Financing Rural Infrastructure: Overcoming Budget Constraints

3 FINANCING OF RURAL
INFRASTRUCTURE
Vijay Mahajan, Preeti Sahai, and Sandeep Pasrija

INTRODUCTION economic, social as well as political aspects, features, and
compulsions in order to draw implications for existing financing

E
conomic growth and human development are practices. This is followed by a brief assessment of the demand–
strongly determined by the prevailing infrastructure supply gap that exists in rural infrastructure segregated by
development scenario. Rural infrastructure in India service, that is, water and sanitation, roads, irrigation, electricity,
in terms of its roads, electricity supplies, telecom facilities, telecom, agro-processing, and marketing. Detailed discussions
irrigation systems, water supply and sanitation, market yards, of prevailing funding options and avenues are followed in
schools and health centres is woefully short of demand. It is the subsequent sections by an examination of viability of new
almost totally publicly funded, and the governments at the options in the resource generation.
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 ATTRIBUTES OF RURAL INFRASTRUCTURE AND
government disbursals, and are thus hardly ever in a fund INTERLINKAGES WITH FUNDING ISSUES
surplus situation to spare money for infrastructure investment.
Economic Parameters and Decentralization
Rural communities themselves are impoverished and
unorganized, so community financing of infrastructure is not Possibilities across Services
possible beyond an occasional piau (communal source of Institutional and financing arrangements relevant for service
drinking water) or dharamshala (resthouse or shelter). In this provisioning will be derived from the nature of the infrastructure
context the role of private capital in filling the need gap in question, in terms of its public good versus private good
acquires tremendous importance. Seventy per cent of Indians characteristics (a rural road tends to be public in nature, an
live in villages and rural infrastructure is a key determinant in-house electric connection is a private good); and the scale
of rural development and economic and social well-being. of the service—whether the service helps a single community
In this paper we try to understand the prevailing financing or many communities. Even for most ‘heavy capital investment’
options for rural infrastructure and attempt to identify viable intensive infrastructure, some part of the recurring expenditure
alternatives towards bridging the gap. For our purpose we can be paid by the consumers. It is critical that policy-makers
extend the standard elements of infrastructure (roads, irrigation, recognize the need to balance cost sharing strategies with
water and sanitation, telecom, and electricity) to include agro- objectives of maximizing outreach to the poor. ‘As a rule, the
processing and marketing facilities within the ambit of rural potential for private sector interest in providing infrastructure
infrastructure needs. This is driven by the fact that the positive increases as the activity shifts from public to private. A shift
impact of these services on agriculture-based economic activity from smaller to more extensive coverage also tends to transcend
in rural areas is significant, the user group for them is large community-based solutions’ (World Bank, 2006a).
and the investment required is lumpy. We characterize rural infrastructure based on parameters
In the initial sections of the chapter we lay out the basic such as investment required, extent of incremental expenditure,
attributes of the rural infrastructure sector in terms of its consumers’ willingness to pay, and scale economies (Table 3.1).

48 India Infrastructure Report 2007

Table 3.1
Categorization of Rural Infrastructure
Health Education Energy Water and IT/Telecom Roads Canal
Sanitation Irrigation
Scale Economies Low Low Moderate Moderate V. High V. High V. High
to High
Initial Investment Moderate Low Moderate Moderate V. High V. High V. High
to High
Recurring Expenditure1 Moderate Low High Moderate Moderate Low Low
Willingness to pay High Moderate High High Moderate Nil High
to High to High
Source: Computed by author.

Health and education delivery can be decentralized to the how it has been viewed by policy-makers and stakeholders
local level. However, resource needs for research, training to alike as a need that must largely be addressed by the
different cadres of health/education workers, curriculum government. In India, even sixty years after independence the
development and so on are significant and require centralized government plays an overwhelming role in financing, building,
infrastructure. Similarly, promotional activities required to and maintaining infrastructure.
run both health and education facilities are significant and Public infrastructure faces disuse and apathy at the hands
require large administrative machinery to deliver. Information of its target segment, its users. There are often no clear
Technology (IT) related services typically require huge basic incentives to maintain public infrastructure at the local level.
infrastructure to extend services. For water services, it is In addition, factors which have created an institutional
less the connection to a physical network and more the access environment for low maintenance of infrastructure include
to organizational and professional skills that drives utility the non-excludability of public infrastructure, concern for social
expansion. justice leading to absence of or low user fees, and ownership
Measured by scale economies, electricity falls somewhere and operation by a public bureaucracy. The government mostly
between IT and water. Unlike telecom, electricity can be limits its role to infrastructure creation, without creating a
decentralized to local levels, without being necessarily connected local institutional set-up with user participation, which has a
to a larger regional or national network. This is a viable stake in the maintenance, use and other issues such as billing,
solution for remote areas, where establishing transmission links recovery of payments and so on. Thus, in the interest of more
from a larger network is prohibitively costly, given the size of effective infrastructure services, the ‘rules of the game’ will
the rural market. Private entrepreneurs in India are already have to be redefined.
selling power generated micro-hydel and wind-based renewable
energy generation systems to large grids. The next step could
Political Attributes of Infrastructure
be to enable them to distribute power in localized rural areas.
Rural power distribution was prioritized by several pioneering Allocation of resources for infrastructure creation is as much
projects of the Rural Electrification Corporation, using rural a subject of political decision-making as anything else. Such
electric supply cooperatives. One of these, in Ankapalle in allocation is often based on parameters that go beyond the
Vishakhapatnam district of Andhra Pradesh, is an example infrastructure deficiency of an area, or its people, or even the
of a robust community institution owning and managing an efficiency of resource use. Infrastructure requires large, lumpy
important rural infrastructure facility. (See Box 6.1.5) 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
Social Attributes
for political mileage and gains from their voter base. This
That the term ‘infrastructure’ was traditionally used creates distorted responses on the part of the consumers and
interchangeably with ‘social overhead capital’ sets the tone for also adversely affects their attitude to infrastructure, and
willingness to pay for it. This offers perverse incentives to the
1 Expenditure on continued provision of the service includes expense users to misuse infrastructure services and get away with
on salaries of doctors and teachers, maintenance of the power plant, inadequate or no payments. Electricity and water, for example
maintenance of the water structures and so on. 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)


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 mum needs came into the policy frame, with an explicit
allied produce.’ 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
Storage
addressed in a rather more cohesive and direct manner than
The three main agencies in the public sector, which are engaged before under the Minimum Needs Programme.
in building large scale storage capacity: the State Warehousing The infrastructure investments in rural areas are mired in
Corporation (SWC), Central Warehousing Corporation hidden and explicit subsidies and heavy losses. The approach
(CWC) and Food Corporation of India (FCI). The CWC to investment in rural infrastructure was traditionally that of
and SWC have enhanced capacity from 8 warehouses handling complete state support as such investment was viewed as
7000 tonnes in 1957–8 to over 1800 warehouses handling economically unattractive and also too complicated for the
over 23 million tonnes in 2000–1. The FCI has created storage private sector to consider.
capacity of over 35 million tonnes. While on the one hand, public investment was the only
The storage capacity, at its present level is sufficient only source of finance for rural infrastructure; on the other even
for 10 per cent of the total production of fruits and vegetables. these have been declining as a proportion of both total
The capacity requirement for post-harvest management of government expenditures and as a proportion of GDP. During
perishables is estimated to be over five times that of the current the post-reform period, between 1993–4 and 2001–2, not
capacity. The Expert Committee on Strengthening and only has the share of budgetary expenditure on all social services
Developing of Agricultural Marketing (GoI, 2001) assesses and poverty alleviation programmes declined from 2.08 to
the need for creation of 15,000 additional cold storages with 1.87 per cent, but also the share of rural development in all
a capacity of 45 million tonnes. This would require an social services and poverty alleviation programmes has fallen
investment of the order of Rs 27,000 crore. 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.
Processing Infrastructure Investment in the major and medium irrigation programmes
This enables local value addition and supports self-employment. comes almost entirely from public sources, whereas for minor
The fruit and vegetable processing industry in India has irrigation programmes a significant share comes from institutional
increased capacity three-fold from 0.7 million tonnes to 2.1 and private sources as well. Between 1977–8 and 1994–5,
million tonnes between 1990 and 2001. This processing capital investments in major and medium irrigation schemes
infrastructure for fruit and vegetable is highly decentralized, went up 7.5 times at current prices and 4 times at constant
and most units operate in cottage/homes and the small scale prices, whereas the irrigation potential increased only by
sector. Dairy related micro infrastructure, for example, entails 30 per cent (Vaidyanathan, 2003). Investment in irrigation
not just the processing units such as bulk coolers, chilling constitutes 55 per cent of total agricultural investment—the
plants, pasteurising facilities, and packaging facilities, but also single largest component of the investment by the public
milk collection cans, fat testing machines, milk vans operating sector. The government has spent over Rs 120,000 crore
on milk routes, and marketing facilities. towards developing irrigation potential up to the Ninth Plan.
The financing of such infrastructure is likely to be different The plan outlay under the Accelerated Irrigation Benefit
from other larger infrastructure in that there is scope for Programme for 2005–6 was Rs 4500 crore.
significant private finance. An integrated approach to creating The outlay of the State and Central Governments for rural
such infrastructure and attracting private finance is needed roads was Rs 3070 crore in the Eighth Plan period. It was Rs
to add significant value for different sectors such as dairy, 1980 crore and Rs 2140 crore in the next two years, 1997–8
horticulture, and agriculture of different types of commodities. 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
RURAL INFRASTRUCTURE FINANCING 47:53.
Public resources are thinly spread over a large number of
Funding from Governmental Sources competing alternative uses. Even though state funding is the
Around 70 per cent of the population of India lives in rural only significant source of infrastructure finance, it is not
areas, and therefore, Indian planning has a history of interven- adequate. As a case in point, at 2000–1 prices, the Planning
ing in and focussing on the problems of the rural sector. It Commission estimates that an investment of Rs 107,800
was around the mid-1970s that the concept of basic mini- crore will be required to provide electricity to all villages in


India. Compared with this, the average annual investment of co-financing either from the community or other sources.
over the last few years has been merely Rs 8.8 thousand crore. 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.
Central Government Sponsored Schemes
The manner in which subsidies are designed continues to
Most poverty alleviation schemes of the government have asset be an issue with public funds. Outright and upfront grants
creation and infrastructure creation components. In February have often failed to motivate the beneficiaries to use the funds
2006, the Finance Minister, in his budget speech, announced judiciously. ‘Smart’ subsidies or those which ensure community
an allocation of Rs 186,960 crore for rural infrastructure, under contribution and where the grant is targetted appropriately
the Bharat Nirman Programme. This is the single largest at an institutional structure ensure more efficient and sustainable
allocation for any sector and is 54 per cent higher than the use of the funds. Beyond sunk capital costs, such funds often
previous year. remain with the community as revolving funds. If subsidies
Schemes directed at creation of infrastructure include the are made contingent to performance, or are structured as
Million Wells Scheme (MWS) for surface water bodies, Indira output-based aid, their effectiveness is likely to be much higher
Awas Yojana (IAY) for housing, Jawahar Gram Samridhi Yojana (Box 3.1).
for school buildings, rural roads and other infrastructure,
Swarna Jayanti Swarozgar Yojana to support micro-enterprises. MULTIPLICITY OF ROLES
The Employment Assurance Scheme (EAS), Food for Work One of the issues with public funds, for creation and
programmes, as also the new National Rural Employment maintenance of infrastructure, stems from the multiplicity of
Guarantee Scheme (NREGS) provide employment to villagers roles that the government plays. These roles range across
in the construction of minor local infrastructure such as small regulatory, promotional, financial, and implementational.
roads, school buildings, and pond digging. Notwithstanding the near pure public good attributes of some
types of infrastructure, the government has been seen to under-
SUBSIDY DESIGN perform when it is playing all these roles simultaneously. Most
The design of the subsidy disbursed is crucial to how the often, the implementation role of the government is played
infrastructure is built, financed, and managed. The thrust on by the DRDAs and increasingly by Gram Panchayats. The
community participation has been increasing, yet the financing DRDAs largely have low capability for micro-planning and
mechanisms have not efficiently built in the crucial aspects 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 Rural Infrastructure Development Fund
programmes yet.
The Rural Infrastructure Development Fund (RIDF) was
CENTRE-STATE COST SHARING launched in 1995–6 to address the inadequacy of public
investment in agriculture and rural development, and was
Most of these schemes require 25 per cent contribution from housed with National Bank of Agriculture and Rural Devel-
states. Experience has shown that state governments are often opment (NABARD). The initial corpus of Rs 2000 crore
slow in offering their share. In Kerala, the state government was raised through contributions both from public and
has taken a policy decision to transfer all small single village private sector banks with shortfalls in agricultural lending.
water supply schemes to gram panchayats. However, even with In each successive year, the RIDF received additional corpus,
such a decision, the process has been slow and only a limited and as of September 2006, a total corpus of Rs 60,000 crore
number of about 1000 such schemes have really been transferred. reposes with the RIDF (Box 3.3).
The state governments often give the alibi of inadequate NABARD describes the success of the RIDF using two
capacities of the local authorities to execute these programmes. criteria—the high social return and employment generation
There is a case for reform-linked incentives and assistance from and the near perfect repayment experience. Both these however,
the Centre to the states. Enactment of the 73rd Amendment are not direct pointers to the success of the RIDF. Irrigation
developing a framework of user charges, to create space for projects per se have a high social rate of return in water-
private finance could form the basis for setting up these criteria constrained or water-uncertain situations. The RIDF only
(Mehta et al. 2003). funded completion of such projects, after the larger proportion
of cost had already been undertaken. So, ignoring the sunk
PRICING OF INFRASTRUCTURE
costs, the RIDF IRR would obviously show high returns.
The required reforms in infrastructure sectors include restruc- Similarly for the latter, all loans given were against state
turing of pricing as an essential part of effective management. government guarantees and the governments had an additional
In irrigation a chasm exists between the cost and pricing of incentive to repay because the disbursement growth rates were
irrigation, which doesn’t augur well for the development of higher than the debt servicing needed.
irrigation infrastructure. The water rates collected by several The RIDF did relatively little to check quality of infra-
states served by public works are neither revised regularly to structure created or completed with these funds by state gov-
keep pace with the escalating costs, nor are sufficient to meet ernments. Taking the case of Rajasthan, Morris (2003) shows
the working expenses, let alone cover fixed investment or that of the 179 schemes sanctioned between RIDF I to VI,
earn a rate of return over the investment. Tamil Nadu revised 76 were reportedly completed, yet on a physical inspection,
water rates thirty years ago, Punjab, Haryana, Kerala did so several of these were found to be actually unfinished. Also,
in the mid-1970s, while Andhra Pradesh, Bihar, Rajasthan, from an advance of Rs 9.5 crore in 1998–2000, the State
Orissa, and a few others did so in 1981–6. Andhra, Gujarat, Finance Department had disbursed only Rs 35 lakh till 2001.
and Karnataka tried to implement a new regime which got These funds were actually used to improve the ways and means
held up due to various reasons. The Committee on Infra- situation of the state. Often the states did not make adequate
structure Pricing stressed the need to view the strategy for budget provisions for infrastructure spending, despite higher
reform of water pricing as part of a larger programme of loans sanctioned by the RIDF. Inadequate provisions have
modernization of irrigation systems, and restructuring of led to delays in completion of many projects. Cost overruns
their management. are only around 7.8 per cent but time overruns are rampant
Fund utilization of government schemes has historically across RIDF funded projects. The cost and time overruns do
been seen as patchy and inefficient. Experiences such as Rogi not account for benefits lost on account of delayed completion,
Kalyan Samiti5 in Madhya Pradesh show that as soon as market and are underestimations to that extent.
mechanisms such as pricing of services are allowed to function, While the RIDF was conceived with the right ends in
in synergy with the government intervention, all parties begin mind and was funded appropriately from shortfalls in priority
to play a more efficient role. The increased accountability sector lending, it has in effect been reduced to just another
and transparency of such systems due to the presence of ‘other’ pool of funds available to state governments. Data does show
players, including the community, is likely to ensure better that the fund sanctions were weakly linked with the state fiscal
utilization of funds (Box 3.2). situation, which can be called an improvement over direct
allocations by the central government.
5 The Rogi Kalyan Samiti is a patients’ welfare association comprising Given that NABARD is a specialized funding agency with
local politicians, government officials, doctors, donors, and community appraisal and monitoring capabilities, RIDF should have
leaders. enhanced the governmental system’s understanding of rural


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;


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.


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 have not changed substantially and the RIDF has not quite
governments have treated the RIDF, merely as another source taken rural infrastructure financing to the next logical level.
of funds, does not indicate that much learning has been In some ways, therefore, the RIDF despite having filled a crucial
acquired. If the RIDF had led to a better understanding of gap, has not fundamentally influenced the paradigm for
risks in financing rural infrastructure, it could have shared financing rural infrastructure.
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 Other Public Financial Institutions
SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI)
6A project is classified as non-starter if its implementation does
not commence within six months from the date of release of start-up SIDBI has schemes designated for developing Industrial
advance from NABARD. Infrastructure for Small Scale Industries (SSI) and Integrated


Infrastructure. The former caters to small industrial parks, Packing and Grading Sheds and Godowns—The NCDC
common facilities, warehousing and market facilities of up provided assistance to cooperatives at the primary level as
to Rs 10 crore and the latter caters to cluster development by well as at the mandi level and for the establishment of fruit
creating or upgrading infrastructure facilities including water, and vegetable processing units. As on March 2004, 48
power, telecom, industrial effluent plants, and others of up cooperative fruit and vegetable processing units were sanctioned
to Rs 5 crore in rural and backward areas. These schemes had out of which 39 have been installed. The NCDC has sanctioned
provisions of grant funding from the Central and State Rs 41.3 crore for establishing such units.
governments and lending by SIDBI, but do not seem to have
made a dent in infrastructure financing in India. SIDBI could Marketing Infrastructure including Retailing—The NCDC
have played a role complementary to NABARD–RIDF in provided a total investment of Rs 37.29 crore to assist 1431
the interests of creating an enabling environment for rural cooperatives towards infrastructure and business development.
non-farm sector enterprises but has mainly confined its work The projects have helped in creating necessary infrastructure
to urban clusters. in the rural areas. Under the projects, 28 million tonnes of
godown capacity has been created at the primary society level,
HOUSING AND URBAN DEVELOPMENT besides which 212 strong room/lockers and 352 deposit
CORPORATION (HUDCO) counters have also been established for mobilising the deposits
in the rural areas and starting mini banking activities through
HUDCO is a national financing agency with a dedicated
village cooperatives.
focus on housing for economically challenged sections of
While the financing efforts of NCDC are welcome,
society. The non-housing portfolio of HUDCO includes
particularly as they go to financing user groups (exactly
sanitation and water supply, sewerage, drainage, solid waste
what cooperatives are supposed to ensure) the overall
management, roads, and bridges. While the infrastructure
financing by NCDC in comparison to the unmet demand is
financing is increasing as a proportion of HUDCO’s portfolio,
rather small.
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. Private Funding
The expertise and resources of an apex institution can be better
utilized by enhancing its scope to include rural infrastructure With public sector resources under pressure due to prior
as well. commitments of the government on salaries, pensions and
interest payments of past borrowings, there is need to raise
NATIONAL COOPERATIVE DEVELOPMENT funds from private sources for infrastructure creation. The
CORPORATION (NCDC) economic reform process has not quite extended to rural India
yet. Not surprisingly therefore, private funding for rural
NCDC was established in 1963 under the Ministry of
infrastructure has neither been systematically invited nor has
Agriculture. It extends term loans to cooperatives for creation
it come forth save some experimental money, largely at the
of infrastructural facilities like godowns, cold storages,
behest of development organisations. Public financial resources
equipment financing, transport vehicles, boats, and other
and the government’s administrative capacity are overburdened,
tangible assets and also for establishment/modernization/
and private sector participation will help ease the situation
expansion/rehabilitation/diversification of agro-processing
in rural infrastructure.
industries. The scope of the NCDC’s activities has been
The private sector stayed away from rural infrastructure
extended by an amendment to its Act, to include assistance
daunted by long gestation periods, lack of information on risk
for certain notified services in rural areas like water conservation,
profiles, perception of inadequate financial returns, regulatory
irrigation and micro irrigation, agri-insurance, agro-credit, rural
restrictions, and ambiguity. Other hurdles include relatively
sanitation, animal health, and so on.
low income density (income per square kilometre, which is
Construction of Cold Storages and Ice Plants—The NCDC depressed both by lower income per household in rural areas
provided assistance to build 313 cold storages (including as compared to urban areas as well as lower number of households
capacity expansion) with a total capacity of 0.9 million tonnes per square kilometre) and high incidence of subsidised (though
as on March 2004. Of these, 285 cold storages, with a total poorly performing) services leading to unchecked pilferage,
capacity of 8.46 lakh tonnes, have been completed. The as in the case of electricity. While the Government admits to
Corporation has, so far, provided about Rs 139.58 crore for limitations of budgetary support as the sole source of funding,
establishment of cold storages. The assisted cold storages are and is taking steps to invite private funds for infrastructure,
mainly for storage of potatoes, though items like fruits, these steps are mainly for large industrial infrastructure.
tamarind, spices, and milk products are also being stored. Attracting private capital for rural infrastructure requires the


policy-makers to rethink their approach and strategy and play at the apex level, which on-lend to retail institutions to enable
a proactive promotional role. delivery of market-based housing finance to low income
Minor irrigation infrastructure has been significantly funded households. ADB offers a combination of long-term loans
by private money, supplied through institutional sources and and technical assistance grants to financial institutions such
accessed by individuals. Groundwater, which forms the source as HUDCO, IDFC, ICICI, and NHB who are further
of a large proportion of minor irrigation supply, is largely entrusted with on-lending of these funds to institutions which
accessed through dug wells and tube wells, much of which is work more closely with poor communities.
privately financed. Factors which contribute to rapid devel- The World Bank has also extended several loans to state
opment of groundwater structures include new agricultural governments for establishing irrigation projects and command
technology, better access to credit, and expansion of rural area development endeavours, rural roads networks and
electrification. The down-side of these supportive factors and agricultural produce market yards, apart from large power
their largely unregulated expansion is that states such as sector projects which also benefited rural areas to some extent.
Punjab, Haryana, Rajasthan, and Uttar Pradesh have already The World Bank has also funded the Karnataka Rural Water
over-exploited their groundwater. Supply Project in the mid-1990s, while experimenting
There have been private sector initiatives for construction with several models related to community participation and
of household toilets. Overall, however, the private sector’s user fees.
involvement in O&M in the water and sanitation sector is
still very limited. One of the reasons is that maintenance is
Insurance Companies
usually considered a state responsibility. There are no cases
of organized large-scale private involvement in water supply. Insurance companies potentially have large pools of funds,
In health and education, the involvement of the private and their long-term maturity matches the investment needs
sector is widespread at all levels, be it the village ‘medical in infrastructure. Currently, except for the gigantic government-
practitioner’, the entrepreneur who runs a one-room ‘English- owned Life Insurance Corporation (LIC), the total amount
medium’ school or the large super-speciality hospitals and of investible funds is still small with private life insurance
‘deemed universities’ for professional education. One sector companies. As per the regulations of the Insurance Regulatory
where private investment overtakes that from public sources and Development Authority, 15 per cent of the investments
is storage infrastructure for perishable and semi-perishable of any insurance company should be in infrastructure. The
commodities. Eighty per cent of the cold storages, accounting LIC alone had plans to invest Rs 10,000 crore in infrastructure
for around 94 per cent of the total capacity countrywide, are in 2005–6.
from the private sector.
Apart from easing the fiscal position, there is a belief that
Commercial Banks
with private sector participation, investments will be better
managed with likely efficiency and productivity gains. The Commercial bank deficit in sectoral lending to agriculture is
reform process for the electricity sector in India has shown called forth by the GOI into the RIDF. This, in some ways,
that creating incentives for state-owned enterprises is difficult is their contribution to rural infrastructure lending, and a
and the outcomes are far from certain. convenient one at that because the risks and transaction costs
Overall, both unfulfilled demand of infrastructure services are very low. The direct lending by commercial banks to
and constrained supply of finance, management and governance infrastructure in rural areas receives purpose-wise refinance
are factors which discourage private capital from rural infra- from NABARD. In the year 2004–5, the rural infrastructure
structure financing. Existing specialized public institutions loans disbursed by NABARD to Commercial Banks, RRBs,
such as the RIDF need to play a pioneering role in catalysing Cooperative Banks included minor irrigation of around Rs
these investments. We need to take cues from private in- 679 crore, land development of Rs 291.3 crore, storage/market
vestments in urban infrastructure for the poor in devising yards of Rs 32.3 crore across all these banks, and forestry
innovative solutions to suit specific local requirements. These development of Rs 7.1 crore.
institutions can play a larger role in formulating risk profiles That this is largely all that commercial banks have to offer
and addressing other issues related to investment in rural in- to rural infrastructure is at one level understandable, because
frastructure. 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
Multilateral Agencies
these banks to engage in infrastructure financing in rural areas.
Multilateral aid agencies such as the Asian Development Bank These banks need to be incentivized to finance infrastructure
(ADB) have schemes designed to lend to specialized institutions with innovative delivery mechanisms closely linked with the


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


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. can lead to a situation where they use borrowed funds to
Community contribution is a meaningful strategy, not only meet their contribution and ‘participation’ becomes a burden
from the perspective of generating additional funds but also rather than a step to empowerment.
for better management and governance of community projects. On the question of cost recovery through user charges, it
Community contribution brings a sense of ownership and leads is interesting to note the following data from a World Bank
to better management of commonly owned infrastructure. study in India. The World Bank has made assessments of costs
The user community could play a significant catalysing role associated with poor rural water supply services for six states.7
in inviting investor confidence by contributing funds. The The opportunity cost of time spent in collecting water is Rs
community stake ensures that if systems are built appropriately 12 per household per day while that for time spent due to
the community can hold the other stakeholders accountable open defecation practices stands at Rs 9 per household per
and demand proper service. day. In addition, the health costs due to diarrhoea and
Community cost sharing needs to be done based on sus- gastroenteritis diseases are likely to be around Rs 300 per
tainable financial rules. While several government programmes household per year. This opportunity cost totals up to Rs 21.8
do have community cost sharing modules in their design, per household per day, close to half the daily income of a BPL
often low levels of community contribution are arbitrarily household with one income earner. These estimates point
fixed leading to failure in generating adequate stakes for the towards the ease with which the community is likely to opt for
community. The concept of community cost sharing has to
be translated into actual strategies, including building partici- 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 gains in operational efficiency and service but provide little
water supply service can eliminate the costs associated with incentive or framework for expansion of infrastructure.
existing practices. The study shows that the O&M cost recovery 4. Concessions place the responsibility of investments for
from beneficiary communities is generally in the range of 10 expansion on the private partner while the public partner
to 50 per cent for water services. The O&M cost recovery retains ownership of the assets. As private partners take
for piped water schemes is much higher than for handpump on more and more responsibility, appropriate regulations
and standpost schemes (World Bank, 2006b). are needed, and the terms of agreement need to be clearly
ASSEFA’s experience in Tamil Nadu in creating rural defined.
infrastructure with community contributions and stake is 5. Build-Operate-Transfer (BOT) model and its many varieties
encouraging and shows high demand and willingness to pay differ from concessions in terms of asset ownership. The
for such infrastructure (Box 3.5). 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
WORKABLE INFRASTRUCTURE FINANCING MODELS arrangements to mitigate the demand risk for both parties.
FOR RURAL INDIA Depending on the type of infrastructure and regulatory
With the liberalization of the Indian economy in the early framework, the public partner agrees to cover a certain level
1990s, the regulatory environment is increasingly supporting of demand or a per unit charge for consumption and related
experiments in private financing of infrastructure. The 73rd expenses, thus varying the exposure to demand generation
CAA has cleared the path for empowering local bodies in for both the private and public partner.
decision-making and choice. As a result we also see examples 6. Finally, there is divestiture in which the assets are completely
of community participation in infrastructure service provision owned by the private partner. While the government is
and financing. The progress of private sector and community not exposed to any financial risks thereafter, it must have a
involvement is halting, as the political and economic changes mature regulatory framework to manage and monitor
needed to accommodate and encourage their participation privatized infrastructure. Especially in the context of
are slow. In this context, we take a closer look at partnership rural infrastructure, systems must be in place to encourage
models in infrastructure (mostly urban), along with examples expansion of the infrastructure to remote areas (Table 3.5).
of similar attempts in India or abroad to explore possible In the rural context, due to uncertainty of demand and
options for financing rural infrastructure. 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
Kinds of Partnerships/Contractual Arrangements component. Active participation brings a better understanding
Contractual arrangements between the public and private of the end users’ consumption habits, the local context of fee
sector take many forms, and these infrastructure partnerships collection, and involvement of the community in the design
can largely be classified based on the levels of risk, regulations, and maintenance of infrastructure which are essential
and the nature of the infrastructure. components for the success of any rural project. Franchising
1. Service contracts, as short-term engagements, usually may also be explored as a way for private investments to
outsource specific operations or maintenance of existing empower entrepreneurs in the local communities to provide
infrastructure. This inherently limits the scope of private operations and maintenance for infrastructure. This effectively
involvement but also limits the risk associated with places the responsibility of ongoing service quality and cost
providing the service. within the local community under the broad supervision of
2. Management contracts are better suited for privatization the infrastructure developer.
of stable infrastructure. While retaining ownership, this
arrangement outsources the entire operations and PPP Options and their Applicability in Rural Context
maintenance to the private sector. Management contracts
are also used to gradually move infrastructure towards Public-private partnerships (PPP) in the rural context are still
privatization. in their nascent stages. Therefore, it is too early to label specific
3. Leases, while similar to management contracts in most models that will work and those that will not. Given the
respects, also transfer the assets and their streams of income. complexity of the rural context, creating space for private
This effectively increases the private partner’s exposure to financing and the challenges of sustaining collaborations have
the risks of commercial operation. Leases generally provide led to mixed results so far. However, it is a worthy exercise to


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


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

Electricity Roads
Power sector infrastructure requires huge investments in The transportation sector and roads have widely been viewed
production and transmission. Besides the economic constraints as an integral component for social and economic growth.
in rural India, transmission and distribution losses (both Construction of highways, bridges, and routes to urban
technical and due to theft), political interference, and the centres attract private investments in the form of BOT, BOO
current financial disarray in the SEBs have deterred private (Build Own and Operate) and BOOT (Build Own Operate
investments in rural areas. In order to fulfil demand, and Transfer). The rural context requires significant, if not
alternative stand-alone forms of energy production have been complete subsidization for roads due to difficulties in recovering
introduced despite higher per unit expenses. Though there is cost from the community. Availability of resources has been
little scope for this stand-alone infrastructure to be integrated the main constraint in maintenance of roads. Some states are
into the eventual extension of traditional grids, that often adopting a levy of market fee on agriculture produce to generate
seems to be the only viable alternative. additional resources for road maintenance. In this context,
To gain some learning from international experience in private sector maintenance of a 143 km state highway stretch
this regard, one may look at the case of Chile which, in its between Bhopal and Dewas has seen encouraging results.
There has also been some success in Latin America for
8 This amount may seem a large sum for a village family, but it has
rehabilitation and maintenance of roads through service
been done in several villages in Orissa by Gram Vikas. For details please
contracts by forming localized community based micro-
refer to the Gram Vikas website or contact Joe Madaith, the Director
of Gram Vikas. enterprises, which require some capacity building.

Financing Rural Infrastructure: Overcoming Budget Constraints

Financing Rural Infrastructure: Overcoming Budget Constraints

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