Vinayak Chatterjee: Sweat the assets to deliver true value

INFRATALK

India must move forward from an obsession with asset creation to maintenance and service delivery.

One of the top ten 'most admired companies' in Britain is SERCO Group Plc. It is an infrastructure maintenance and services company with 45,000 employees and a turnover in excess of £2 billion and with more than 600 contracts in 35 countries for governmental and commercial clients. One such set of service delivery contracts includes running urban transit systems in London, Manchester and Copenhagen. The work includes operating the trains and maintaining the rolling stock, track, signaling and stations. Companies like SERCO, in the developed world, undertake similar tasks for not just core infrastructure projects, but also 'social' infra-projects like prisons, schools, traffic management and healthcare delivery. More often than not, contracts between 'service-providers' and 'asset-owners' are based on outcomes, not inputs. SERCO's motto is: 'We bring service to life".

It is about time India brought 'service to life'. As a nation, we have been obsessed with asset creation. The latter half of the 19th century and the first half of the 20th century saw British India build railways, set out irrigation systems and lay the large water pipelines and sewer systems buried under our now-groaning cities.

Post-independence, the Nehruvian era saw a burst of 'socialist' asset creation including dams and hydro-electric projects and various other PSU-driven infra-projects under the 'commanding heights' philosophy. Subsequently, after three decades of indifference to infrastructure-building, the NHDP programme under the NDA government kicked off the resurgence of national-level investment programmes and the present UPA government has ushered in the era of public-private partnerships (PPPs).

All along this journey, the emphasis has always been on asset creation with very little emphasis on maintenance and/or delivery of pre-determined service levels from these assets. In fact, there has not been sufficient attention paid to the fact that 'hard' asset-creation is preceded and followed by two 'soft' aspects, viz, R&R and O&M. R&R (Resettlement and Rehabilitation) aspects have been brought to attention by two ladies "" Medha Patkar and Mamta Banerjee. O&M (Operations and Maintenance) aspects, closely related to service-delivery, get insufficient attention as they are not amenable to immediate political gains or media attention.

The world over, there is the growing realisation that governmental systems lack the motivation to provide desirable levels of service. Therefore, PPPs are gaining popularity around the world as a means of delivering high-quality, cost-effective public services. Infrastructure is after all built simply to serve. And service is extracted by the transference of legacy assets (sale, privatisation, lease), creation of greenfield assets, and better delivery from legacy assets through O&M contracts that include incremental balancing investments and tight service-level agreements (SLAs).

As experience grows, it is interesting to note that the leadership of such projects is shifting from the builder to the maintainer to the service provider. Simultaneously, the focus is also shifting from reducing capital expenditure to optimising through life cost to cost-effective delivery of public services.

Service-led PPPs enable governments to contract with a single entity to deliver public service outcomes. It becomes the responsibility of the service provider to integrate the design of processes, assets and technologies with funding, people management and customer services. In this way complexity is reduced, more risk transferred and better public services delivered for longer.

Indeed, the National Highway Authority of India (NHAI) must be credited with recognising this reality. It has swiftly moved the goalpost from EPC contracts to annuity (where, for the first time O&M responsibilities were thrust on the private party) to BOT and finally now on to DBFO (Design-Build-Fund-Operate).

An analysis of data for the past five years for various NHAI four-laning projects suggests that an operation and maintenance cost of around 3 per cent of the capital cost is realistic. This is made up of 1 per cent for operations and 2 per cent for maintenance.

The auditor-general's report to the Australian Parliament in 2002 on the maintenance of infrastructure assets provides an interesting statistic. It observes that the NSW government agencies use $120 billion of assets to provide goods and services. During 2000-01, approximately $1.8 billion was spent maintaining these assets. This works out to 1.5 per cent as maintenance costs. For adding service provision and operations over and above 'maintenance', it is not inconceivable that the maintenance-operations-service basket could well be over 3 per cent of the asset-cost per annum. This has some interesting conclusions:

With India's plans to put $350 billion worth of new infrastructure assets on the ground during the 11th Plan period, a new infra-services market worth 3 per cent of $350 billion, that is, $10.5 billion or approximately Rs 8,500 crore per annum is shaping up. Add to this the PPP possibilities for historically existing assets and you can safely double the figure to arrive at a Rs17,000 crore per annum market size beckoning a new generation of entrepreneurs.

For Indian citizens, a quality-of-life revolution can be effected through significantly enhanced service levels in urban transport, electricity, water/sanitation and municipal services. These could be as dramatic as the 'world-class levels' experienced from private telecom and airline operators.

The bureaucracy will have to get used to a widely different nature of contracting. From the centuries-old, lowest-capital cost tender system, the bureaucracy will have to define SLAs and choose parties that will deliver agreed levels of service at "minimum" cost to the citizen.

Regulatory focus should move to detailed definitions and monitoring of actual service deliveries across the life of the contract. Hopefully 'transparency' will be enhanced through involving citizen groups and impartial watchdogs.

Finally, infrastructure operators must get prepared for regulatory raps as well as individual and 'class action' litigation for failure to provide desired levels of service. For example, highway toll operators will have to wake up to the reality that toll cannot be charged merely for the privilege of just being allowed to use a particular stretch of road. The 'purchase consideration' inherent in charging a toll has to come bundled with the commitment of a smooth ride at a designated average speed, with full consideration of safety and highway amenities. Failure should attract penalties and damages.

Maybe, it is in the rapid shift to a service-driven O&M regime wherein lies the awakening of a new India!

The author is the Chairman of Feedback Ventures. He is also the Co-Chairman of CII's National Council on Infrastructure. The views expressed are personal