COMPREHENDING

INFRASTRUCTURE

Dr. Kusum Lata

13th Feb2022
INTRODUCTION
Infrastructure used in French since 1875 & in English since 1887,
originally meaning “installations that form the basis for any operation or system”

Its use in Military gained popularity after formation of NATO in 1940s

US National Research Council panel in 1987 adopted "public works
infrastructure", referring to :
functional modes – streets, roads, highways & bridges; mass
transit; airports & airways;
water supply & water resources;
wastewater management; solid waste treatment & disposal;
electric power generation & transmission;
telecommunications; &
hazardous waste management
INFRASTRUCTURE DEFINITION
Webster’s Dictionary : the basic equipment & structures that are
needed for a country, region, or organization to function properly
Business dictionary broadens it to include public utility,
telecommunications, transportation, and waste removal facilities.
Its broad definition : The basic structure, the framework, the system
which supports the operation of an organization, which makes
economic development possible of a country/enterprise (Clark, 2004)
Its concise definition : The physical components of interrelated
systems providing commodities & services essential to enable,
sustain, or enhance societal living conditions.(JE Fulmer, 2009),
Can be summarized that Infrastructure refers to structures, systems,
including services & facilities necessary for economy of a country,
city, or area to function.
INFRASTRUCTURE DEFINITION
Broadest definition of infrastructure—which includes real estate, social
infrastructure, and backbone systems for the oil, gas, mining, and
processing industries— the world spent $9.6 trillion, or 14 percent of
global GDP, on infrastructure in 2013 (Exhibit 1).

McKinsey Global Institute in their research on “Bridging global

infrastructure gaps” 2016 focuses on a narrower subset of this
spending, namely networked economic infrastructure. This consists of
transport (roads, railways, airports, and ports), water, power, and
telecom systems (which include digital infrastructure such as
broadband). Together these asset classes accounted for $2.5 trillion of
global investment in 2013. Over the past two decades, investment has
averaged 3.5 percent of global GDP (Exhibit 2). 4
INFRASTRUCTURE AS COMPREHENED
Infrastructure in hindi - aadharik sanrachna

Infrastructure can be comprehended as:

operating procedures,
management practices, and
development policies that interact with societal demand & physical
world :
to facilitate the transport of people & goods,
for provision of water for drinking &
a variety of other uses - safe disposal of society's waste products,
provision of energy where it is needed, & transmission of
information within & between communities.
TYPES OF INFRASTRUCTURE
“Hard" infra. refers to large physical networks necessary for the
functioning of a country/settlement. Ex.- roads, highways, vehicles, refineries
“Soft" infra. refers to all the institutions which are required to maintain
the economy, health, cultural & social standards of a country. Ex.
Systems – financial, education, health care, govt., law enforcement, emergency, etc.

“Urban” / “Municipal” Infra. refers to hard / physical infra. generally owned

& operated by municipalities, such as network of - streets, water distribution, sewers, drains.

It also include some of the facilities associated with soft / social infra.
such as parks, play grounds, securities, schools, hospitals & libraries.

Rural infra. refers to hard infra. like rural roads, major dams & canal works
for irrigation & drainage, mandis, rural water supply, rural electrification &
rural telecommunication connectivity.
TYPES OF INFRASTRUCTURE
Environmental infra. is an interconnected system of public & private
lands that contains significant areas of woodlands, wetlands, wildlife
habitats, & other sensitive areas

The Clean Water Act (CWA) is the primary federal law in the United
States governing water pollution. Its Section 502 defines green
infrastructure as "...the range of measures that use plant or soil
systems, permeable pavement or other permeable surfaces or
substrates, stormwater harvest and reuse, or landscaping to store,
infiltrate, or evapotranspirate stormwater and reduce flows to sewer
systems or to surface waters.”
TYPES OF INFRASTRUCTURE
Green infrastructure is an approach to water management that
protects, restores, or mimics the natural water cycle. It is effective,
economical, & enhances community safety & QoL. It means planting
trees & restoring wetlands
Blue infrastructure refers to water elements, like rivers, canals, ponds,
wetlands, floodplains, water treatment facilities, etc
Blue-Green Infrastructure (BGI) offers a feasible & valuable solution for
urban areas facing the challenges of climate change such as
cloudbursts & droughts. BGI connects urban hydrological functions
with nature, landscape design & planning. Thereby using the blue &
green to protect against flooding & other effects of climate change.
TYPES OF INFRASTRUCTURE
Grey Infrastructure: in context of Natural Water Retention Measures
(NWRM), Grey Infra. usually refers to the traditional methods of
managing water, using man-made, constructed assets, most often
water tight & designed to avoid any type of ecosystem to grow on it.
Modern grey infrastructure such as permeable pavements & some roof
water retention systems mimic the natural water retention capacity of
the landscape & help to restore more natural patterns of run-off &
infiltration. It includes channels, pipes, sewers & STPs, ditches, dikes,
dams...
It is so-called because it is often constructed of concrete. Unlike green
infra. grey infra. typically does not deliver multiple benefits. Grey infra.
such as sewers & sewage treatment works are needed in urban areas
but their effectiveness can be enhanced by green measures which help
to restore the natural water retention capacity of the landscape.
TYPES OF INFRASTRUCTURE
Transportation infrastructure
Road & highway networks (including structures (bridges, tunnels, culverts,
retaining walls), signage & markings, electrical systems (street lighting &
traffic lights), edge treatments (curbs, sidewalks, landscaping), & specialised
facilities such as road maintenance depots & rest areas)
Mass transit systems (Commuter rail systems, subways, tramways,
trolleys, City Bicycle Sharing system, City Car Sharing system and bus
transportation)
Railways, (including structures, terminal facilities (rail yards, railway
stations), level crossings, signalling & communications systems,)
Canals & navigable waterways requiring continuous maintenance
(dredging, etc.) Seaports & lighthouses
Airports, (including air navigational systems)
Bicycle paths & pedestrian walkways (including pedestrian bridges,
underpasses & other specialised structures for cyclists & pedestrian)
TYPES OF INFRASTRUCTURE
IT Infrastructure comprises of technical systems such as networking
equipment & servers, which provide critical function of sharing & moving

data within a specific environment

Energy infrastructure
Electrical power network, including generation plants, electrical grid, substations, &
local distribution
Natural gas pipelines, storage & distribution terminals, as well as the local
distribution network, may also include gas wells, as well as the fleets of ships and
trucks transporting liquefied gas.
Petroleum pipelines, storage & distribution terminals. may include oil wells,
refineries, as well as the fleets of tanker ships & trucks.
Specialised coal handling facilities for washing, storing, & transporting coal..
Electric vehicle networks for charging electric vehicles.
Solar energy ; Wind Mills ; Biogas ; Nuclear Energy
TYPES OF INFRASTRUCTURE
Economic Infra. is internal facilities of city/region/country that support
business & production. Such as communication, transportation & distribution
networks, financial institutions & markets, & energy supply systems

Critical Infra. refers to processes, systems, facilities, technologies,

networks, assets & services defined by a Government as being
essential to the health, safety, security or economic well-being of
citizens such as facilities for shelter, telecommunication, public health, etc.

Complementary infra. brings perfection or completes the existing infra.

like networks of light railways, tramways, etc.

Institutional infra. determines the framework within which economic

agents may formulate their economic plans & carry them out in
cooperation with others
INFRASTRUCTURE AS DEFINED IN INDIA
Dr. Rakesh Mohan Committee “The India Infrastructure Report” (1996)
Dr. C. Rangarajan, Chairman National Statistical Commission submitted report on 5th Sept 2001

Central Statistical Organisation (CSO) ; Economic Survey 2000-2001

Reserve Bank of India 2nd July 2007 circular included sectors - power, telecommunication,
railways, road including bridges, sea port , airport, industrial parks & urban infrastructure (WS, Sanitation &

Sewage Projects) for raising external commercial borrowings

Insurance Regulatory & Development Authority (IRDA) through its 2nd Amendment
2008, defined infrastructure

Income Tax Deptt. - For an Infrastructure Company, Section 80-IA allows deduction of 100% profit
from its income during 1st 5 ys of operation & then 30% deduction of profit from income during next 5 yrs

Empowered Sub-Committee of the ‘Committee on Infrastructure’ compared 23

sectors and arrived to some consensus in April 2008
Isher Ahluwalia Committee, 2011, “Urban Infrastructure covers urban roads, transport, renewal
& redevelopment including slums, WS, sewerage, drainage, SWM & street lighting.’’
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Cabinet Committee on Infrastructure 2012
The Cabinet Committee on Infrastructure (CCI), on 1 March 2012,
identified the sectors that should get infrastructure status.

The move emanated from the lack of consistency in definition of what

constitutes infrastructure.
The harmonised master list approved by the CCI has five main sectors
and 29 infra subsectors.

The five sectors include transport, energy, water sanitation,

communication and social and commercial infrastructure.

The infra tag allows certain benefits including access to easier

borrowings overseas, ability to raise funds through tax-free bonds, tax
concessions, and access to dedicated lenders such as IIFCL, and the
debt funds 16
CCI 2012
The new master list to serve as a guidepost for all the agencies
responsible for supporting infrastructure in various ways.

However, each agency will be free to draw its own list of sub-sectors
out of the master list, which it intends to support, with adequate
justification for inclusion or exclusion.

Any fresh sector or a subsector will be included in the master list if it

has six characteristics identified by Dr. C. Rangarajan

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CCI 2012
Master List of Infrastructure Subsectors:

SN Category Infrastructure Sub-sector

1 Transport Roads and bridges
Ports
Inland Waterways
Airport
Railway Track, tunnels, viaducts, bridges1
Urban Public Transport (except rolling stock in case of
urban road transport)

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CCI 2012
Master List of Infrastructure Subsectors:

SN Category Infrastructure Sub-sector

2 Energy Electricity Generation
Electricity Transmission
Electricity Distribution
Oil pipelines
Oil/Gas/Liquefied Natural Gas (LNG) storage facility2
Gas pipelines3
Electricity Generation

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CCI 2012
Master List of Infrastructure Subsectors:

SN Category Infrastructure Sub-sector

3 Water Solid Waste Management
Sanitation Water supply pipelines
Water treatment plants
Sewage collection, treatment and disposal system
Irrigation (dams, channels, embankments etc)
Storm Water Drainage System
4 Communi- Telecommunication (fixed network)4
cation Telecommunication towers

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CCI 2012 Master List of Infrastructure Subsectors:

SN Category Infrastructure Sub-sector

5 Social Education Institutions (capital stock)
and Hospitals (capital stock)5
Commerc Three-star or higher category classified hotels located
outside cities with population of more than one million
ial
Common infrastructure for industrial parks, SEZ, tourism
Infrastruc
facilities and agriculture markets
ture
Fertilizer (Capital investment)
Post harvest storage infrastructure for agriculture and
horticultural produce including cold storage
Terminal markets
Soil-testing laboratories
Cold Chain6
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CHARACTERISTICS OF INFRASTRUCTURE
Dr. C. Rangarajan, Chairman, National Statistical Commission
(2001) indicated 6 characteristics of Infrastructure sectors :
Natural monopoly – one organisation catering to entire demand for goods
& services at most efficient price

High-sunk costs – cost incurred but cannot be recovered

Non-tradability of output – good that is intangible & not tradable

Non-rivalness in consumption – no conflict over additional consumer

enjoying the benefits of a good/ service

Possibility of price exclusion - pricing not regulated by market forces

Bestowing externalities on society – externalities are spillover

effects (costs or benefits) accrue to other (third) parties
Infrastructure for Development , WDR 1994
World Bank’s World Development Report 1994 titled
“Infrastructure for Development” states that “Infrastructure if
cannot be the engine” then it is the “wheels” of eco. activity.

Though no precise relationship has been reported between

growth & investment in infrastructure, but WDR stated that
1% increase in the stock of infrastructure is associated with
1% increase in GDP across all countries.

Generally around 6.5% of the total value added is contributed

by infrastructure in low income countries, 9% in middle
income countries & 11% in high income countries.
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Infrastructure endorses Growth
Good quality infrastructure is important not only for faster
economic growth but also to ensure inclusive growth i.e. when
growth benefits are shared by the majority of people of the
city/region/country.

inclusive growth will alleviate poverty & reduce the economic

inequality i.e. the gap between rich & poor.

For example, Micro, small & medium enterprises (MSME) are

dispersed throughout the economy, their production & their
growth require access to quality & reliable infrastructure services
to compete efficiently with large-scale enterprises.
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Infrastructure endorses Growth
Large-scale enterprises are usually located at prime locations
(near port, transport hubs) & very resourceful i.e. if required they can
build their own infrastructure like small power plants or generators.

While Small enterprises, usually labour-intensive units, are

dispersed widely in the economy & have to rely on the availability
of the general infrastructure facilities.

By building good quality infrastructure, the small enterprises can

successfully compete with large-scale industries, this will help
alleviate the poverty in the country.

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Infrastructure endorses Growth
Similarly expansion of infrastructure facilities such as irrigation,
rural electrification, roads & road transport promotes agricultural
produce & agro-processing industries.

These infra. facilities help farmers & owners of agro-processing

industries in not only getting raw materials, fertilizers & other
inputs at cheap rate but also enable them to take their products to
the markets located in big towns & cities.

the expansion of infra. facilities ensures sustained growth of

employment in agriculture & small-scale rural industries & brings
prosperity in the rural areas, thus ensuring inclusive growth

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Infrastructure endorses Growth
This also prevents mass exodus of rural population to urban
areas

Thus it can be summarised that insufficient quantity of power,

water, transport etc. result in sub-optimal utilization in
manufacturing, agricultures, service sector, etc. & deficient
transport sector further deteriorates the productivity.
Also Besides promoting growth, infra. is an effective cure of
slowdown, better than tax cuts & other Govt. spending

Hence for inclusive growth some more considerations are

required while planning, implementation & management of
infrastructure. 27
Infrastructure & Economy – ESoI 2013-
2013-14
Economic Survey of India, 2013-14 emphasises the importance of
quality infrastructure by stating that “Rural economic growth in
recent years has put enormous pressure on existing infrastructure
particularly on transport, energy & communication. Unless it is
significantly improved infrastructure will continue to be a
bottleneck for growth & obstacle to poverty reduction”.

Hence it can be said that, it is the challenge to ensure strong,

sustainable & balanced development through integration of the
economy with environmentally sustainable development of
infrastructure.

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Infrastructure & Economy - Academia Input
Published Research in Economic Annals 2013, examined the
relationship between infrastructure & economic growth by
analyzing annual infrastructure investment 1999-2008.

It used Principal Component Analysis & concluded that 7

broad sectors of infrastructure are complementary in nature
& mutually reinforcing. These are: Road construction;
Railways; Electricity gas & water supply; Communications;
Irrigation; Storage; & Ports
It also established that Infrastructure exhibits a very high
rate of return, when compared to other investment, which
might be due to its spill-over or externality effects. 29
Infrastructure and Economic Growth
Infrastructure affects economic growth in two central ways―
by directly boosting activity & by reinforcing productivity.

Former involves construction and operation of new or

upgraded infrastructure which supports economic activity,
boosting demand for goods & services and providing jobs.

Later involves infrastructure reinforcing productivity

throughout an economy. For example:
Good quality roads & railways, make it easier, cheaper & faster to
transport goods & people, while airports & sea ports connect firms
across international boundaries, facilitates trade & investment.
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Infrastructure and Economic Growth
Example contd.:
Reliable electricity, water & telecoms infrastructures enable firms
to function efficiently & without disruption, and support wider
goals, such as those related to the environment.

All this means that even in the most advanced economies, if

infrastructure capacity does not increase in line with economic and
demographic growth, it can instead act as a drag on progress.

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IMF Study, Oct. 2014
Infrastructure (infra.) spending yields best results, though it has
the ‘longest implementation lags’; tax cuts are obviously faster
but the results will be modest if these are not targeted at ‘credit-
constrained consumers’.
Upper limit for impact of infra. spending is 1.8, i.e. Re 1.0 spent on
infrastructure will lead to a Rs. 1.8 impact on the economy.
Upper limit for tax cuts is 1/3rd of this, as consumers who are
facing uncertain job prospects, will not spend money saved
through the tax cuts.
Other forms of Govt. spending like social security, transfers to
local govts & assistance to small enterprises are likely to be more
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beneficial than tax cuts
IMF Study, 2016
Welfare multipliers of public spending (the consumption
equivalent change in welfare for one dollar change in public
spending) in a DSGE model. The welfare multipliers of public
infrastructure investment are positive if infrastructure is
sufficiently effective

A dollar spent by the government for investment raises domestic

welfare by equivalent of 0.8 dollars of private consumption.

IMF (2014) concludes that increased public infrastructure

investment raises output in both the short and long term,
particularly during periods of economic slack and monetary
accommodation.
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IMF Study, 2016
improving the productivity of public spending is the key to fully
reaping the benefits of an infrastructure spending push

IMF (2015) findings were that improvements in public investment

management can significantly enhance the productivity of public
investment and suggested that governments should strengthen
institutions that are responsible for the planning, allocation, &
implementation of public investments.

Policy implication of this 2016 study being - The time seems right
for a Global Infrastructure Push : it would not only increase output
& reduce public debt-to-GDP ratio(shown by earlier studies), but
also yield quite sizable welfare benefits.
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Other Studies
Studies indicate that with a 20% sustained increase in public
investment in infrastructure, Govt can accelerate real growth by
1.8% pts in medium to long run (6 to 10 yrs) after the policy
change. This will be accompanied by a 0.2 % decline in the rate of
inflation.

Increase in income will lead to a 0.7% point annual reduction in

poverty in rural India.

Potential for achieving the much-debated 8 to10% aggregate real

GDP growth in the Indian economy is thus established.

Infrastructure development boosts short-term as well as potential

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growth rate of GDP.
Summarizing
Infrastructure providing efficient services, corresponding to
effective demand, manifests major benefits in economic growth,
poverty alleviation & environmental sustainability.

Growth raises demand for infra. with increase in income levels, &
change in composition of infra. occurs in following manner :
for low income countries, basic infra. like water, irrigation are most important
in middle income economies, demand for transport grows fast,
in high income economies, power & telecommunication occupy more
importance.

Due to such linkages between the economy & infrastructure,

efficiency, competitiveness & growth of the economy depends
upon the development of the infrastructure sector.
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Thanks for
kind attention
Natural Monopoly
When one firm can potentially supply market’s entire demand for
goods & services at most efficient price, it is said to exist natural
monopoly
When the fixed costs become so large that only one firm can feasibly
operate, & the average costs continue to fall over the entire range of
production, the one firm will emerge as natural monopoly
Production of certain goods & services are subject to scale
economies- like Infrastructure facilities
Production of infrastructure facilities ( like railways, electricity, tele-
communications, gas-pipelines & other public-utilities) require a
certain minimum scale of production
Natural Monopoly is often viewed as market-failure
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Natural Monopoly
Figure 1 shows cost & demand
curves of a natural monopoly.
A firm produces Output Q1, where
Marginal Cost (MC) = Marginal
Revenue (MR).
At this point the Price per unit of
Production is P1 & Average Cost
is AC1.
Price is greater than average cost (
P1>AC1), the profit per unit of
output = [P1-AC1].

If this natural monopoly starts to operate as perfect competitive firm, the

marginal cost pricing [P=MC] principle, then it must produce
output Qa & price will be Pa. In this situation, there is a loss (ACa-Pa)
per unit of output. 39
Sunk Costs
The expenditures that has already made & cannot be recovered
even when the firm go out of business
Sunk costs may be a barrier to entry into infrastructure development
projects for private investors
If sunk costs are high relative to marginal cost, price will almost
surely exceed marginal cost, even though economic profits are zero
Examples of sunk costs include investments in product development, the
construction of a specialized production facility, large infrastructure projects
etc. Such expenditures cannot be recovered & are therefore essentially
irrelevant for any on-going decisions that the firm must make
Sunk costs should not be considered for future investments
decisions
Examples: telecommunication towers, sewerage, railways etc. have high sunk
costs 40
Non-
Non-Tradability of Output
Infrastructure output are the services that are evoked from the
use of particular infrastructure facility. Thus the characteristics of
services are equally applicable to infrastructure: intangible nature &
non-tradability (intangible- unable to be touched; not having physical presence )
This means that infrastructure services must be consumed /
purchased at the place they are produced
These services generally can not be transported (with some
exceptions)
This characteristic has significant policy implications, because the
viability of a particular infrastructure establishment has little role to
play
For instance: roads, railways, bridges, airports etc. can not be
transported
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Non-
Non-Rival Consumption
Consumption by an individual does not affect the consumption by
others
Thus an additional consumer can enjoy the benefits of consuming a
good or service without conflicting the benefits of others
Zero marginal cost of providing the benefits of a good to an additional
consumer
For instance: roads & telecomm
Price Exclusion
The benefits will be provided only to those who pay for the
services/goods
Price exclusion is a feature of private goods
Perfect competition and efficiency merit marginal cost pricing, i.e.,
P=MC, that the prices must be set at marginal cost
But, in the case of infrastructure, it will be very difficult to recover the
costs of providing the facilities
Thus, pricing of infrastructure facilities are not regulated through
market forces 42
Externalities
Externalities are the spillover effects (costs or benefits) that are not
included in the prices and accrue to other (third) parties than those
involved in the transaction. For instance: health & education
Externalities are said to exist when production or consumption of an
entity affect the productivity or well being of another entity
Two conditions are necessary for an externality
1. Interdependence between economic entity
2. Non-compensation for the effects of interdependence

Two types of Externality:

i) Positive Externality
ii) Negative Externality
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