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Column
September 6 – 19, 2010
Infrastructure games
Inadequate competition means more costly infrastructure
N
HUGH SANDEMAN
The author is managing
director, Langham Capital.
He can be reached at
hugh.sandeman@langhamcap
.com
finally starts to win the battle to build adequate infrastructure at an acceptable pace. Perhaps it already has. The share of infrastructure
investment in GDP is on track to meet the targeted increase from 5 per cent to 9 per cent in
the five years to 2012. The road building programme at a national level, and in some states,
has revived. The new privately built airports
are working, with the public sector’s efforts,
like Chennai, lagging predictably behind. The
power sector, while missing the planners’ targets, is building capacity at a much faster rate.
The pillars for carrying new metro trains are
sprouting in cities other than Delhi.
At some point, the debate about whether
India can build enough infrastructure will
start focussing instead on whether it can be
built at an appropriate price. Without more
effective competition at the bidding stage and
better regulation afterwards, infrastructure in
India will be more expensive than it needs to
be, and the economy less productive. Eventually, India will get much of the infrastructure
it is waiting for, but this could be serving an
economy whose potential turns out to be
lower than hoped in recent years.
One indicator of progress towards transparent, competitive bidding and operation of
infrastructure in India will be more direct participation by foreign companies. Until now,
foreign companies have mostly shied away
from leading or even taking part directly in
public-private partnerships (PPP) in Indian
infrastructure. International power developers, for example, usually don’t have the confidence to go to the back door of the ministry
after the bidding is over and get the terms of
one or more key contracts changed. Indian
entrepreneurs, who know how to work the
system, are comfortable with such risks.
For this reason, the main flows of foreign
equity into Indian infrastructure are coming
from private equity and portfolio investors,
backing the local players. A study last year by
the finance ministry looked at 300 PPP contracts and found just 22 involving multinational companies. In another larger tally of
PPP contracts, the ministry found that direct
foreign investors had contributed just 1 per
cent of the total equity raised. This means
inadequate competition, which in turn means
more costly infrastructure.
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ext time you pass through Chennai
airport, take a close look at the large
poster stuck to the hoardings that seal
off the construction site where the public sector Airports Authority of India (AAI) is building a new terminal. The poster shows AAI’s
vision of Chennai’s new airport: a gleaming
21st century terminal building, at par with the
privately-built Bangalore, Delhi or Hyderabad
airports – with a row of bright yellow Ambassador taxis lined up outside. When it comes to
infrastructure in India, it still seems hard to
get the old-fashioned symbols of political and
bureaucratic power out of the picture.
The failure of India’s public sector to enable
or deliver enough infrastructure projects is so
widely recognised at home and abroad that
the shock value of the antics around the
Commonwealth Games is strictly limited. A
far more worrying and tangible sign of the
infrastructure malaise is India’s high inflation,
with consumer prices running ahead at an
annual rate of over 13 per cent, compared
with just over 3 per cent in China and 4 per
cent in Brazil. This shows, as economists have
been warning for years, that India’s GDP simply can’t go on growing in real terms at much
above a 7-8 per cent trend rate without the
wheels threatening to fall off.
The governance problem undermining
India’s infrastructure development and economic growth has been well characterised by
Gajendra Haldea, a senior advisor at the Planning Commission and veteran campaigner for
infrastructure reforms. Haldea argues that economic liberalisation merely displaced the
rent-seeking activities of bureaucrats, politicians and their business clients from permits
to infrastructure projects, from the Licence Raj
to the Contract Raj. The Commonwealth
Games are the Contract Raj at play.
But unlike the end of the Licence Raj, there
could be no ‘big bang’ reform to liberate the
building of India’s infrastructure. The government has had to stay at the centre of infrastructure policy and regulation, whatever the
mix of public or private sector finance used to
build the projects. The ongoing and always
controversial role of the government in infrastructure – with its regular supply of eyewatering scandals – is one reason why it will
be easy to miss the turning point, when India
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