production have been
introduced despite higher per unit expenses. Though there is
little scope for this stand-alone infrastructure to be integrated
into the eventual extension of traditional grids, that often
seems to be the only viable alternative.
To gain some learning from international experience in
this regard, one may look at the case of Chile which, in its
8 This amount may seem a large sum for a village family, but it has
been done in several villages in Orissa by Gram Vikas. For details please
refer to the Gram Vikas website or contact Joe Madaith, the Director
of Gram Vikas.
Roads
The transportation sector and roads have widely been viewed
as an integral component for social and economic growth.
Construction of highways, bridges, and routes to urban
centres attract private investments in the form of BOT, BOO
(Build Own and Operate) and BOOT (Build Own Operate
and Transfer). The rural context requires significant, if not
complete subsidization for roads due to difficulties in recovering
cost from the community. Availability of resources has been
the main constraint in maintenance of roads. Some states are
adopting a levy of market fee on agriculture produce to generate
additional resources for road maintenance. In this context,
private sector maintenance of a 143 km state highway stretch
between Bhopal and Dewas has seen encouraging results.
There has also been some success in Latin America for
rehabilitation and maintenance of roads through service
contracts by forming localized community based micro-
enterprises, which require some capacity building.
64 India Infrastructure Report 2007
Prerequisites for Attracting Private Sector Finance
While the past few decades have demonstrated mixed results
in public–private partnerships in financing urban infrastructure,
the rural context of India presents a set of additional challenges.
The dispersed but vast population, a government induced
culture of artificially low tariffs, culture of non-payment for
services, and therefore, relatively high risk perception, have
kept private financing at bay. Attracting private investments
requires a competitive rate of return for the risks associated
with the investment.
Smart Use of Subsidies
Subsidies can be used as financial instruments to attract private
investments into rural infrastructure by effectively de-risking
the investment. Governments generally face conflicting
objectives and have to balance the tension between using
subsidies to reduce tariffs charged to customers and attracting
private investments (Mehta et al. 2003). Historically subsidies
for new infrastructure projects relent to budgetary pressure
during financial crisis. Chile’s electrification scheme demonstrates
the effective use of subsidies to create an environment of
competition, incentives for entering areas of higher risk, and
accountability for previous efforts.
Special purpose vehicles (like the BOTTs in South Africa),
allow stakeholders to assume genuine responsibility in projects.
This also allows private investors to isolate the risk of infra-
structure projects from other engagements. The necessary
policies should support SPVs when attracting private partners
to rural infrastructure projects.
Move towards Cost Recovery
The government must show a track record of maintaining
cost-recovering tariffs to attract private investment. It must
also demonstrate its commitment to realistic tariff setting and
enforcement for payment for services. Often, due to improper
design of subsidies, the tariffs collected for infrastructure
services do not properly represent the customer’s ability or
willingness to pay for service.
Demand Estimation
The demand of rural communities is often underestimated.
There are several reasons for such underestimation, including,
lack of data, lack of efforts at understanding demand, confusing
the government’s hesitation to charge with inadequate ability
to pay, history of bad service, and so on. Efforts are required
to highlight the actual demand of rural communities.
Underestimation of demand can be seen as a significant
deterrent to private investment. For the challenges associated
with underestimation in demand, community involvement
and exposure are essential, and it is expected that demand
itself will increase with greater exposure to the service.
Regulatory framework
Policy and regulation should help clarify roles of different actors
between financing, building, and operating infrastructure, and
regulation itself should be separate from all these. The
appropriate government body should help manage policy
changes and their impacts on infrastructure projects and ensure
transparency in bidding and other government related activities.
The state of Andhra Pradesh has created the Infrastructure
Development Enabling Act (IDEA) specifically to expedite
development of infrastructure and to facilitate issues between
the public and private partners.
Chile created the National Energy Commission (Comisión
Nacional de Energía, CNE) for technical and project monitoring
in the privatization of state-owned electricity companies. Chile
also allowed the private sector the autonomy to handle the
project details and operations. While some oversight and
regulatory mechanisms are required, excessive involvement
can be seen as a red flag to private investors. Therefore,
clarity in the roles of each partner is essential for attracting
private financing.
Commissions like CNE and policies like the AP–IDEA
Act, in the context of rural infrastructure, can provide sector
oversight and policy inputs that encourage public-private
partnerships and development of rural infrastructure.
Competition
Competition encourages efficiency, transparency, and ac-
countability. The non-exclusive concession system for elec-
trification in Chile, awarded distribution to utilities, provided
appropriate incentives to existing companies to protect their
market share and expand even though rural electrification
is costly.
Prerequisites for Attracting Community Finance
Infrastructure is likely to have some element of non-
excludability, some social and political attributes attached, and
some history of supply and user behaviour. Participation and
finance from the community will always require setting the
stage for collective action. To enable collective action from
the community for financing infrastructure, direct economic
benefit has to be demonstrated. This demonstration is likely
to remain abstract till the infrastructure is created and to that
extent the community is being asked to experiment.

Community Involvement
Community mobilization is the key to community engagement
in infrastructure services. It is a critical component in the
design, operation, and management of rural infrastructure.
Demand driven infrastructure services are likely to be adopted
by large numbers, and are, therefore, more likely to attract
community finance. The various sustainable PPP infrastructure
projects that have been successful often have strong representation
from the community in terms of the design as well as the
operation and maintenance of the infrastructure.
As demonstrated in the RHEP, water and sanitation
programme being run by Gram Vikas, Orissa, community
based organizations play a critical role in looking out for the
interests of the community and in mobilizing them. NGO/
CBO intervention is, therefore, crucial for engaging the
community, with financial and physical contributions.
Norms for user behaviour
Collective action will always be a function of how well the
norms for usership and user behaviour are defined. The
community has to be held jointly responsible (along with
the service provider) for efficient management and judicious
use of the infrastructure services. Once the other institutional
arrangements are in place, community finance will flow and
will ensure not only community participation but also
accountability from all parties involved.
Access to Microfinance
Access to microfinance can provide funding options to
households to meet last-mile infrastructure needs. If the
pipeline is provided by a subsidy, but the household water
connections and taps need to be paid for individually by the
community, microfinance is the ideal solution. In addition,
microfinance can also help stabilize fluctuations in income,
enabling the customer to pay for services on time. Many
government programmes provide reimbursement, but
communities have to mobilize funds up front. In such cases,
access to bridge finance for community groups is needed.
Contributions from the community can be sensitive to the
overall pattern of fund flows into a system. Lack of predictability
in fund flow, makes it difficult for the project to finalize their
work programmes, and therefore, inhibits upfront contributions.
Microfinance can help deal with such uncertainty.
Stepping-up from O&M cost recovery
to capital contribution
At the first level, the community needs to pay operations
and maintenance charges, and this itself requires significant
Financing of Rural Infrastructure 65
awareness building and community mobilization. Any capital
contribution from the community will follow a stage where
O&M costs are fully recovered.
Sound Institutional Arrangements
Once the user community is playing the role of a shareholder
or and is an active participant in the system, the system needs
to ensure that their rights as users and responsibilities as owners
are well defined. Their interface with the other actors in the
arrangement, such as the government or private sector agencies,
needs to be carefully designed. Contracting procedures need
to be simplified for greater community involvement, as has
been done in the Surat Municipal Corporation or for the
community toilets in Pune. In the rural context, this has been
tried in Andhra Pradesh, where several of women’s self-help
group federations have been awarded contracts for local road
and culvert construction.
Some Lessons from Successful Infrastructure Financing
Ownership and Management
Infrastructure should be managed like a business and should
be responsive to consumer demands. Poorly performing
infrastructure services are often marked by low levels of
financial autonomy and consequently, discipline. Private
sector participation in management, financing or ownership
will, in most cases, be needed to ensure a commercial
orientation in infrastructure (Raghuram et al. 1999).
Technology
The use of ‘appropriate’ technologies rather than the ‘best’
technology can attract consumers and reduce commercial
costs. In Chile, the electrification programme addressed the
challenges around rural electrification by encouraging both
traditional distribution as well as stand-alone technologies.
The small scale non-network service providers were given
subsidies to create space for private investment to extend
electrification to areas that could not be viably serviced by
traditional distribution.
Involving Community and Other Stakeholders
To optimize outreach of infrastructure services, as also to
ensure long-term maintenance of the asset, it is imperative
to have representation from diverse stakeholders in the financing
pattern of such infrastructure. The pattern of management
and governance are to a large extent derived from the manner
in which the asset is funded. Accountability and transparency
in the systems can be enhanced with a wider ownership base.
66 India Infrastructure Report 2007
Experiences from Ghana and Cambodia show that
sustainability of services requires financial allocations to be
firmly linked with empowerment and participation of
beneficiaries.
Need to Develop an Institutional Base
The more we penetrate the interiors of rural India, the more
crucial the management aspect becomes, due to the near
absence of institutions to support infrastructure in these areas.
In this respect, NGOs play an important role in facilitating
local finance mechanisms or acting as intermediaries between
microfinance organizations and the poorest clients.
Policy and Regulatory Framework
Failure to develop a clear separation of roles between the policy
maker and the provider may end up compromising both of
these routes of accountability. Holding the provider accountable
financially through consumer choice may be compromised if
the provider is ‘propped up’ by non-transparent subsidies.
Similarly, the failure to clearly separate the roles of the policy-
maker from the provider tends to draw local politicians into
the delivery of services rather than the establishment of
guidelines for service delivery (WDR, 2004).
Increasingly, the governments need to be responsible more
for creation of policy, regulatory frameworks, and encouraging
private involvement in the provision of infrastructure services.
The stance of the policy-makers needs to reflect the changing
reality which necessitates passing on the responsibilities to
the user community and private investors and have them
manage, maintain, and pay for it. Enhancing the involvement
of private sector and the community, while appropriately
manipulating the forces of competition and tools of
decentralization, can lead to more effective and efficient
implementation of the projects.
THE WAY FORWARD
Institutional Reforms to Attract More Financing
Funds will flow only to those investments where it earns a
risk-adjusted market rate of return. This axiom has to be
observed in any institutional arrangement that we design. This
means that first, all possible projects should be sorted in the
sequence of viability or rate of return. This necessarily means
investments will flow into those ventures which cater to a
sufficient number of customers with the purchasing power
and willingness to pay. Thus it is not a coincidence that
enormous amount of private capital has flowed into cellular
telephone network, because it meets these twin criteria.
For activities such as rural electric supply, where there is a
sufficient number of customers, but willingness to pay has
been distorted by decades of subsidized provision, institutional
changes would have to be made to rebuild willingness to pay.
In the long-run scenario, if revenue improvement could be
demonstrated on a steady basis, then it would be possible to
attract private investment. This was attempted in Orissa after
the unbundling of the OSEB into generation, transmission,
distribution corporations and privatizing of the distribution
companies (discoms). Unfortunately, the Orissa electricity
sector, post privatization, has run into great difficulties and as
a result the private sector is cautious about discoms. Such a
failure is not a conceptual refutation and this strategy should
be tried again with the learning gained from the Orissa
experience as a resource. Power distribution gained in the
Hoshangabad district of Madhya Pradesh demonstrates how
institutional structures can evolve to make a success story of
a rural power supply project (Box 3.7).
To attract finance (investment and working capital) all
actors, including the service providers, and the users need to
work jointly towards diminishing the risk profile of the
investment. This will often require them to be co-financers
as well. Robust institutional arrangements between the various
stakeholders are the essential underlying requirement for
finance to flow smoothly.
Institutional arrangements that the government endorses
in each sector will determine user and private sector finance,
as is evident from changing institutional arrangements in
irrigation (Box 3.8).
Continued and Supporting Role of Public Financing
Public funding cannot be dissociated from infrastructure
creation. It has to be recognized however, that neither does
the state have a bottomless treasure-chest, nor has the current
set of approaches worked well for infrastructure creation. This
calls for both reduction in and reorganizing of the role that
public funds play in infrastructure financing. Public funds
are increasingly seeking innovative methods of addressing
infrastructure needs.
The implication of this for rural infrastructure financing
is a more creative use of government funds earmarked for such
work. Instead of the government funds being used as the sole
or main source of funds, they should be used as equity or quasi-
equity, or even as a guarantee, and most of the financing
should be done using other institutional funds, such as, RIDF
funds or loans from commercial banks. This would significantly
enhance the extent to which scarce government funds could
attract infrastructure investments. For example, a minor
irrigation project of say, Rs 50 crore can be either entirely
funded by the government, (in which case it may take up to
 Financing of Rural Infrastructure 67

Box 3.7
Sustainable Rural Power Distribution Project

The Sustainable Rural Power Distribution Project in the Babai block of Hoshangabad district was implemented by BASIX in 2002–
3, with support from the Canadian International Development Agency (CIDA). Under this project, BASIX organized over 80 transformer
user associations, each comprising 5 to 15 farmers owning agriculture pump sets, served by the same distribution transformer. All the
transformers under a single feeder emanating from a 33KV sub-station were organized into such groups. Since the total number of
hours electric supply could not be increased beyond the 6 hour per day that was available to the other feeders, the only thing that
BASIX could promise, in consultation with Madhya Pradesh State Electricity Board (MPSEB), was a better service in terms of quicker
attention to fuse calls and replacement of transformers in case of burn outs.
Even this limited promise led to improved bill collection ratio and after a few months enhanced billing because many undeclared
connections were registered. Eventually, the MPSEB was so pleased with this pilot effort, that it placed a whole sub-station in place of
a feeder, which dramatically improved the voltage delivery to the farmers. This is a small example of the virtuous cycle that can be a
trigger between an infrastructure provider and the users, provided the right institutional arrangements are made.
Due to change of government in MP in 2004, this project could not be taken to the next planned step, which was to organize
all the farmers along the four feeders emanating from the Babai sub-station and then establishing a power users’ mutually aided
cooperative society, federating all the transformers users associations. This federation was registered but the sub station could
never be handed over to them for management. Had this process gone through, the sub-station would have become a user group
managed facility, whose ownership and technical support would have continued from the MPSEB. This would have significantly
improved the billing to supply ratio and the collection to billing ratio, since these functions would have been in the hands of the
users associations.
In return the farmers would have got steady voltage, preventing frequent motor burn outs, as well as quick response to fuse calls
and any infrequent transformer burnouts. Eventually the MPSEB could have increased the number of hours of supply to this sub
station because of increased remuneration. Indeed in Madhya Pradesh, the Electricity Regulatory Commission gave an order to ration
electricity in ascending order of over dues. Thus those circles which had the highest overdues would have their power cut first. Over
time consumers could learn to start paying for their usage.

Box 3.8
Changing Institutional Arrangements in Irrigation

People’s participation in renovation and maintenance of field channels was an established practice during the pre-independence
era. The Command Area Development Programme (CADP) introduced in 1974–5 was an improvement on the existing system
with emphasis on field channels, land levelling and on-farm development and the use of warabandi as a water management system.
The 10th Five Year Plan document lays emphasis on restructuring the Command Area Development Programme by involving
stakeholders with renewed emphasis on structures like field channels, focus on intermediate and main drains, and revised terms of
warabandi, based on usage instead of hours and formation of water users associations. A fresh approach to Participatory Irrigation
Management (PIM), and creation of robust grassroots institutional structures thereby was underlined as essential to any reform in
the sector.
The issue of financing of infrastructure is a function of the overall reform in the sector in question. The reform in irrigation, for
example, needs to tackle water efficiency, water rates, O&M, dilapidation of systems and PIM as a package of measures to improve the
overall system. Although there is some progress in the development of water resources, a lot remains to be achieved in terms of
improving utilisation, operational efficiency, management, and promotion of a regionally equitable irrigation infrastructure.

ten years to complete) or its financial structure could be such
that the government puts Rs 5 crore as straight subsidy to reduce
the ‘viability gap’, another Rs 5 crore as equity to reduce risk
perception, and yet another Rs 5 crore as a guarantee against
shortfalls in collections of user fees in the initial years (till users
display their willingness to pay). With this offer the government
can seek Rs 40 crore (guarantee not counted) from the RIDF
or commercial banks, and finish the project in a few years.
Thus the role of public financing both from central and
state governments, till such time that panchayats build stronger
finances, will remain significant. It is our attempt to highlight
that the more governments learn to play this role differently
68 India Infrastructure Report 2007
and leverage their strengths as the policy-maker, the more likely
we are to attract other forms of finance and enable sustainable
solutions for financing of rural infrastructure.
Need to Experiment with Private Financing
The case of electrification in Chile shows how private finance
can be used creatively for rural contexts, if the supportive
finance from government is structured well. In the case under
discussion, the user communities covered 10 per cent of cost,
which was paid upfront by a private company and recovered
subsequently through tariffs. The distribution utilities were
divided across regions, and each region used subsidies (paid
for by the region and the central fund) to encourage
electrification of areas that provided a greater social impact.
Regions were encouraged by a special central fund that rewarded
the region based on achievements in rural electrification and
the remaining infrastructure needs.
Panchayat Financing v/s Users’ Association Financing
Some form of local institution is required for on-site
infrastructure construction, operation, and maintenance.
Proximity to the site is an advantage that panchayats and
user bodies have. There are two types of local institutions in
rural India—panchayats and user groups, which could be
incorporated as cooperatives or even companies.
Panchayats generate revenues through taxes which could
provide funding, and users’ associations have the ability to
generate revenues through user charges. The overall taxation
base of the local bodies is so poor that they derive over 90
per cent of their revenue from grants-in-aid. Thus, unless
their tax base and tax collection are significantly enhanced,
the general tax revenues of panchayats cannot be a significant
source for infrastructure financing. Even as the tax base
improves, panchayats should only provide the equity for
raising infrastructure loans from specialized sources (see Box
2.2). We hope that panchayats would be able to finance rural
infrastructure in due course of time but it may take several
decades before we can get there and meanwhile user group
financing is a more reliable alternative for local financing.
A more promising route for financing rural infrastructure
seems to be through specific user charges levied by a direct service
providing entity such as the water users’ association. The twin
issues of ability to pay and willingness to pay constantly come
in the way of using this route for rural infrastructure finance.
But it is being increasingly recognized that the unwillingness
to charge, rather than the willingness to pay, is the main
constraint. Decades of patronage-based service provision has
led to a situation where such bodies are unwilling to charge
for the services at a reasonable rate which covers all the
cost. By linking their viability with user charges, specific
infrastructure users’ associations can be incentivised to recover
their operating and maintenance costs and, hopefully over a
period of time, their capital cost (Box 3.9).
Financial Orchestration
Innovative orchestration of financial resources can be done
by combining various sources of funds—public and private.
Public funds can be from the centre, state, district, or the
panchayat level. Private funds can be from investors, com-
mercial banks, or from the people, who are users of the infra-
structure (Box 3.10).
Government of India programmes have been used
innovatively by some state governments enabling convergence
of resources from different programmes and schemes as well
as greater community participation through own contributions
and creation of ‘financing space’ for other stakeholders.
A privately managed community infrastructure financing
initiative, namely the Community Led Infrastructure Finance
Facility (CLIFF) provides an interesting model of financing
infrastructure. CLIFF uses finance as a tool to bring poor
communities (and the organizations which support them) right
into the heart of urban development planning and action.
While the initial trigger is financed by CLIFF in one of the
many forms mentioned, it ensures the provision of the missing
link in catalysing other sources of funds efficiently. CLIFF
provides venture capital and other financial products directly
to organizations of the urban poor, rather than to government,
to support community-led slum upgrading schemes conceived
of in partnership with city authorities. This scheme can only
therefore, work where poor communities have built the
capacity to manage slum-upgrading initiatives (Box 3.11).
An example of financial orchestration including private
investment in Tajikistan is relevant because of the unique
poverty and risks profile in the country. If the public-private
partnership approach outlined here could work in one of the
more challenging countries in the world, it should be
applicable to rural contexts elsewhere (Box 3.12).
Some of the institutional innovations brought in included:
creation of a full-function regional utility, which meant the
monolithic national utility was unbundled in a geographic
sense (as opposed to the functional sense of separating
generation, transmission, and distribution which was the
conventional wisdom at the time); creation of a fully funded
social protection mechanism, monitored and administered
by a credible third party (in this case the World Bank); and
participation of IDA, the World Bank’s concessional lending
window, in the financing of a project company, with IFC
 Financing of Rural Infrastructure 69

Box 3.9
Shift in Financing Pattern in Rural Water Supply

The Government of India initiated water services first through the Minimum Needs Programme, and then through the Accelerated
Rural Water Supply Programme (ARWSP). Initially, rural water supply in India followed a supply-led approach where water access was
a deemed social good. Financial and operational failures in the ARWSP led to a fundamental shift in the sector towards demand-driven
approaches, which the GOI brought about through decentralization of responsibilities and pilots in the Sector Reform Project (SRP)
in 1999. The SRP focused on increasing community participation to bring about a significant shift by integrating the concept of
beneficiary cost-sharing, at 10 per cent of the capital cost and the entire O&M cost.
The Tenth Five Year Plan document refers to the experience that while the panchayats are unwilling to shoulder the responsibility
for operating and maintaining these projects, state governments do not have effective village level mechanisms to maintain these assets.
This Plan therefore, laid emphasis on participation of stakeholders at all levels, from planning, design, and location to implementation
and management. It also said that while the central and state budgets will continue to be the major source of funds, the project costs
should be progressively borne by the beneficiary community. However, it is imperative to change the management system to make it
more demand-driven to engage the community in O&M.

Box 3.10
Innovative Programmes with Financing Orchestrated by Government of Andhra Pradesh

The Government of Andhra Pradesh introduced a programme called Janmabhoomi and also used the GOI programmes innovatively
to cater to local priorities. Janmabhoomi launched in 1996 is a statewide programme designed to address civic needs of communities
in a participatory manner. Allocations from central programmes such as Swarna Jayanti Shahri Rozgar Yojana (SJSRY) and National
Slum Development Programme (NSDP), partial grants from the State government for community infrastructure in both rural and
urban areas with a 30 to 50 per cent contribution by the communities themselves formed the core funding. Innovative use of this
scheme was made in a slum settlement in Tirupati, with participation from a thrift and credit group developed with support from
the Development of Humane Action (DHAN) Foundation. This group mobilized the required resources by accessing loans available
from the federation of self-help groups, Sri Padmavathy Abyudaya Sangam (SPMS), to meet its contribution and was able to get
the local authorities to improve roads, install utility connections by laying connecting sewers, storm drains and drinking water
network. The community in each street mobilized the necessary resources through this approach. In general, repayment for such
loans has been good.

Box 3.11
CLIFF Financial Products, Pune, India

Meeting the challenge of slums, particularly in large cities, generally requires collective housing and infrastructure solutions, as opposed
to separate individual/household solutions. Consequently, CLIFF has been designed as a venture capital facility supporting flagship
community-led slum development projects rather than providing credit to individual households. CLIFF therefore, offers the following
forms of financial support:
• Technical assistance grants so that professional help can be brought in to help communities to ‘package’ projects in a way that
banks and state authorities can deal with.
• Loan financing to projects to kick-start community-led flagship initiatives while conducting further negotiations with formal
finance institutions and public officials to unlock local financial resources. Provided schemes at least break even, CLIFF finance
gets fully repaid to Nirman from income streams, which can then be recycled to pre-finance further projects. Nirman is a not-for-
profit company, promoted by the SPARC (Society for Promotion of Area Resource Centers), and acts as the financial and construction
arm of this initiative.
• Knowledge grants for exchanges, visits and workshops so that as many people as possible are able to learn from the projects as they
are developed and implemented.
70 India Infrastructure Report 2007

• Grants for core operational and administration costs of the agencies managing CLIFF.
Guarantees: Homeless International’s Guarantee Fund can also be used to complement CLIFF, by providing financial guarantees to
underwrite some of the risk taken by banks when lending to projects. Loan financing will be recycled as projects are completed and
revenues received, thereby establishing Nirman as a sustainable, long-term financing facility in India.

Box 3.12
Pamir Private Power Project in Tajikistan

This project is restoring reliable electricity supply to a poor and isolated population in eastern Tajikistan that was almost completely
cut off from power supplies after the country’s independence from the former Soviet Union in 1991. This restoration has been
achieved through an innovative combination of private investors and multilateral financial institutions. It has been backed by a
donor-funded social protection programme to ensure that the electricity remains affordable. At the same time, the government of
Tajikistan has undertaken reforms necessary for the new framework to work. The total cost of $26 million was financed through a
mix of 45 per cent equity and 55 per cent debt provided by the International Finance Corporation (IFC) and International
Development Association (IDA). IFC provided $3.5 million in equity financing; the remainder, $8.2 million, came from the Aga
Khan Fund for Economic Development (AKFED), the principal private sector partner in the venture.

bringing a 30 per cent equity stake, to introduce a capital
market orientation and links with the private sector.
The essence of orchestrating finances for infrastructure
creation is to understand the value that different actors bring
to different contexts. The type of financial instruments used
by different actors is a function of their relative strengths and
risk taking abilities.
Evolution of Institutional and Financing Arrangements
in Rural Infrastructure
We all know that there exist limitations in institutions and
financial arrangements which make operation and maintenance
of infrastructure projects fraught with many deficiencies. Lack
of institutional mechanisms also gives rise to lack of ownership
of these projects. The infrastructure sector is filled with contract
and contractor relationships which are temporary. Here we have
suggested an evolutionary development of community
arrangement along with financial institutions which can make
communities tackle with ownership issue.
Financing arrangements are inextricably linked to the
underlying institutional arrangements in rural areas. As the
supply-side institutional arrangements evolve towards greater
participation from a larger number of stakeholders, and towards
a reduced and largely facilitating role of the government, the
involvement of users also increases. The arrangements amongst
the service providers and their interface with the users constitute
the institutional mechanism for infrastructure creation and
provision. This mechanism determines the financing pattern
that can be configured.
The sources which can be accessed to finance at each stage
(Figure 3.1) move from complete state subsidy to increasing
levels of mainstream commercial capital and community
finance. Increasing levels of user community contribution,
and facilitating finance from the government will help de-
risk rural infrastructure projects to attract private sector
finance. Infrastructure financing solutions for rural areas will
have to be designed creatively, with each set of actors providing
the right space to others.
The institutional and financing arrangements for rural
infrastructure have been captured in Figure 3.1. The view is
evolutionary, starting from stage one, where the state is the
financier, builder, operator, regulator, and patron of a group
of unorganized powerless users, to stage four, where the
government is only the regulator and provider of ‘viability
gap’ financing, whereas users are well-organized into a body
which is representative and which finances and operates
the infrastructure facility. Bihar Hill Area Lift Irrigation
Corporation, Central Power Distribution Company of Andhra
Pradesh Ltd., Village Electricity Committees, and Anakapalle
Rural Electricity Supply Co-operative, A.P. are good examples
of stages I, II, III, and IV of financing respectively.
Bihar Hill Area Lift Irrigation Corporation
(BHALCO)
This entity was established in the 1970s in the Chhota Nagpur
tribal areas of Bihar (now Jharkhand state), to lift water from
the numerous rivulets in the area, each ‘lift’ irrigating 500–
2000 acres. Intake wells were built in the middle of the river
 Financing of Rural Infrastructure 71

GOVERMENT
REGULATOR
VIABILITY GAP/CATALYTIC FINANCING
PARTNERSHIP + EVOLVED
PRIVATE ENTITY
COMMERCIAL LONG-TERM DEBT FINANCING
BUILDER/OPERATOR
+
USERS
OPERATION MANAGED BY USER ASSOCIATION
FEE COLLECTION COVER O & M
& POSSIBLY PARTIAL CAPITAL COSTS

Stage IV

GOVERNMENT USERS HAVE A

REGULATOR VOICE & GRIEVANCE
INSTITUTIONAL ARRANGEMENT

LIMITED FINANCIER REDRESSAL FOR

USER INVOLVEMENT
+ SERVICE QUALITY
PUBLIC/PRIVATE ENTITY & SUPPLY
DEBT FINANCING Stage III USERS PAY O&M
OPERATOR COSTS

GOVERNMENT USERS HAVE SOME

REGULATOR VOICE NO
FINANCIER CONTRIBUTORS TO
+ FINANCING USERS BEING
PUBLIC ENTITY BILLED FOR O & M COSTS
(e.g. SEB) LIMITED
OPERATOR Stage II REPAYMENT

SERVICE USERS
PROVIDER

GOVERNMENT: UNORGANIZED &

FINANCIER UNINVOLVED USERS
BUILDER
OPERATOR NO REPAYMENT
PATRON CULTURE
Stage I
PATRON-CLIENT NONEXISTENT

SERVICE PROVIDER ROLES USER ROLES

GOVERNMENT PARTERSHIPS COMMUNITY INDIVIDUAL

Figure 3.1 Evolution of Institutions and Financial Arrangements for Rural Infrastructure

and 6” cast iron pipes carried water from there to a high point,
using an electric pump, and thereafter it was released in the
command area through gravity flow. These schemes were fully
financed and constructed by the government, and were operated
by government employees. Due to frequent power failures,
despite having separate dedicated feeders and transformers, the
schemes were not reliable. Operator absenteeism coupled with
favouritism in supply of water to those who paid off informally,
led the remaining farmers to break the pipes and pumps in
many places. By the middle of the 1980s, all the few hundred
of these schemes were defunct.
Central Power Distribution Company of A.P. Ltd.
The infrastructure of the Central Power Distribution Com-
pany of A.P. Ltd. (APCPDCL) has been financed by the
72 India Infrastructure Report 2007

government and the distribution company (Rao, 2004). The are examples of mobilizing community to handle billing,
recent efforts of the distribution company, APCPDCL, towards collections, and basic maintenance of distribution. In case of
customer service and billing programmes have begun to real- the VECs in Orissa, these were organized by the Xavier Institute
ize efficiency gains in distribution, better collections, and in- of Management, as a pilot project with the regional distribution
creases in revenue. Some steps taken by the APCPDCL in companies. The VECs were given responsibilities of billing,
this direction are: collection, routine maintenance, and identifying and regularizing
1. Shift to a customer centric/responsive approach: the illegal connections. The model worked well initially but has
establishment of Customer Service Centres, with satellite not been sustained since private discoms have wound up.
Call Centres in remote rural areas, Vidyut Adalats for The project in Karnataka used Gram Panchayats to handle
dissemination of Citizen Charters (clear service metrics meter reading, billing, and collections with the flexibility to
set a standard for customer service and ensured timely subcontract these tasks. The experience of this transition has
resolution of billing conflicts) in rural areas and issue brought some important learning to light. Shifting O&M to
resolution, Farmer Meetings for irrigation related issues the Gram Panchayat requires significant attention for capacity
and demand side management. building and active involvement from distribution entities.
2. Leveraging technology for billing efficiency: the use of Collection issues around irrigation for smaller consumers of
spot billing eliminates many complications around billing energy still persist. The use of technology enables simplification
involving issues like transparency, up to date billing, cash in billing, improves transparency, accountability, and reduction
flow due to collections, and simplification of billing process in long-run costs (The SARI/Energy Programme—Resource
(Table 3.6). Centre, 2004).
3. Access to convenient payment methods: eSeva, payment
collection at banks, and online payments.
Anakapalle Rural Electric Supply Cooperative, A.P.
Conscious efforts towards providing decentralized services
also enabled: The Anakapalle Rural Electric Cooperative Society Ltd.
1. User Participation, transparency, and accountability. (ARECS) in the Vishakapatnam District of Andhra Pradesh
2. Possible billing and collections by community institutions. was formed in 1974 with a mission ‘to make electrical energy
3. Financial viability of decentralized systems (with some start- available to its members to promote the economic
up support if transmission tariff is set by the government development in the area’. In 1976, the cooperative took over
while the user charge is set by the distribution company). distribution operations and maintenance from the State
4. Release of the potential of community institutions in Electricity Board. Thirty years later, with over 96,000 members,
depoliticizing collections. the cooperative has achieved 100 per cent village electrification,
increased the number of service connections by 2400 per cent,
Table 3.6 and is debt free and profitable.
Progress of Central Power Distribution The government played a critical role in providing the
Company of AP Ltd 2000–3 necessary start-up equity to transfer the distribution
infrastructure to the cooperative. As this equity came in the
2000 2001 2002 2003 form of a twenty-five-year loan from the Rural Electrification
Government Subsidy + Corporation that was eventually repaid by the cooperative, it
Additional Support can be seen as largely catalytic in nature. The community
(in Rs Billion) 30.64 29.35 30.05 18.82 investment, in the form of shares in the cooperative, combined
T&D Losses (per cent) 36.90 33.90 29.60 26.13 with the start-up contributions from the state government
Revenue (in Rs Billion) 49.56 60.68 64.18 81.29
provided sufficient equity to take on these loans (Rao, 2006).
ARECS was able to establish a culture of payment for
Metered Sales (per cent) 38.01 38.28 40.84 43.67
service and responsive customer support. A 50 per cent
Source: Rao (2004). decrease in line loss from inception till today and a substantial
increase in user demand, with the change in management
from state government to an institution of the people, strongly
Village Electricity Committees,
suggest that the rural customer base responded favourably to
Gram Vidyuth Prathinidhi customer service and was more willing to pay user fees. This
Village Electricity Committees (VECs) of Orissa and Gram institution also used loans to fund the successful expansion
Vidyuth Prathinidhi of the Karnataka State Electricity Board of distribution infrastructure. The expansion and outreach
are good examples of Stage III of institutional evolution. These that the ARECS achieved in a span of twenty years resulted

from an amalgamation of community ownership, a supportive
government framework, and debt financing (see Box 6.1.5).
CONCLUSION
There is basic agreement on the fact that public resources are
scarce, and also that they have not been used with a high
degree of effectiveness till now. On the other hand, both due
to the semi-public good nature of infrastructure and also the
lack of precedence of complete private sector financing, it is
unlikely that private funds will flow to rural infrastructure
financing substantially. Also, while NGOs and MFIs are a
good medium for devising and delivering rural infrastructure
solutions to the community, they are not geared for large-
scale financing given their limited resource base and
organizational constraints.
Private capital has barely started flowing to the urban
infrastructure sector in India, and it will take a long time before
it finds its way to rural infrastructure. The constraints to flow
of private capital are largely institutional, a term by which we
mean the ‘rules of the game’ or norms, codified under laws,
regulations, and specific contracts, by which all the stakeholders
related to an infrastructure project, transact, and interact with
each other. This can be something as simple as a norm that
‘services used must be paid for’ to something as complex as a
contract that ‘the return on equity exceeds the weighted
annual average of LIBOR over 10 years, plus 500 basis
points’. Establishing and enforcing such norms is the area of
institutional reforms. This is happening, albeit slowly, with many
ups and downs. Once satisfactory institutional arrangements
are devised for urban projects, these will slowly diffuse to rural
projects as well, though we should not underestimate the more
difficult political economy of rural India.
Financing of Rural Infrastructure 73
The complexity of demand and supply gap, willingness to
pay, and ability to pay for infrastructure services require financial
orchestration which implies blending different sources of funds,
such as government capital subsidy, community contribution,
and private equity. Greater provision of rural infrastructure
will require a paradigm shift towards recognizing the value that
other players bring apart from the government—panchayats,
private sector, and the user community. It will be necessary
to define their roles and responsibilities and bring them pro-
actively on board for creation and maintenance of rural
infrastructure.
The government needs to create the space for financial
orchestration and enable development of a collaborative
framework to build and operate infrastructure in rural areas.
Given the relative strengths and weaknesses of each set of
institutions in delivering finance for rural infrastructure, it is
imperative that we look for solutions in the ‘middle-ground’.
Even conceptually, the state and the market mechanisms are
two extreme modes of functioning, and either of these, by
themselves, cannot ensure development with equity. Solutions
with the strengths of each side, which are balanced by civil
society, are likely to be efficient, equitable, and sustainable.
We have also suggested a progressive model which can be
gainfully applied to various infrastructure projects (Figure
3.1). This kind of evolution of institutional and financing
arrangements requires several years of practice before it can
be mastered and thus the initial projects need to be structured
to offer a ‘soft landing’ to the institutions which agree
to pioneer this. Once a number of pilots are successfully
implemented, the lessons can be built into a supportive
regulatory policy, and institutional strategic framework.
Several examples abound right here in India and the task is
to build on their successes.
74 India Infrastructure Report 2007
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