While the road sector exemplifies the problem starkly, the problem, of variability in rules, afflicts the entire swathe of infrastructure sectors. In three budgets since 2002-03, when the concept of “viability gap funding” was first floated — as Infrastructure Equity Fund — the rules have changed. The concept itself is very sound. Since infrastructure projects often include a substantial risk element that banks or even long-term financial institutions are wary of funding, the government should finance that segment of the cost.

In the first place, getting from the budget that announced the scheme, to the finance ministry

finally figuring out a workable way to implement it, took over a year. Then, repeated tweaking of the scheme substantially weakened its utility and effectiveness. Till April 2009, as per government data, projects worth just Rs 16,471.7 crore ($3.2 billion) have been cleared under viability gap funding, for all of which the Centre has earmarked Rs 3,228.89 crore. Almost all these 15 projects are for the construction of roads.

A prime minister’s committee has estimated the Indian bill for infrastructure projects at $500 billion. The delay is crucial, as successive changes to the rules and the policy environment have meant that in most years till now not more than 70 per cent of the annual amount earmarked for funding projects could be utilised. And these numbers severely underestimate the problem; since the viability gap funding has a tremendous leverage potential, the potential amount of investment foregone is several times more.

The problem of rule-instability extends to several areas. Take the case of tax treatment that affected oil and gas exploration under NELP-VII. The finance ministry issued a clarification to Section 80(IB)9 of the Income Tax Act, restricting the tax holiday to only oil manufacturing companies. Gas explorers were left out; they had to pay the tax. This, despite the entire bunch of bidders aligning with the petroleum ministry saying this should have been made explicit before they made the bids.

... contd.