SUMILA GULYANINOVEMBER 2006

INNOVATING WITH INFRASTUCTURE

“DEMAND SIDE” INSIGHTS FROM FIRM RESPONSES

2

Key variables in infrastructure reform

Institutions & governance

Demand

Technology

Invest

Restructure

Supply

3

Development practitioners’ view

“infrastructure raises productivity …” India Infrastructure Report

“the adequacy of infrastructure helps determine one country’s success and another’s failures . . . (and) good infrastructure raises productivity and lowers production costs”

World Bank

Paradox?: Industrial successes without infrastructure

And little support in the literature

4

Research Questions & Methodology

How does inadequate infrastructure affect the costs and competitiveness of firms?

How do firms respond?

Indian Auto Industry (31 firms)Major Case Study: Maruti

5

Power Problems: Firm-level Perspective

Chronic shortage (Cause: Demand >> Supply)– Hard to get a connection– Frequent power cuts

Power quality problem (Cause: D>S, poor infrastr)– Voltage fluctuations– Frequency fluctuations

Impacts: loss of production; machines shut down, material losses, product quality variations

Solution: Self generate

6

Maruti’s innovative power solution

Idle capacity

Polluting fuels

High Cost

Critique against self-generation

High plant load factor: 70%

Use gas- a clean fuel

Low-cost & hi-quality US$0.08/unit

Maruti Case

7

Maruti’s Power Sharing Arrangements

35,00030,00025,00020,00015,00010,000

5,0000

90-9194-95

95-9696-97

97-98

(GT-1) 93-9492-93

91-92(GT-2)

(GT-3)

HSEBSuppliersMaruti-own

MWH

8

Transmission and Distribution– Dedicated underground 11 kv cables– Dedicated 66 kv transmission line

Billings and Collections– 100% Collection

Tariffs Ensure Cost Recovery– Supplier firms ($ 0.09) cross-subsidize HSEB

($0.04)

Maruti’s Mini-Electric Utility

9

Disruptions in supplier production affect assembly operations

Time & material losses at supplier create costs for assembler

Variations in quality are problematic The “inventories solution” is expensive

How important is the supply chain?

Why? Supply-chain effects

10

Cost structure & the supply-chain

78.3%61.7% 76.2%

67.3% 76.7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Maruti

Hindus

tan

A-Leya

ndTelc

o

Hero-H

onda

% o

f Tot

al E

xpen

ditu

re Other expensesDepreciationFinancial ExpensesFrieght,Forwarding & pkgingStores & SparesMaterials & ComponentsWages,Salaries,benefitsPower & fuel

11

CONCLUSIONS

12

Conclusions Adverse impacts of poor infrastructure:

– production and quality suffer at the plant – cascade through industrial supply-chains– external diseconomies are more debilitating

Firms respond: Some devise innovative solutions Ability to respond has increased

– Technological revolution – Institutional innovations– Response=f (technology, impact)

+management/vision

But, still, cannot solve the problem entirelyCrucial to understand demand

13

The Framework: Power sharingUnderstanding Demand for InfrastructureSupply-side -Scale economies (-)

-Tech vendors (+)-New/special contracts (+)

Response

Demand for public infra

Self-generation with sharing

Impact

With lean productionexternal diseconomies

Direct & External costs & benefits

14

Expands the options for users & govt

GENERATION TRANSMISSION DISTRIBUTION USERSSUPPLY DEMAND

15

Practical Implications Need for Govt action persists Roles:

– Traditional: Investor, Planner and Regulator– Non-traditional: enabler, deal-maker, partner

Govt can and should:– leverage user interest and investments– Work with a broader set of possible solutions

Industrial targeting: alternatives– New Integrated Industrial Parks (Mohan report,

1996) – Vs. Focus on existing industrial districts – Franchises for “infrastructure districts”