Using Land for Economic Development: India's Land Problem Is Also a Public-Finance Problem

by Anirudh Burman.

Policy makers have traditionally considered the state's use of land for economic development as only a property rights problem. Using land for economic development is one of the main ways in which Indian cities are built and expanded. Roads, metros, housing, industrial areas and public facilities all require land. Government agencies decide where this infrastructure will go and what can be built around it. These decisions change the accessibility and development potential of land. They also create new obligations for roads, drainage, water, waste collection and other public services. Most of this is done by acquiring private land and putting it to public use.

Indian governments have traditionally relied heavily on compulsory acquisition to assemble land for this process. The state acquires land and pays compensation before financing the infrastructure needed to develop it. It gives the state a clear legal instrument, but it also has serious costs. Its use has often left compensation, rehabilitation and resettlement, procedural fairness and the wider distributional costs borne by affected people inadequately addressed.

It is also a poor way to finance development. Acquisition routinely takes time and money. Litigation, administrative delay and financing gaps compound both.

Under the old land-acquisition law and its successor, the state is the upfront buyer of land for roads, stations, housing, public facilities and urban expansion. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (the "2013 land acquisition law") made this route more expensive and more demanding. Over the past decade, states have looked for alternatives. But the case for change is larger than the consequences of the 2013 law.

Compulsory acquisition creates two linked land-finance problems. First, the state often commits large sums to land before it can build the infrastructure that gives a project its public value, sometimes without the resources to do so. This leads to delays. Second, litigation and administrative delay raise the cost of development and defer its benefits. They increase financing and construction costs, postpone land development and reduce the present value of expected benefits.

There is also an institutional problem. A development authority may assemble land, grant additional development rights or collect development-related charges, while a municipality or utility provides the resulting roads, drainage, water and other services. Similar problems arise outside municipal boundaries, where land may already be converting to urban uses while planning and finance powers remain with institutions designed for rural settlements. Land development therefore raises a wider set of public-finance questions. What rights does the state actually need over land? How should the costs of infrastructure be financed? What part of value created by public action can be recovered? Which institution should receive that revenue, and which institution must provide the resulting services?

I make the argument in three steps. First, compulsory acquisition should remain available but cease to be the default, especially for urban development and expansion. Second, I set out principles for choosing among land-development instruments and financing the public costs associated with them. Third, I propose seven changes to land assembly, public-asset management, planning and local finance. Together, they would lower unnecessary public expenditure while creating lawful and durable sources of revenue for public investment.

Limiting the use of compulsory acquisition

The 2013 land acquisition law raised compensation and placed rehabilitation and resettlement at the centre of acquisition. This protects people whose land is taken for public purposes. In many cases, acquisition costs can be a multiple of the market rate of the land being acquired, which makes urban land especially expensive. Government agencies must therefore account for compensation, rehabilitation and resettlement, administrative effort, finance costs, delay and litigation. These are fiscal commitments, not merely administrative processes.

Compulsory acquisition remains necessary for some public works. Metro alignments, transmission corridors, trunk sewers and road junctions may require contiguous land, indefeasible title, fixed geometry and timely possession. Voluntary assembly may fail where a single holdout can block a network. This, however, does not mean that compulsory acquisition should be the default strategy for state agencies.

The fiscal problem predates the 2013 law. When the state acquires land before developing it for urban purposes, it makes a fiscal commitment years before the developed land generates revenue. It also bears the risk of delayed approvals, contested awards, fragmented possession and changing construction costs. A project can acquire land first and confront the service and financing problem later, during redesigns, additional land requirements, delayed construction and obligations that were not part of the original acquisition decision.

The social cost is equally important. Acquisition can break the relationship between a landowning household and the value created by later planning and infrastructure, often by displacing that household. A one-time compensation payment may settle a legal claim, but it does not create a durable stake in the development that follows. The state is then the only party with a continuing stake in the land. In Indian practice, it has often not produced the intended development outcomes. Tenants, farm workers, small businesses, informal occupants and households with uncertain documents can lose access, income or neighbourhood ties. Compulsory acquisition can turn a potentially mutually beneficial transaction into an adversarial process between the state and affected citizens. That process has fiscal consequences as well.

The choice of instrument is therefore a question of public purpose and distribution, but also of long-term fiscal responsibility. States should develop a repertoire of land-assembly instruments that reduces coercion and upfront fiscal claims, while keeping the incentives of affected parties in view.

That is why the Indian state must have a choice of land-assembly instruments. It cannot rely only on expropriation. Before acquiring land, a state agency should compare the full lifecycle cost of negotiated purchase, pooling, readjustment, leasing and other alternatives. A lower upfront outlay is not necessarily fairer or cheaper over the life of a project.

Principles for a different land-development finance policy

Compulsory acquisition for urban development is usually framed as a question of coercion, compensation and procedural fairness. This treats the problem as one of how the state takes private property. But acquisition is a way to assemble undeveloped or underused land, develop it through infrastructure and planning, and unlock higher economic value for private and public actors alike. Most urban interventions change the productive potential of land. The question extends beyond acquisition to how the state measures, attributes and partly recovers the value created by that transformation to finance the public action that made it possible.

The starting point must be private property, because development changes the value of privately held land. Increases in land value belong to holders of property rights. The state does not acquire a claim over those gains merely because land values rise. It acquires a claim when its investment and planning decisions create part of that increase. A metro line, a road, rezoning or additional development rights can increase a parcel's accessibility or its development potential.

Where public action creates such an increase in value, the state should be able to do two things: (a) assemble and develop the land needed for planning and infrastructure, and (b) capture a limited and proportionate part of the value increase to help finance the investment that created the gain ((Peterson, 2008); (Suzuki, Murakami and Hong, 2015)). The objective is to recover public costs from the value those costs help create. Revenue must also reach the public body that bears the related infrastructure and service obligations. These premises lead to four principles for choosing and designing land-development instruments.

First, a better policy should reduce land-assembly and development costs for landowners and the state, as far as possible and without coercion. Indian states and cities already use versions of this approach for urban development, including town-planning schemes in Gujarat under the Gujarat Town Planning and Urban Development Act, 1976, and more recently in Maharashtra; and land-pooling schemes in Amravati, Delhi, Chennai and Guwahati ((Ballaney, Faust, Swarankar and Ghosh Belliappa, 2022)). The choice of the exact land-assembly scheme follows from this principle.

Second, states must ask whether a project requires absolute title, free from pre-existing private interests. Compulsory acquisition gives the acquiring state agency complete and final title. This reduces the risk of title challenges and gives planners broad scope to implement planned development in the acquired area. Agencies should weigh the need for such secure title against the cost of compulsory acquisition. Indefeasible title may be necessary only where a public purpose requires permanent and exclusive control over land. Relevant considerations include network continuity, security, strategic importance and the inability to tolerate later termination of the state's rights.

Third, land-development instruments should preserve the economic stake of affected parties where possible. Existing owners may then retain an interest in the value created by development, which can reduce opposition and lower upfront costs relative to compulsory acquisition. Town planning, land pooling and leasing can do this through returned serviced plots, retained title, deferred payments or other forms of continuing interest ((Hong and Needham, eds., 2007); Byahut and Mittal (2017)). These mechanisms may still displace existing uses or impose costs on tenants, workers and occupiers. Those costs can be lower than under compulsory acquisition, but they must remain part of the comparison.

Fourth, regular and stable flows of spending and income are preferable to large upfront allocations. Several proposals below reduce the state's initial cost and turn development finance into a steady, predictable stream.

These principles point to three relationships that land policy must get right. First, the state should acquire only the property interest that a public purpose requires. Permanent ownership, temporary possession, development rights and access rights impose different costs and allocate different risks. Second, where public investment or planning raises land values, the state should recover only a limited share of the increase attributable to public action, sufficient to help finance the investment and related service costs.

Third, revenue must be aligned with the institution that bears the resulting costs. A planning authority may grant development rights while a municipality provides roads, drainage, waste collection and other services. If revenue and service obligations sit in different institutions, value capture cannot finance public services effectively. The proposals below apply these relationships to land assembly, development, public assets and urban finance.

Proposals for a different land policy

I propose seven linked changes. None is novel in isolation, but their value lies in their combination as a public-finance strategy for urban development. They respond to four weaknesses in the present system: (a) excessive reliance on cash-heavy compulsory acquisition, (b) limited use of arrangements that preserve a private stake in development, (c) planning and development rights that are often disconnected from infrastructure costs, and (d) weak assignment of development-related revenue to the public bodies that finance infrastructure and services.

1. Reserve compulsory acquisition for indispensable public infrastructure. It should be limited to cases in which an alignment, network or public facility requires contiguous land, indefeasible title, fixed geometry and timely possession. Every other proposal should compare acquisition with lower-outlay alternatives on full lifecycle cost, not compensation alone. Urban development projects should be able to combine purchase, compulsory acquisition, leasing and land readjustment.
2. Create a legal framework for land assembly that reduces the state's immediate cash requirement. Land pooling, town-planning and land-readjustment schemes can reorganise plots, reserve land for public purposes and return serviced land to owners. They can reduce the state's immediate cash requirement while retaining land, rights or charges that help finance infrastructure.
3. Use long-term leasing where purchase is unnecessary. Long-term leasing is appropriate where a public purpose requires use or control, but not permanent ownership. It can reduce the state's upfront cash requirement while allowing the owner to retain title and receive an income stream. This does not make leasing cheaper by itself. The state should compare the discounted value of lease payments and contingent liabilities with the cost of purchase.
4. Use concessions to manage publicly owned assets, such as parks and gardens. Public ownership does not require the state to finance every investment or maintenance obligation directly from the budget. This was common across much of the economy until the 1990s and early 2000s, when the state often acted as both regulator and provider. Although the state has moved towards a more regulatory and facilitative role in many sectors, urban development still relies on direct public provision in many cases. Where the public purpose can be protected, the state can grant limited, time-bound use rights over public assets in return for investment and service obligations. It retains ownership and control over the public purpose, while the private party receives only the rights needed to perform the agreed function. States can, for example, use limited concessions to finance the maintenance of public parks and gardens by allowing commercial use over defined parts of an asset. A private party could operate specified commercial or visitor facilities. The municipality should retain ownership, preserve public access, limit the area and uses, and specify enforceable maintenance and service standards. As an example, the City of Austin Policies and Procedures for Concessions in City Parks provide a useful municipal-policy illustration: concessions remain limited commercial uses, must serve a public benefit and a financial return to the city, and operate under defined terms, planning and maintenance standards.
5. Make the local area plan the unit of value capture. A local area plan should link development rights, infrastructure and value capture. Public investment and planning decisions within an area can increase the development value of land. Premium FAR, betterment charges and other instruments should recover a proportionate share of the increase attributable to those actions. The proceeds should help finance the infrastructure and additional service capacity that make the development possible. The local area plan provides the spatial framework for identifying these costs, coordinating development rights and assigning the resulting revenue.
6. Align planning, service responsibility and revenue. Planning powers, development-related revenue and service obligations should be aligned. In many Indian cities, development authorities, such as DDA, MMRDA and AUDA, plan and develop land while municipalities and utilities bear service obligations. Where one public agency grants development rights and another must provide the resulting infrastructure and local services, they must share the resulting revenue. This applies a basic public-finance principle: revenue assignment should follow expenditure responsibility, or, in the usual formulation, finance should follow function ((Boex et. al., 2024)). The arrangement can take different forms. Planning and service functions may sit in the same body, or development-related revenue may be shared through a defined and timely transfer rule. The objective is to ensure that institutions responsible for servicing new development receive a portion of the revenue it generates.
7. Give rural local bodies planning and finance powers in peri-urban areas. The final question is where these powers should apply. Land conversion often begins before a settlement is formally classified as urban. If planning powers, infrastructure finance and development-related charges arrive only after urbanisation, the public sector inherits the cost of retrofitting roads, drainage and other services after development has occurred and much of the associated value has already been allocated. Planning and finance powers should therefore follow the geography of development. Much land conversion occurs where settlements function as urban places but remain under panchayats or other rural local bodies. These bodies must have lawful powers to plan layouts, reserve rights-of-way, collect development-related charges and provide basic services before unplanned growth makes infrastructure far more expensive.

The proposals form an architecture for reducing the upfront cost of urban development. They allow the state to recover a share of the value generated by public action while allowing land markets to function. The first three reduce the state's cash-heavy role as buyer of land. The fourth lowers the fiscal burden of maintaining a public asset without abandoning its public character. The fifth creates an area-based account for planning and infrastructure. The sixth ensures that revenue reaches the institutions that must provide services. The seventh extends the approach to places where urban growth is already changing land values outside municipal boundaries.

Conclusion

India does not need land-acquisition and development policies that claim all gains from land. It needs policies that stop treating compulsory acquisition as the first response and additional development rights as a free or disconnected permission. Land assembly, planning, infrastructure and municipal finance must be treated as one public-finance sequence. The seven proposals offer a starting point.

Selected bibliography

Hong, Yu-Hung, and Barrie Needham, eds. Analyzing Land Readjustment: Economics, Law, and Collective Action. Lincoln Institute of Land Policy, 2007.

Sorensen, Andre. "Land Readjustment, Urban Planning and Urban Sprawl in the Tokyo Metropolitan Area." Urban Studies 36, no. 13 (1999): 2333-2360.

Byahut, Sweta, and Jay Mittal. "Using Land Readjustment in Rebuilding the Earthquake-Damaged City of Bhuj, India." Journal of Urban Planning and Development 143, no. 1 (2017).

Jain, Vibhu. Examining the Town Planning Scheme of India and Lessons from Land Readjustment in Japan. ADBI Working Paper 1037, 2019.

Mahendra, Anjali, Robin King, Erin Gray, Maria Hart, Laura Azeredo, Luana Betti, Surya Prakash, Amartya Deb, Elleni Ashebir and Asmaa Ibrahim. Urban Land Value Capture in Sau Paulo, Addis Ababa, and Hyderabad: Differing Interpretations, Equity Impacts, and Enabling Conditions. World Resources Institute and Lincoln Institute of Land Policy, 2020.

Smolka, Martim O. Implementing Value Capture in Latin America: Policies and Tools for Urban Development. Lincoln Institute of Land Policy, 2013.

Ingram, Gregory K., and Yu-Hung Hong, eds. Value Capture and Land Policies. Lincoln Institute of Land Policy, 2012.

Sheikh, Shahana, and Ben Mandelkern. The Delhi Development Authority: Accumulation without Development. Centre for Policy Research, 2014.

van Duijne, Robbin Jan, and Jan Nijman. "India's Emergent Urban Formations." Annals of the American Association of Geographers 109, no. 6 (2019): 1978-1998.

The Gujarat Town Planning and Urban Development Act, 1976.

Delhi Development Authority. TOD Policy dated 30 July 2021, 2021.

De Souza, Flavia A. M., Tetsuo Ochi and Akio Hosono, eds. Land Readjustment: Solving Urban Problems Through Innovative Approach. JICA Research Institute, 2018.

Glasser, Matthew. Institutional Models for Governance of Urban Services, Volume 1: Synthesis Report. World Bank, 2021.

Anirudh Burman is a research at XKDR Forum.

Improving electricity regulation in Tamil Nadu

by Akshay Jaitly, Charmi Mehta, Rishika Ranga, Renuka Sane, Ajay Shah and Karthik Suresh.

The Indian electricity sector is a centrally planned sector that faces increasing financial stress. In other words, a centrally planned decarbonisation would result in enlarged costs and political difficulties. The path forward for electricity reforms is to make changes one state at a time. We have started this journey with the state of Tamil Nadu.

The case of Tamil Nadu is particularly interesting. It holds great potential when it comes to the energy transition with high potential of offshore wind and solar. However, poor quality of supply along with indiscriminate subsidies for domestic and agricultural consumers has led to deep levels of fiscal stress on the Tamil Nadu state exchequer. Fiscal stress harms investibility in electricity, which is particularly a challenge for renewables. Due to multiple reasons, some of which may be attributed to the political economy at the state level, the state of Tamil Nadu has also revised tariffs only four times since the Electricity Act was enacted in 2003. These tariff revisions have often not reflected the cost of supply of electricity (e.g., the tariff revisions in 2017).

While the electricity sector in Tamil Nadu has recently undergone institutional changes in the form of TANGEDCO's demerger, the present state of regulatory challenges has not been adequately addressed. In a new paper, Improving electricity regulation in Tamil Nadu, we present evidence on regulatory failures of the electricity regulator in Tamil Nadu (TNERC) and contextualise the impact of this on associated aspects of public finance and private finance. We bring the knowledge of regulatory theory to bear upon the possible causes of these failures. We discuss the TNERC's performance on elements that make up a well-functioning regulator, such as clarity of purpose, separation of powers, selection of board members, fair adjudication, public consultations and financial independence.

Many aspects of regulatory reform require amendments to the Electricity Act, and hence the problem statement lies in identifying the levers available to make progress in Tamil Nadu. We identify several levers that the state government can use to undertake reforms, well within its powers under the Electricity Act, to make Tamil Nadu a turnaround story and a model for good electricity regulation nationwide. When these improvements are put into motion, they will materially change the views of private investors on the feasibility of investment in the Tamil Nadu electricity sector. This paper offers ideas on how this can be done.

Akshay Jaitly, Rishika Ranga and Renuka Sane are researchers at Trustbridge Rule of Law Foundation. Charmi Mehta, Ajay Shah and Karthik Suresh are researchers at XKDR Forum.

Who lends to the Indian state?

by Aneesha Chitgupi, Ajay Shah, Manish Kumar Singh, Susan Thomas and Harsh Vardhan.

Public finance researchers in India have paid great attention to debt and deficits. By now, the main messages of the field have started sinking into common knowledge: that it is good to run primary deficits in most years, so as to create space to surge the deficit once in a while when faced with a crisis. There is an adjacent field of public debt management that is equally important. Here, the strategic question is: How should the government borrow? From whom? Debt management strategy has not received the required level of interest.

Strategic thinking in debt management

A sound public debt management strategy must cater to three objectives:

• The mechanism for borrowing must not induce economic distortions upon the domestic economy.
• It must create strategic depth of being able to borrow on a very large scale when faced with great challenges, once every few decades.
• It must induce sustainable mechanisms for reasonably low cost borrowing, at reasonably predictable rates, for the long term.

There are four main pathways to choose from in debt issuance:

1. Monetisation of the deficit. Here, the central bank distorts the monetary base with `fiscal dominance’ where it buys the bonds issued by the government.
2. Coerced borrowing from financial firms. These are typically regulated firms, who are coerced using the tools of financial regulation.
3. Borrowing from voluntary participants (domestic or foreign). This is done through local currency bonds issued domestically, possibly nominal and possibly inflation indexed.
4. Borrowing abroad using foreign currency denominated bonds. As an example, this could involve Yen denominated bonds issued in London.

As with many other countries, we started out in India with the first method (monetisation of the deficit). This induces an economic distortion: the loss of monetary policy autonomy. A long journey of monetary policy reform took place, from the Ways and means agreement of 1993, to the Monetary policy framework agreement in 2015 that ushered in inflation targeting. This freed up monetary policy from the limitations imposed by debt management. In 2015, there was an attempt at institutional reform, in the form of the establishment of the Public Debt Management Agency (freeing up the Reserve Bank of India of the responsibility of issuing public debt), but this did not come to pass.

From 1993 onward, the main strategy for public debt management in India has involved method 2 in the list: a system of `financial repression’ where the government borrows from coerced financial firms. This is a tax upon financial intermediation. The interest rates discovered through government borrowing are important prices that impinge upon the economy. But these rates are distorted owing to the presence of coerced buyers of government debt. The lack of voluntary lenders creates the lack of strategic depth. The government is limited in how it can expand its borrowing when faced with special situations.

From the late 1990s onwards, economists and thinkers have sought to enhance fiscal prudence in India through the mechanism of fiscal responsibility law. It is increasingly clear that this does not work. In recent work, Datta et. al. 2023 show that the Indian constitutional arrangements frustrate the possibility of Parliamentary law imposing fiscal discipline upon the union government. Once this idea is internalised, there is one main path towards fiscal responsibility: market discipline. This requires removing the system of financial repression.

Who lends to the Indian state?

In this context, the question Who lends to the Indian state? attains importance. A recent paper by Aneesha Chitgupi, Ajay Shah, Manish Singh, Susan Thomas and Harsh Vardhan examines this question. For a period of 10 years, we assemble information from multiple sources, which were all available in the public domain, to examine the nature of lenders to the Indian state. Some discoveries that we make are:

• The SLR went down in the last decade. This meant that the extent of bank funds mandated for the government decreased. However, the actual investments by banks in government debt securities was higher than what was mandated.
• Simultaneously, there was major growth in the role of insurance and pension funds lending to the government. While de jure financial repression of banks declined, there has been no such retreat with pensions and insurance.
• All the three groups of financial firms bought a lot more government bonds as compared with the de jure requirements. Excess ownership went from about 0 in 2011 to Rs.30 trillion in 2021.
• How did the government increase borrowing over the last decade, while simultaneously elongating the maturity profile? The answer lies in (a) Strong growth in insurance and pensions industries, and (b) Excess ownership of government bonds by coerced industries.
• The voluntary lenders are the private firms, MFs and FIIs, who are 4.8% of investors in the government debt market for 2021. India (along with China) remains an outlier in having very low borrowing from international debt markets.

Important questions for the future

This field is target rich with interesting questions, some of which are:

1. Why do financial firms lend so much to the government?
2. What will the structure of lenders to the government look like, 10 years out into the future?
3. If a big surge in borrowing is required, where will it come from?
4. How are households and firms changing their behaviour in response to the financial repression tax?
5. What is the path to fiscal responsibility?

Conclusion

The field of public finance in India has studied deficits and debt. There has been work on the institutional arrangements for debt management (i.e. the establishment of the Public Debt Management Agency). There has been relatively little work on the economic reasoning, the strategic thinking for debt management. In this paper, we offer novel insights and facts for this journey. More research is required, at the interfaces between public finance, finance and public administration, to grow knowledge on the important field of debt management strategy.

An evaluation framework for public procurement processes

by Karan Gulati and Anjali Sharma.

Governments require and use goods and services to operate their machinery and deliver schemes and programs to their constituents. However, self-production cannot meet this need for goods and services. As a result, governments rely on public procurement. However, India does not have an optimal public procurement system. Tenders often undergo modifications, the government incurs significant debt due to payment delays, competition is limited, and contract execution is frequently delayed. Procuring entities also tend to favour large private companies by setting eligibility criteria that exclude small and medium-sized enterprises or providing them with private information that offers a competitive advantage.

Given this experience and the limitations of existing literature, integrating international and best practices can facilitate strategic evolution and ensure that the Indian public procurement system is conducive to achieving broader objectives of efficiency and effectiveness in public resource allocation. By methodically aligning with these practices, India can foster a competitive market environment, attract better vendors, and achieve effective and sustainable procurement outcomes. Specifically, such methodological alignment can help establish an evaluation framework with clear benchmarks and indicators that enable the measurement of procurement processes across departments, identify systematic weaknesses, and explore opportunities for reform.

In a new TrustBridge Rule of Law Foundation Working Paper, we propose "An evaluation framework for public procurement processes" that recognises the government's dual role as the state and a market participant throughout the procurement life cycle and can be deployed to evaluate public procurement across sectors and procuring entities. It contributes to India's growing field of evidence-based literature and policy interventions. Based on the UNCITRAL Model Law on Public Procurement, OECD Recommendations of the Council on Public Procurement, the World Bank's Benchmarking of Procurement, FIDIC, ADB, and NEC standard contracts, and relevant literature, the evaluation framework includes the following benchmark:

• Transparency
• Integrity
• Documentation
• Capacity

• Timeliness
• Negotiation
• Monitoring
• Dispute resolution

It divides these benchmarks along two axes. The first pertains to the role of the procuring entities, either as (i) the state or (ii) a market participant. The second pertains to procurement stages: (i) pre-award to award, (ii) award to completion, and (iii) completion to payment. For instance, as the state, procuring entities must ensure transparency before awarding a tender. To evaluate transparency, the framework assesses whether procuring entities publish procurement plans, which aids in planning and reduces the need for emergency procurement. It also evaluates whether the entity conducts pre-bid consultations, which are beneficial for identifying suppliers early in the process.

To assess the effectiveness of the framework, we evaluate the procurement processes of the National Highways Authority of India (NHAI), India's largest public procuring entity, with tenders worth over 3,70,000 crore rupees (USD 44.5 billion). Its parent ministry, the Ministry of Road Transport and Highways, accounts for over half of India's capital expenditure on procurement. This operational experience should have endowed NHAI with expertise that reflects a spectrum of procurement processes and methodologies. Furthermore, the government's focus on infrastructure development, especially in road transport, underscores the NHAI's role as a driver of public procurement by the Indian state. Thus, evaluating NHAI can provide insights into public procurement processes in large-scale procuring entities and the efficacy of our framework.

Through this first-of-its-kind and illustrative evaluation, we identify several areas for improving India's public procurement system, thus optimising the allocation of public resources, curtailing opportunities for rent-seeking, and fortifying public trust. This includes better estimation of project timelines, improving the role of independent monitoring, and conducting performance evaluations. It also highlights that procuring entities need to enhance transparency not just in their operational processes but also in their data collection and reporting practices. These results validate the efficacy of our evaluation framework. Its comprehensive nature, encompassing a range of benchmarks, allows for a detailed evaluation of public procurement processes. Its application to NHAI demonstrates its potential to evaluate and improve procurement processes across procuring entities.

Extending this evaluation framework is essential to building on this foundational work. The task now involves evaluating other large-scale procuring entities. This endeavour is about identifying areas for improvement and understanding the patterns that define public procurement processes. The insights from this work can inform policy-making and catalyse systemic improvements, contributing to enhancing and refining the public procurement system.

References

Anirudh Burman and Pavithra Manivannan, Delays in government contracting: A tale of two metros, Leap Blog, 23 December 2022.

Anjali Sharma and Susan Thomas, The footprint of union government procurement in India, XKDR Working Paper No 10 of 2021.

Charmi Mehta and Diya Uday, How competitive is bidding in infrastructure public procurement? A study of road and water projects in five Indian states, Leap Blog, 29 March 2022.

Karan Gulati and Anjali Sharma, An evaluation framework for public procurement processes, TrustBridge Rule of Law Foundation Working Paper No 4 of 2024.

Prasanta Sahu, Forget stimulus, clear your dues: Rs 7 lakh crore unpaid dues to industry by central govt depts and PSUs, Financial Express, 8 September 2020.

Shubho Roy and Anjali Sharma, What ails public procurement: an analysis of tender modifications in the pre-award process, Leap Blog, 26 November 2020.

Yugank Goyal, How Governments Promote Monopolies: Public Procurement in India, The American Journal of Economics and Sociology, 26 November 2019.

The authors are researchers at the TrustBridge Rule of Law Foundation. We are grateful to Akshay Jaitly, Renuka Sane, Charmi Mehta, and participants at the Joint Field Workshop on Public Procurement for their valuable comments. Views are personal.

The electricity chokepoint in Tamil Nadu public finance

Charmi Mehta, Radhika Pandey, Renuka Sane and Ajay Shah

Each state in India can be visualised as an entity in itself. Vast magnitudes of finance will be needed to put the states on an energy transition pathway. While this pathway will be different for every state, the electricity sector is likely to be the recipient of much of these funds. The investibility of the electricity sector is thus an important field of study.

Many states in India face fiscal distress and many states in India have difficulties in the electricity system. In a new paper, 'The electricity chokepoint in Tamil Nadu public finance', we bring the two streams of knowledge together for the state of Tamil Nadu, and offer fresh insights for fiscal policy and for electricity policy.

The formal toolkit of a `debt sustainability analysis' (DSA) is brought to the standard Tamil Nadu fiscal data. This involves a first stage of comparing a group of fiscal indicators against normative benchmarks, and a second stage of forecasting the debt/GSDP ratio and the interest payments to revenue receipts ratio (IP/RR ratio) for five years; till FY 2028. These results, which we term the `baseline DSA' translate the mainstream intuition towards Tamil Nadu's fiscal difficulties into tangible numbers and forecasts.

A consolidated financial picture is drawn by integrating the two electricity sector utilities -- TANGEDCO and TANTRANSCO -- fused into the Government of Tamil Nadu debt stock. This yields a modified DSA that we term a `Corrected DSA'. This is done to acknowledge the implicit guarantee that state governments hold towards the debt of state-owned entities. This modified picture is thus a truer depiction of the fiscal problems of the state.

The fact that large debt servicing expenditures were successfully achieved for the last decade has helped create a confidence that the fiscal strategy of Tamil Nadu is deplorable but feasible. Of essence in the fiscal outlook of every highly indebted entity is the problem of sustainability. There are three concerns:

1. Sustained large scale borrowing, from the financial system, may potentially face difficulties through the risk appetite of lenders, changes in regulations, systemic crises in the financial system, etc.
2. The most important assumptions that shape the results of this paper are the nominal interest rate ($r$), estimated at 7%, and nominal GSDP growth rate ($g$), estimated at 9%. This has a $r-g$ of -2: it is a very positive environment from the viewpoint of fundamental fiscal dynamics. In the future, if $r-g$ becomes less benign, the debt dynamics could change significantly.
3. The conventional notion of fiscal stress is phrased in terms of bond default. In India, fiscal distress is known to manifest itself as unplanned budget cuts (that disrupt the working of the government), defaults on payments to private firms, and even the deferrals salaries or pensions. We look back upon three instances when state governments faced high fiscal stress in 2001, and find that the present projections for Tamil Nadu for FY 2028 are partially similar to these values.

The fiscal knowledge of this paper has implications for electricity policy. The electricity system requires two large blocks of investment. A big block of capital is required to rebuild the grid for the post-carbon world. And, a big block of capital is required for the investment in renewables and storage that are required to sustain economic growth in the post-carbon world. Of particular importance is the economic upside from exploiting that remarkable natural resource which is found off the coast of Tamil Nadu in the form of offshore wind generation. These investments will not arise in the environment of chronic fiscal stress in the electricity system.

The electricity knowledge of this paper has implications for fiscal policy. Through simulations where electricity subsidies remain constant or they are completely eliminated, we find that the electricity system is material in solving the fiscal problem. Thus, we extract the electricity subsidy problem from the sector, and place upfront its impact on the public finance parameters and the development trajectory of the state. A complete electricity sector reform versus business-as-usual translates into an FY 2028 outcome for the debt/GSDP ratio of 32.47% vs. 43.53%, and an IP/RR ratio outcome of 19.71% vs. 26.12%. These are large differences. They encourage us to prioritise electricity sector reform as a part of the medium-term fiscal strategy.

Charmi Mehta and Ajay Shah are researchers at XKDR Forum. Radhika Pandey is a researcher at NIPFP. Renuka Sane is a researcher at Trustbridge.

Solarisation in agriculture in Tamil Nadu

by Susan Das, Renuka Sane, Ajay Shah.

Highly subsidised electricity for farmers is an important problem faced in the working of the electricity sector. With falling prices of solar panels, there is the possibility of government subsidising solar panels established by farmers.

This could potentially induce welfare gains in several directions.

1. The fiscal burden imposed by the subsidy could decline.
2. The pricing distortion in electricity (where commercial / industrial / domestic buyers are overcharged) could decline.
3. Farmers could earn a revenue selling their surplus electricity to the grid.
4. Farmers could become more thoughtful in their extraction of ground water when they face an opportunity cost, in the sense that the electricity that is not used to pump water is a revenue generator for them. This would yield welfare gains by diminishing the `tragedy of the commons' in ground water.

These possibilities turn on careful calculations. Whether some or all of these gains are obtained depends on insolation, the magnitude of water required, the energy cost of extracting the water, the cost of solar panels and the price paid by the grid. There will not be one answer within a state, and therefore there will not be one optimal policy within a state. (Similarly, the economic possibilities from such pathways will vary greatly across the breadth of the country).

In a recent paper, Solarisation in agriculture in Tamil Nadu: A first principles evaluation, we try to engage in this careful calculation for one district (Erode) in Tamil Nadu. We analyse a corner solution: one where the government pays for the full cost of the solar panel. 

The results turn on the price at which the surplus energy, that comes from the farmer to the discom, is sold. If the discom is able to sell this energy at the (high) prices that are charged to the commercial and industrial ("C&I") customers, then the corner solution is financially efficient for the grid. At lower prices, the proposition is less attractive.

 One important parameter that influences the results -- the price of solar panels -- is likely to decline in the future. Hence, we simulate the scenario with lower costs. We find this expands the class of situations where solarisation in agriculture is useful.

This paper is about one district (Erode) in Tamil Nadu. The methods adopted are general and could be applied to other locations in India. The answers are likely to vary considerably depending on the precise setting. There is value in discovering how this varies across India.

This is a field with many intricacies in implementation. These include the mechanism of selling surplus electricity, the choice of the tariff paid to the farmer, the problems of (the lack of) metering of electricity connections to farmers, the trustworthiness of the government on timely payments to farmers, the financing mechanism for the capital cost the puzzles of operations and maintenance at the level of one farmer, and the path to a sound monitoring and evaluation of such programs. These are much studied areas where considerable research has taken place. These discussions will improve through using the carefully constructed numerical estimates, on a per-district basis, all across the country.

On the usefulness of Parliamentary law in achieving fiscal responsibility

by Pratik Datta, Radhika Pandey, Ila Patnaik and Ajay Shah.

Economists in India have long pondered the design of a fiscal rule. It is felt that once that ideal rule is embedded into the FRBM Act, we would solve the long-standing excesses of Indian public finance.

Pratik Datta, Radhika Pandey, Ila Patnaik and I looked under the hood, at the legal mechanisms through which such a Parliamentary law works. In a recent paper, Understanding deviations from the fiscal responsibility law in India, we argue that the difficulty lies not in economics but in the Indian constitutional arrangement. Because the budget is enacted through a `money bill', it can readily contain clauses that amend the FRBM Act. We argue that the problem with the FRBM Act lies not in the economic thinking but in the notion that Parliamentary law can constraint leviathan.

On the subject of public finance, the following design elements are embedded in the Constitution:

1. The executive cannot raise money (tax or borrow) or spend money without the authority of the Parliament.
2. The power to raise money (tax or borrow) or spend money belongs exclusively to the Lok Sabha. The philosophy of checks and balances associated with the presence of the Rajya Sabha, so eloquently described by Suyash Rai in 2016, is absent when it comes to money bills.
3. The Parliament cannot authorize expenditure except on demand by the Executive.
4. The Parliament cannot authorize taxation except on recommendation by the Executive.
5. The Lok Sabha has the power to assent to, reject or reduce but not to increase the amount of any demand made by the Executive under Article 113(2). The Parliament can neither suggest any new expenditure nor propose an increase in demand over and above what the government suggests in the Demand for Grants.

Normative public finance in India needs to grapple with this design of the Constitution. The power of the executive, embedded in this design, should be seen as part of the larger problem of the Indian administrative state. A generation of public finance economists in India have tried to solve the chronic deficits of the union government through Parliamentary law. We suggest that this is not a fruitful line of inquiry.

Delays in government contracting: A tale of two metros

by Anirudh Burman and Pavithra Manivannan.

A state entity undertaking a procurement exercise must meet prescribed timelines throughout its procurement pipeline. Delays in one or more milestones adversely affect all parties involved: the procuring entity (increase in expenditure beyond the budget and disputes), the contracted vendors (uncertainty and delays in payment) and the public (delays in utilising public goods and services). At the outset, we recognise that the indicator of a successful procurement exercise are multi-fold: achieving required quality, adhering to timeline and limiting spending gap. Our approach employs the lack of delays as the indicator of a successful procurement exercise.

In a recent article, we examined the extent to which DMRC's (the Delhi Metro Rail Corporation) competence in timely project execution was borne out by data. We found that (a) DMRC is able to meet the Government of India's and its own stipulations in two stages of its procurement process, that is, contract award and vendor payments; and (b) In spite of this exemplary performance, DMRC has faced delays in overall project implementation that have gradually increased over time. This article seeks to understand the underlying factors that potentially contributed to DMRC's prompt performance in its procurement process.

It is not possible to understand DMRC's success in isolation. Instead, we analyse it relative to its predecessor, the Calcutta metro-rail system (Calcutta metro). The Calcutta metro was India's first metro-rail system to be implemented. It was plagued by delays and cost overruns. Such a comparative analysis of a successful public project to one that fared worse in execution is revealing. First, it shows the learning curve of the state in building capacity to execute public projects. Second, it helps to understand what works and what does not, when a state entity conducts a procurement exercise. The analysis can serve to provide valuable feedback in procurement reform policies.

Delays in execution of metro-rail systems

Formerly, the Ministry of Railways was responsible for the construction of mass rail services, including metro-rail systems in metropolitan cities. The Ministry undertook the construction of the Calcutta metro in 1971. In 1986, the Government of India (Allocation of Business) Rules, 1961 was amended to shift the responsibility of the urban transport system to the Ministry of Urban Development (now the Ministry of Housing and Urban Affairs). In contrast to the Calcutta metro, the construction of the Delhi metro-rail system (Delhi metro) was undertaken by the Ministry of Urban Development as the nodal union ministry. The role of Railways was limited to providing technical assistance.

We study the annual reports of the Delhi metro and the Parliamentary Public Accounts Committee Reports (1981; 1989; 1992) on the Calcutta metro, to estimate overall delays in both these projects. We source this data from the website of DMRC and the Parliament of India, respectively. Our data consists of six time periods during which there was significant procurement of works. The data includes the date of completion and submission of the detailed project report (DPR), the date on which the project received Union Cabinet approval, the date of commencement of works, the scheduled date of completion of the project, and the actual date of completion of the project, in part and full. These are presented in Table 1 below, as a timeline of events for the first line of the Calcutta metro and the first phase of the Delhi metro.

Table 1: Timeline of events

Event	Calcutta Metro Line-1	Delhi Metro Phase-1
Completion of Detailed Project Report (DPR)	1971	1995
Project sanction	1972	1996
Project commencement	1978	1997
Scheduled completion	1978	2005
Partial commission (one section)	1984	2002
Project completion (fully operational)	1995	2006

We find that the gap between estimated and actual date of completion is a little more than a year for the Delhi metro. This gap was close to two decades for the Calcutta metro. Further, the lag between the date of sanction of the project to the date of commencement of works for the project is wider for the Calcutta metro (4 years) than for the Delhi metro (about a year).

This suggests that, from 1971 to 1995, there appears to be much improvement in the way procurement was undertaken for Indian metro-rail systems. We posit that the Delhi metro's success was shaped by the challenges faced and the experiences gained in implementing the Calcutta metro. Our analysis attributes learnings from the Calcutta metro to the following structure and list of processes adopted by DMRC: its institutional design, its financing and revenue models, global transfer of technical know-how, and expertise of its early leadership. In the subsequent sections we analyse how each of these features enabled the Delhi metro to avoid inordinate delays.

The institutional design of the procuring entity

What motivated the institutional design of DMRC? To answer this we look at various Parliamentary Committee reports, CAG reports and literature on the subject. Our review suggests that there were three main institutional constraints faced by the Ministry of Railways in implementing the Calcutta metro.

1. The lack of coordination with the West Bengal State Government and the local agencies in Kolkata. There were delays in land acquisition, problems in utility diversions such as transport, water and sewage, and detection of uncharted utilities after commencement of works. These instances had a direct impact on the contracting process, such as frequent interruptions of works, revisions to scope of work, and change in construction methodology (Public Accounts Committee, 1981).
2. Frequent changes and vacancies within the Ministry of several important personnel such as the General Manager and Chief Engineer. This was due to the administrative process of the Ministry. The Railways had to follow the conditions laid down by the Appointment Committee of the Cabinet with respect to retirement, superannuation and promotion (Public Accounts Committee, 1981). This resulted in loss of experience and expertise within the procuring entity.
3. Inadequacy of financial powers delegated to the General Manager. From the year 1974 to 1982 the General Manager had the power to sanction tenders up to Rs. 1 crore only. This was increased to Rs. 2 crores in 1983 and Rs. 5 crores in 1985. This limited power of the General Manager meant, approvals for sanctions of higher value tenders had to be received from the Railway Board. This procedure was time consuming and caused delays in finalisation of contracts by up to 3 years (Public Accounts Committee, 1989).

We speculate that the above constraints prompted the authorities undertaking the Delhi metro project to adopt a different approach. The Calcutta experience provided two guides for the organisational structure of DMRC. One, to build institutional capabilities for executing a metro-rail system outside the Ministry of Railways. Second, to have a separate corporate entity with independent decision making authority. Thus, DMRC was set up with two distinguishing features which worked in its favour: It was formed as a limited liability company under the Companies Act, 1956 and the ownership of the entity vested equally in the Union and the State Government. The board of directors of DMRC constituted representatives from the Union Ministry of Urban Development, Department of Transport of GNCTD and the Delhi Development Authority. Such an institutional arrangement, by aligning incentives for all the stakeholders, enabled better coordination with the local government and ensured that the management had the backing of both the State and the Union Government. Further, functional directors appointed for distinct functions such as, project and planning, works, electrical, finance, business development and the like, had sufficient powers delegated to them under the Schedule of Powers (CAG, 2008). This facilitated quick decisions in expenditure approvals, qualification of bidders, finalisation and acceptance of contracts. Finally, the long tenure of key personnel such as the Managing Director, enabled the organisation to retain domain experience and expertise.

Financing and revenue models

For prompt execution and sustenance of any infrastructure project, timely flow of funds is essential. Metro-rail systems are capital-intensive projects. The Calcutta metro was fully funded by the Ministry of Railways. One of the main reported reasons for delay in the project was lack of funds and improper utilisation of allocated funds. Up until 1980, the Railways had not fully utilised the funds allocated for the project. Further, for subsequent years, sufficient funds were not made available for the construction. This resulted in shortage of raw materials, such as steel and signaling equipment, and delayed payments to vendors (Standing Committee on Railways, 1993; Public Accounts Committee, 1981). For the DMRC project, the Calcutta experience prompted the authorities to explore other avenues for funding such as, equity, external agency loans, subordinate loans from centre and state, property development revenue and central government grants. Most significant was the official development assistance (ODA) loan from the Japan International Cooperation Agency (JICA). Nearly 54-55 per cent of the first three phases of the DMRC projects was funded by JICA as a low-interest and long-term concessional loan. The funding pattern for each phase of the project sourced from the DMRC website is as set out in Table 2. Smooth flow of funds into DMRC enabled timely payment to vendors and ensured that the project was not delayed due to uncertainty in financing.

Table 2: Funding pattern for DMRC projects

	Phase I	Phase II	Phase III
JICA loan	60%	54.47%	48.57%
Equity from GoI	14%	16.39%	10.04%
Equity from GNCTD	14%	16.39%	10.04%
Loans from Union/States	5%	6.56%	13.39%
Grants from States	-	0.59%	10.62%
Property Development	7%	5.59%	7.34%

Another lesson came from the fact that the Calcutta Metro was not financially viable (Singh, 2002). The traffic earnings were inadequate to cover the operating expenses of the metro-rail system. This not only burdened the exchequer in the form of subsidies but also affected the public as the fare per trip that was charged had to be increased to sustain operations (Public Accounts Committee, 1989). Decrease in cash flow meant stalling of procurement of raw materials, and delays in payments to vendors.

The financial crunch faced by Calcutta Metro encouraged DMRC to generate revenue through non-conventional sources. DMRC adopted the examples of well-performing international metro-rail systems and sought to increase its non-farebox revenue. Table 3 below shows the revenue model of DMRC for 10 years (FY2011-FY2020) obtained from its annual reports. Revenue from traffic operations is categorised as fare-box revenue and revenue from real estate, consultancy and external projects are categorised as non fare-box revenue.

Table 3: DMRC Revenue Model (as percentage of total revenue)

Description	Fare revenue	Non fare revenue
FY20	65.49	34.51
FY19	62.92	37.08
FY18	55.22	44.78
FY17	45.69	54.31
FY16	53.35	46.65
FY15	60.34	39.66
FY14	55.74	44.26
FY13	62.93	37.07
FY12	65.74	34.26
FY11	65.05	34.95

On an average 58.49% of DMRC's revenue is from traffic operations (fare-box revenue) and 41.51% of the revenue is through other sources (non-fare box revenue). This is in line with international practice. For instance, the non-farebox revenue of some of the better performing metros in the world (in terms of ridership and network length), such as London, Singapore and Hong Kong, ranges from 25-60% of its total revenue. DMRC's capacity to source funds and remain financially viable has helped it to make timely payments to its contractors, repay its debts, and expand its network line.

Human capacity and technical know-how

Building human competence within the government is paramount to do procurement well. This includes both functional as well as technical competence. In India, the technical know-how to build metro-rail systems was lacking. The Calcutta metro was the first ever underground railway project undertaken in India. Despite this, global tenders were not invited for construction of the work. Neither the construction firms in the country nor the Railway Administration possessed the experience to construct underground structures for a rapid transit system. The lack of expertise led to frequent abandonment of works and changes in scope of work, resulting in huge financial implications in addition to time overruns (Public Accounts Committee 1989 and 1992). Thus, when the idea of a metro-rail system in Delhi was born, the need to rope in personnel with prior expertise and experience, such as, B.I. Singal and E. Sreedharan, was recognised.

Mr. B.I. Singal was the former Director General of the Institute of Urban Transport and the then Managing Director of RITES (Rail India Technical and Economic Service). Mr. Singal came in with 11 years of experience in the planning and building of some of the finest metro-rail systems in the world, such as the Hong Kong MTR (known for completing the project within time and budget) and Taipei metro-rail network. RITES prepared the feasibility study on building a metro-rail system for Delhi. Mr. Singal made sure that his RITES team had a few professionals who had previous experience of working with the Calcutta metro. Mr. E. Sreedharan, the first Managing Director of DMRC, had served as the Chairman and Managing Director of Konkan Railways. He brought in his domain experience of working with the Railways as well as the management experience of heading an autonomous entity. Studies document some effective practices adopted by Singal and Sreedharan which we speculate had an impact on the organisation's procurement practices. They insisted on independence in decision making, speed, and global exchange of knowledge and expertise (Ashokan, 2015; CPI, 2017). This resulted in creation of DMRC as a separate legal entity and in transfer of Japanese technology and know-how in building metro-rail systems.

After the failed attempt at indigenisation by the Calcutta metro, the authorities felt the need to tap in to global expertise for the Delhi metro project. In addition to funding from JICA, Japanese Consultants were also brought on board. This ensured transfer of foreign technological knowledge, skills and expertise to DMRC. DMRC engineers developed technical skills such as tunneling technologies, and functional skills such as management ethos, and value for time from their Japanese counterparts (Onishi, 2016). This enabled DMRC to build in-house capacity, which now helps other metro-rail networks in the country.

Discussion

Our work shows how the Indian state attempts to achieve better outcomes by identifying lessons from its past shortcomings. The challenges faced by the Calcutta metro shaped the Delhi metro's institutional design, financial structure, and human resource competence. Our article highlights the importance of these three factors in enabling desirable procurement outcomes.

A key insight from our analysis is that these factors do not work in isolation. Autonomy in decision making, efficient and experienced personnel, adequate financing, and right institutional choice are all inter-operable and go hand in hand. If a procuring entity seeks to realise better outcomes, procurement reforms must not merely pick the lowest hanging fruit of these factors. Instead, a sector-specific approach of studying the past experiences must be employed to act as feedback into future projects. Our research provides a framework to assess such past successes and failures, and demonstrates the potential of deploying such research.

References

Public Accounts Committee, Fifty-fifth Report, 1981, Hundred and Forty-second Report, 1989 and Ninth Report, 1991.

Standing Committee on Railways, Second Report, 1993 and Thirty-fourth Report, 2007.

Comptroller and Auditor General of India, Report No. Performance Audit 17, 2008.

Pavithra Manivannan, Lessons from the Delhi Metro, Business Standard, July 2021.

Anirudh Burman and Pavithra Manivannan, Timeliness in government contracting: Evidence from the country's largest metro-rail network, The Leap Blog, August 2022.

Yumiko Onishi, Breaking Ground: A Narrative on the making of Delhi Metro, JICA, 2016.

Centre for Public Impact, The Construction of the Delhi Metro, November 2017.

Saurabh Singhal, Non Farebox Revenue for Metro - A Global Perspective, Business World, May 2022.

The International Association of Public Transport (UITP), World Metro Figures, 2018.

M.S. Ashokan, Karmayogi - A biography of E. Sreedharan, Penguin, 2015.

Anirudh Burman is an Associate Research Director and Fellow at Carnegie India. Pavithra Manivannan is a Senior Research Associate at XKDR Forum and Chennai Mathematical Institute.

Timeliness in government contracting: Evidence from the country's largest metro-rail network

by Anirudh Burman and Pavithra Manivannan.

Introduction

Infrastructure projects in India are plagued by delays (MOSPI, 2022). Proposed explanations include failures of government contracting for public procurement (Singh, 2010, Sinha and Vatsa, 2021, etc.). In this article, we measure delays in the procurement process of the largest metro-rail network in the country -- the Delhi Metro Rail Corporation (DMRC) -- which is considered a successful project. It fares well on global ranks on some parameters such as network length and ridership. The early phases of this metro rail project have been lauded for timeliness in execution and contract payments (Expenditure Management Commission, 2016).

We look at two distinct datasets to obtain a birds eye view and a procurement-oriented view of the delays in DMRC. We find that DMRC is prompt in stages of the contracting processes for which we are able to find evidence, but that the overall project implementation suffers from time overruns. We put this knowledge together to obtain insights into government contracting.

Our approach

As with contracts drawn between any two counterparties, government contracting is a pipeline that runs through four phases (Mehta and Thomas, 2022): (I) Contract specification and design, (II) Contract tendering and award, (III) Contract management and (IV) Contract closure. Flaws in government contracting shows up as inefficiencies in public procurement such as delays in infrastructure projects, which in turn, results in cost overruns, loss in revenues, vendor dissatisfaction and lack of competition when government wants to procure, and ultimately, deprives the public of the intended benefits.

We use three data-sets to understand the timeliness of government contracting in DMRC projects.

1. A data-set of the time taken by the various DMRC projects, sourced from the CapEx database published by the Centre for Monitoring Indian Economy (CMIE).
2. A data-set of tenders awarded by DMRC, hand-constructed from the 'Contracts Awarded' section of the DMRC website;
3. A data-set of payments made by DMRC, hand-constructed from the 'Vendor Payment Details' section of the DMRC website and from an RTI application.

The first data is sourced from the CMIE CapEx database. The CapEx database records the date of significant events for each project. We collect data for the three operational metro networks constructed by DMRC, that is, Phase 1, 2 and 3. This data-set consists of project level information such as, the date of announcement of the project, initial completion date, actual completion date and time overruns.

The second dataset is a hand-constructed data-set consists of tender level information for awarded contracts of DMRC, such as the department calling for tenders, nature of work, date of publication of Notice Inviting Tender (NIT), date of issue of letter of acceptance and value of the contract. This data-set covers this information for 892 tenders for a period of 5 years (2016-2020). DMRC categorises these tenders into 7 heads: Civil and Architecture Works, Electrical Works, Operations and Maintenance, Rolling Stock, Track Works, Signalling and Telecom and Property Development.

In addition, we categorise the contracts for IT services and housekeeping works as 'Miscellaneous' and the procurement done by DMRC for other metros in the country as 'For Other Metros'. The highest number of contracts were awarded for Operation and Maintenance works (623) and the least for Rolling Stock (2). Table 1 shows the typology of procurement undertaken by DMRC during our study period.

Table 1: Typology of DMRC Procurement

Category	2016	2017	2018	2019	2020	Total
Civil and Architecture Works	17	28	9	15	9	78
Electrical Works	5	1	3	5	13	27
Operations and Maintenance	0	65	167	200	191	623
Rolling Stock	0	0	0	2	0	2
Track Works	12	2	0	1	3	18
Signalling and Telecom	8	1	0	0	3	12
Property Development	0	5	3	10	5	23
Miscellaneous	4	14	23	8	13	62
For other metros	5	7	17	8	10	47

Our second hand-constructed data-set consists of monthly bill payment status of DMRC. Pursuant to government communication (vide D.O.18(18)/IFD/2019 dated 05.11.2019), DMRC uploads its monthly vendor payment details on its website since December 2019. This data gives us periodic information about the bill submission date and the bill payment date of DMRC vendors. Since the website does not archive its data we obtained our data partly from the DMRC website and partly vide an RTI application made for this purpose. Our data-set consists of 20,654 bills for the period between November 2019 to August 2021. The payment period is unknown for about 1,550 bills in our data-set, which we discard in our analysis.

We restrict our study to benchmark DMRC's performance against the timelines prescribed by its internal guidelines (DMRC Procurement Manual, 2016 and General Conditions of Contract, 2019) and the Central Government procurement guidelines (General Financial Rules, 2017 and the Manual for Procurement of Works, 2019). We do not employ a comparative analysis with other procuring entities for two reasons: One, availability of data in government portals such as the CPPP (Central Public Procurement Portal) and websites of the procuring entities are often sparse and sporadic. Second, a deeper understanding of the fundamental functioning, internal rules, processes and organisational structure of each entity is required for a meaningful comparison and it warrants a separate study.

Findings: Time overrun in DMRC project implementation

In the CapEx data, we are able to see that, between 1995 to 2021, there were three projects announced, implemented and completed by DMRC. These are the Phase 1, Phase 2, and Phase 3 lines. These have been operational from 2006, 2011 and 2021 respectively. From this data, we are able to locate various timelines for all three phases, including the date on which the Phase was announced, to the date on which they were completed and commissioned for public use for fully operational metro lines. We calculate the time overruns as the difference between the date projected initially as the completion date for a Phase and the date on which it was actually completed and operationalised. These are presented as project delays in Table 2.

Table 2: Project delays (in months)

Phase 1	15
Phase 2	32
Phase 3	102
Source: CMIE Capex Database

Findings: Timeliness in contract award by DMRC

High-income countries, countries with greater political accountability, and countries with greater economic freedom process public works procurement in a more timely manner (Djankov and Bosio, 2020). Each of these countries does infrastructure procurement following its own regulations to award contracts. In India, works procurement is guided by the Manual for Procurement of Works, 2019. According to Clause 5.6 in this manual, the time taken by Ministries and Departments from the date of opening the tender to the date of awarding of contract is 90 days.

We estimate the actual time taken by DMRC to award tenders (Table 3). This is calculated as the time taken from the date of opening of the tender to the date of issuing of the acceptance letter. We find that, on an average, DMRC takes 91-92 days to complete the tendering process.

Table 3: Time taken to award tenders (in days)

Year	No. of tenders	Average time taken
2016	51	101
2017	123	98
2018	222	103
2019	249	81
2020	247	89
Average	178	92

Findings: Timeliness in making vendor payments by DMRC

Payment delays are endemic in public contracts in India. DMRC has sought to avoid payment delays by including provisions for both interim and final payments within its Procurement Manual and General Conditions of Contract, 2019 (GCC). Depending on the type of contract, payments may be made at different stages of the procurement cycle. At Clause 11, the GCC provides for set timelines for the scrutiny of invoices and payments to be made by the procuring entity:

• Interim payments: A contracting firm may apply to the respective project engineer of DMRC requesting for an 'interim payment certificate'. This certificate will be issued based on achieved milestones or prescribed payment schedule in the contract, if any.
1. Within 21 days of the request, the project engineer must issue the interim payment certificate specifying the amount due to the contractor.
2. DMRC is mandated to make 80% of the certified payment amount within 7 days of issue of the certificate.
3. The balance 20% is to be made within 28 days of issue of the certificate.
• Final payments: Once the project engineer certifies that the contractor has completed all his obligations related to a particular work, the contractor is entitled to apply for a 'final payment certificate' with the required supporting documents.
1. Within 28 days of receiving this request, the project engineer must issue the final payment certificate stating the final amount due.
2. DMRC is mandated to pay the amount certified in the final payment certificate within 56 days of issue of this certificate.

We look at the vendor payments data-set of DMRC to analyse the adherence to these timelines. We find that, on an average, DMRC takes about 4 days to clear its dues from the date of submission of the bill by the vendors (Table 4). For the data-set in our study, the maximum days taken by DMRC to make its payment is about a year.

Table 4: Time period for clearance of dues (in days)

Year	No. of bills	Average time	Median time	Minimum time
2019	1326	5	2	0
2020	9887	4	3	0
2021	7891	4	4	0
Total	19104	4	3	0

Payment delays by public sector enterprises in India to their vendors far exceeds their procurement values (Manivannan and Zaveri, 2021). We find that DMRC is an outlier in terms of maintaining payment discipline to its vendors, and in adhering to the timelines provided in its GCC.

Discussion

The public discourse on government infrastructure procurement focuses on delays and time overruns being an indicator of poor government contracting. In this article, we have analysed the capability of a procurement-intensive public sector enterprise to keep up with its timelines in two stages, that is, in contract award and payments. We find that DMRC takes about 3 months to award a contract, and about 4 days to clear its payment dues to vendors. Regardless of this exemplary performance on awarding contracts and paying vendor dues, we also find that the overall project implementation by DMRC failed to meet scheduled timelines to complete. All three phases took a longer time than originally expected. In fact, we observe that the overall project time delays increased from the Phase 1 project to the Phase 3 project.

Executing infrastructure projects on time has been a continuous concern and challenge in India. Our analysis about DMRC timeliness in awarding contracts and in making payments provides evidence against the popular perception that public projects are delayed due to delays in decision-making by the public authorities and their inability to make timely payments. Instead, we speculate that these are because of other factors for overall project delays, some of which could be misaligned allocation of scope and risk in procurement contracts and poor contract management. A deeper analysis into each project, procurement practises, financial and institutional structure of DMRC may help in understanding the reasons for its timely performance in certain procurement processes and the potential causes of time overruns. These learnings can then be adopted by other procuring entities to achieve better procurement and project outcomes.

References

Ministry of Statistics and Programme Implementation Infrastructure and Project Monitoring Division, 434th Flash Report on Central Sector Projects, January 2022.

Ram Singh, Delays and Cost Overruns in Infrastructure Projects: Extent, Causes and Remedies, Economic and Political Weekly, Vol 45, No. 21, May 2010.

PC Sinha and Ananys Vatsa, Delays in Project Completion in India, Indian Journal of Projects, Infrastructure and Energy Law, January 2021.

Erica Bosio and Simeon Djankov, Timely procurement of public works, World Bank Blogs, February 2020.

Department of Expenditure, Ministry of Finance, General Instructions on Procurement and Project Management, October 2021.

Expenditure Management Commission, Recommendations of the Expenditure Management Commission, December 2015.

Department of Expenditure, Ministry of Finance, Manual for Procurement of Works, 2019.

Delhi Metro Rail Corporation Ltd., General Conditions of Contract, November 2019.

Pavithra Manivannan and Bhargavi Zaveri, How large is the payment delays problem in Indian public procurement?, The Leap Blog, March 2021.

Charmi Mehta and Susan Thomas, Identifying roadblocks in highway contracting: lessons from NHAI litigation , The Leap Blog, July 2022.

Charmi Mehta and Diya Uday, How competitive is bidding in infrastructure public procurement? A study of road and water projects in five Indian states , The Leap Blog, March 2022.

Anirudh Burman is an Associate Research Director and Fellow at Carnegie India. Pavithra Manivannan is a Senior Research Associate at XKDR Forum and Chennai Mathematical Institute. We thank Susan Thomas for valuable comments and discussions.