INNOVATING WITH INFRASTUCTURE

1. INNOVATING WITH INFRASTUCTURE “DEMAND SIDE”INSIGHTS FROM FIRM RESPONSES SUMILA GULYANI NOVEMBER 2006

2. Key variables in infrastructure reform Restructure Invest Institutions & governance Demand Supply Technology

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 Critique against self-generation Maruti Case Low-cost & hi-quality US$0.08/unit High Cost Polluting fuels Use gas- a clean fuel Idle capacity High plant load factor: 70%

7. Maruti’s Power Sharing Arrangements 90-91 91-92 92-93 (GT-1) 93-94 94-95 95-96 96-97 97-98 (GT-2) (GT-3) MWH 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 HSEB Suppliers Maruti-own

8. Maruti’s Mini-Electric Utility • 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)

9. Why? Supply-chain effects • 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?

10. Cost structure & the supply-chain

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 entirely Crucial to understand demand

13. The Framework: Power sharing Understanding Demand for Infrastructure Impact Response Direct & External costs & benefits Self-generation with sharing Demand for public infra With lean production external diseconomies • -Scale economies (-) • -Tech vendors (+) • -New/special contracts (+) Supply-side

14. Expands the options for users & govt GENERATION TRANSMISSION DISTRIBUTION USERS SUPPLY 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”