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Friday, August 26, 2011

What ails Infrastructure in India?

When I think of problems with infrastructure in India, the first thing that comes to my mind is: Funding (or rather, the lack of it). If you think about it, there is simply no comparison between the government infrastructure budgets of India and say, China. Our government just does not seem to have the money to build thousands of miles of high speed bullet train corridors, or 12 lane freeways, or dozens of world class ports. Where is the money in India? The flagship road infrastructure agency NHAI here has a miniscule Rs. 15,000 Crore budget annually, give or take a few. That is no comparison to the trillion dollar budgets China's agencies have. Can an MMRDA ever think of demolishing all of Mumbai and rebuilding it, a la Shanghai? So why is the Indian state struggling with infrastructure funding? Lets look around at how others built their infra.

The Middle Eastern nations built their infrastructure by pouring billions of dollars of oil money into the sector. This money was always in state hands as petroleum is routed for export sales through government owned entities. But China does not have such resource driven luxuries, so where is their money coming from? I mean, if a Chinese factory exports plastics or toys or electronics or whatever, the revenues go to private hands right? So who is bankrolling the massive infra projects? As an answer, I find it amazing that a primary source of revenue for the Chinese government could be indirect (taxes on corporates). When we then move to India, is it just that Indian exports are so much lesser, or is there inefficiency in resource management (corruption / loopholes in corporate taxation) too?

When I briefly brought the topic up with Pankaj Vaish of Citigroup*, he said that in his mind the key issue isn't actually lack of funds with the government - its execution. If infrastructure execution in India were actually smooth, the private sector would be more than willing to pump in all the money required for all our projects. He pointed out that our land acquisition is so slow and tormented, coordination between agencies so poor, and pace of approvals and execution so slow that international players simply don't feel confident about investing into Indian infra. These are entities otherwise sitting on trillions of dollars of money ready to be invested in emerging markets. Why would they not want to diversify their EM portfolio between equities and some stable, long term infra financing? Very fair point. So the fact that we are a democracy (and a badly administered one at that) is stopping our infra from taking off. Hmm.

There is one caveat though. Private funding for PPP projects (Public Private Partnerships) works well only when we talk of positive NPV projects such as toll roads or airports. You might say many other infra projects have viability gap funding to ensure PPP, but there is an implicit assumption in there. That the government has enough money to provide the viability gap funds. Which goes back to what I spoke about earlier right? Think about it, if you consider a project like the rebuilding of an entire city, there is only so much return it can generate. So private money can't bankroll all (or even most) of such a project. Not just this, there are way too many such infrastructure projects which are a social responsibility on the government's part even if they are not economically viable. The PPP model cant be a panacea - a solution for all cases in my view. Example: Urban planning (Metros and other Mass Rapid Transportation, Building Reconstruction, Intracity roads), Rural roads (difficult to impose tolls), High speed train networks, etc. Even if some of these projects can be successfully completed using Viability Gap Funding, I think we will still end up with too many projects which fall short of funds. Any ideas?

*Pankaj is the Head of Markets, Citigroup for all of South Asia. He was part of a panel discussion I attended recently in Worli. The two other members part of the discussion were Rakesh Jhunjhunwala, popularly known as India's Warren Buffett, and S P Kothari, Deputy Dean of MIT Sloan School of Management. I particularly sought out Pankaj's views on infra after the discussion because of his astute observations on other macroeconomic issues India is facing, particularly inflation.


  1. One option could be to pair an unattractive investment project with an attractive real estate project, so that real estate player necessarily has to find a means (itself, partnership or outsourcing) to ensure that the former is carried out even as it gladly takes up the latter. Is this being implemented already?

  2. Nice point Priya, I failed to touch upon that.

    Cross-subsidization through real estate is indeed already being practiced - but with disastrous results. When the state bring in real estate into the infra mix, an element of resource allocation creeps in. Land from small private land owners (usually farmers) is acquired in the name of infrastructure. But the project developer is then allowed to monetize the real estate around the core infra. Land acquired for a few lakh rupees per acre is now being resold / leased out by the developer for crores per acre. The result? The farmers mighty angry (perhaps rightfully so), the courts righteously indignant, and thus, the land acquisition a legal mess which takes years to resolve. Live example of this happening? The Taj Expressway.

    Also, resource allocation is by nature a very very tricky subject. Allows so much room for subjective calls that in a country like India it usually leads to corruption. Example: In theory the Slum Rehabilitation Authority (SRA) in Mumbai is just the perfect cure to redevelop slums using private money. In reality all you see is scam after scam. Why, even outside the infra space, a shining sector like telecom got hobbled in corruption in the one instance where the government had resource allocation rights: spectrum.