How about a new white elephant to fund infrastructure?

More of the same when the same has failed

Here’s a conundrum: it is amply clear that given the abysmal state of India’s roads, railways, ports, irrigation and electricity grids, and given the rapid growth of the Indian economy over the past several years, good infrastructure is in great demand in India. Yet the central government’s infrastructure financing vehicles have been unable to disburse the allocated funds for the lack of financially viable projects. Understanding this unusual state of affairs is important, even critical, to be able to solve one of the Indian economy’s most pressing problems. Unfortunately though, the UPA government’s latest proposal to address this problem shows every sign of poor diagnosis and equally unimaginative solutioning.

Infrastructure projects are not taking off in India in a big way not because there are inadequate sources of capital, but because government policies make it impossible for many projects to be financially viable. First there are regulations that firmly put several industries out of the private sector. The state runs the railways, almost all of the India’s power industry and dominates the aviation sector. Road projects are hampered by overlapping local, state and central government regulations. If the state were to roll back its choke-hold even a little — as in the case of telecommunications and to a lesser extent in civil aviation — it is clear that market forces can provide quick and competitive solutions.

And then there is that admixture of socialism and populism that destroys the price-mechanism. Electricity pricing is not based on costs of production or on market demand. Instead it is based on electoral necessities. Railway ticket prices do not even account for inflation. Air tickets are the government’s way to rob the rich and pay airline employees. While there is hardly a party in India’s political spectrum that dares to challenge these perceptions and point out that good infrastructure cannot be free, the UPA and the Left are the worst of the lot.

The solution to India’s infrastructure shortfall, therefore, lies in deregulation and movement towards a market-based infrastructure industry. As the Economic Times suggests, the government could well have developed greater sophistication in bond markets to aid the flow of capital into the infrastructure sector. Instead, the UPA government has created yet another ‘special purpose vehicle’ to fund infrastructure. The India Infrastructure Finance Company (IIFC) will borrow from international financial institutions and lend to ‘deserving’ infrastructure projects. This is a doubly dangerous. The government, and not the market, will choose which projects are funded. And governments have a poor record on this front. And since the central government is underwriting the international borrowings of the IIFC, it will have to repay lenders from its own revenues in case the projects it picked run into difficulties.

Despite throwing about fashionable terms like ‘public private partnerships’, it is clear that the UPA government has thrown up a lazy and very likely an ineffective solution due to its fundamentally mistaken belief that India can solve its infrastructure problems without further freeing up its economy. No wonder then, that among India’s leading newspapers, it is only the leftist Hindu that is cheering the move.

This post also appears on The Indian Economy Blog

21 thoughts on “How about a new white elephant to fund infrastructure?”

  1. There is a difference between the telecom scenario and with building an infrastructure: The Rate of return of the investment is much different and lower when it comes to an infrastructure. Unless there is a high return factor, private ventures have no business with it and don’t want to clog their finances into something that will take a longer period of time to be redeemed.

    I am working with the Indian Institute of Technology on building the digital network to connect the administrative offices of the government and have a first-hand taste of the situation.

    If you want to know more, you can mail me at the address below.

    Vijay
    vijaysanand2003@hotmail.com

  2. Vijay,

    “Infrastructure” includes power, transport, irrigation, communications etc. Of course, no two sectors will have the same business case; ditto within each sector. But they are all similar as they involve large upfront capital investment with returns spread over long periods of time. The assets itself have long economic and physical lives.

    You are right about the return factor. Infrastructure investments are usually low risk, with lower returns on investment (compared to say portfolio investments in stocks). At the risk of oversimplifying, infrastructure investments must offer a rate of return better than the safest other investment (like long-term government bonds).

    Because telecom is both a infrastructure and service industry, investors have an opportunity to recoup their overall investment in a shorter timeframe. Investment in basic infrastructure (like underground ducts, fibre-optic networks etc) is not unlike investment in building a power grid or road network. Returns are lower and slower. Because the same players also run mobile and other services (which have higher and faster rates of return), it makes business sense to invest in telecom.

    This suggests a good model for power, roads etc; i.e., government policy should aim give investors opportunity to balance their investments.

  3. India should split the Railways into two corporation. One freight
    and one Passenger. The freight should be spit into several baby-bell
    type of companies that are privatized that have to compete with each other. The Passenger side should build bullet train system which can
    compete with airplane. In twenty years airplane is going to be so expensive due to oil running out. Bullet train would also be safer
    and cleaner. There is Global Warming and Peak Oil which should be
    taken in account of before deciding on the best course of action.
    Only problem with the plan is all the employees that would be obsolete
    with the automation and deregulation.

  4. India already has decent bond market. Existing laws, not deregulation per se, are hindrance to infrastructure such as road, ports, airports, and power. But these laws are hard to change, especially in the next four years. If a fund will help move things along by reducing risk of investing infrastructure projects, so be it. I think that’s why Dr. Ahluwalia is pushing for the infrastructure fund. Some of the same people who seem to be opposed to the fund while pushing for market based solution disparage, rightly, India’s infrastructure when compared with China’s. It is surely more important to people’s lives and the economy to build the infrastructure needed as fast as possible instead of worrying about how it is funded as long as it is done openly with minimal corruption. Privatization of railways is impossible as it is the primary mode of travel for vast majority of people, especially low-income people, across the country. If it is any consolation, low rail tickets cost are helping to keep air travel cost low.

  5. Nitin: I already made a response post to your comment in the Indian Economy Blog. Thanks for the comment.

    I wonder what it would take to build better roads. Maybe just like how the planning of National Highways happened in the U.S, there should be some sort of massive planning to lay roads that run through the outskirts, with exit points to cities and towns, instead of all roads running through every city and town in existence.

    There already are two classes of Railways. There are the trains that are allocated for Goods and the ones allocated for Passengers – though it doesn’t seem that way. In Passengers there are the local trains and the express trains. So I think it almost comes close to what Mr. Argod is talking about – though the implementation and outcome are much different from the theoretical output.

    Bullet trains require too much precision engineering and it consumes a lot of financial resources. As it is the Express trains are much expensive than other modes of land travel even for short distances and cost as much as or higher than some of the competitive air travel rates. Bullet trains would just be priced higher and at the moment, there is a very little population that would require of such facilities. It would ultimately meet the end of the Concord.

    This is a good discussion guys. Keep it going!

  6. Vijay,

    Airplanes are not sustainable due to pollution and oil running out.
    There is no substitute for Jet fuel where as electricity can be generated
    from variety of sources. US highway took 40 years to complete.
    India needs sustainable development. If you cannot look ahead to
    20, 30, 50 years, then this quick fix is not the way to go. In the US
    highway are paved over every year due to salt corroding and heavy trucks.
    As far as precision engineering is concerned, what is the IT, auto, space,
    airspace industries doing. It is precision control systems. On the other hand if India keeps buying military equipment from foreign manufactures
    then domestics will never do anything. Bullet trains are 30 year technology, no one is asking for maglev.

  7. I agree with you Argod. But what I have realized in the past six months since I am trying to gather some talent pool together for an infrastructure project is that, the talent pool in India is very different. The education system is quite updated that they have no idea about the current engineering practices and what are the tools that are used at the present age. It’s very rare to see people who are well aware of the tools of the trade and updated with current technology. Do you want someone like that to build the bullet train and let your family ride on it?

    I absolutely agree that we need to look into the future. Though we have an enormous amount of the population who would complete a task to the best of their ability once they are handed to them, we still need people who are immersed on the fore-front of technology and who can lead the rest, and on the way educate them. Most people who are capable of doing this, arent in this country anymore – they are somewhere earning in dollars and enjoying a better lifestyle. I was talking to a leading professor in the Indian Institute of Technology and he shared with me the same thought – “none of our best minds are here anymore”

    Let me put it this way. If you had the opportunity to live abroad and make good money, would you be willing to come and work in India for sometime (maybe 2-3 years) to be part of a team and get paid next to nothing in working conditions that might or might not be bearable?

    That’s one of the bigger issues. And according to the definition of “Sustainable Development”, it means a project that can reel in revenue when it is partially completed so that it can support its own completion and maintenance , in other words a self generating revenue system. We need better minds than what’s in India to put together a business plan for that.

    I am not criticizing the people in India (for I too am one in the end), but It’s sad that the people here have gotten so used to the current way of life, that it seems to most that bullet trains, clean roads and green grass is just something they can only see in the movies. And most of these people have grown under this and have seen nothing change much that they are used to it as the norm.

    Now that India does have more than half of its population below the age of 25, it’s a bet by the government that the upcoming generation will challenge the views, perspectives and what we have accepted as the norm. It’s all waiting for initiation.

    PS: I absolutely agree with you on buying weapons. We need to put our team to work and build our own military equipment, or just put that money towards something of better use. I heard that there was a recent agreement signed with France about building some Submarines in the Indian shipyards and also there was a deal made for complete knowledge transfer. It might be a good start.

  8. Atanu,

    Great piece on the railways. One thing about any government project is widespread corruption and ineffiency. So any major overhauling of railways will fail unless we change the governance structure of the railways.
    We can make railways an autonomous body (like the reserve bank of india or election commission) without interference from bureaucrats and politicians. Sridharan was able to achieve a lot because he had virtual autonomy in implementing the konkan and delhi metro projects.

  9. Its always been about throwing more money at the same problem isnt it? Despite it being 2 decades since that “14 paise of every rupee” observation of Rajiv Gandhi.

    Whether it be things like education, health or any other form of infrastructure most Governments have excelled at announcing huge funds but without any plan on how they are going to utilize it, and what benefits are forseen from that spending.

  10. Well said Prasanna! Planning and execution are absolutely two different things with quite a difference. We have great aspirations. But very few with the backbone to back it up.

  11. I agree strongly with argod and Atanu that Railways is the onyl way forward for building a sustainable and environment friendly form of transportation.

    I have started observing that even Americans are coming around to this view, witness the explosion in freight traffic in the Deep South, compared to 18-wheelers (A Freightliner/Mack truck with 18 wheels). No traffic jams, no downtime… The locomotive engine can be a hybrid diesel with excellent mileage and low low emissions. No need for electrification. Solar installs for electricity for drivers and guard in back for freight, and for running the lights in passenger trains. Usage of high intensity efficient LEDs for lights. Usage of intelligent design which maximizes incoming light during daytime, and also allows wind to be funneled such that there is reduced need for fans. (You cannot have AC in high density passenger trains, too costly).

    argod, having bullet trains/metro rail is so costly, it is not feasible countrywide but maybe local cities. Instead the average passenger train speed is say 40-60 km/h, commission a study and see where the bottlenecks are. It would be really easy to raise it by 20-30 km/hr by just a small effort. I think that it is possible to do Mumbai Pune in 1.5 hrs for all trains.

    The basic thing holding increased traffic on same amount of rail lines in India is installation of sophisticated signalling equipment everywhere. THIS IS A MUST. In Mumbai on the Western railway sector between Churchgate and Virar, train frequency is such that the signalling equipment can handle 30 sec difference in train appearing at a station. We need a way to make sure driver/guard at each side of train can communicate securely without anybody listening in. We need a way to centrally track all trains, and display them in real time on a map. (I am a Geographer by profession and making maps is what I do nowadays.) THIS HAS TO BE ACCESSEBILE TO THE PUBLIC. Sell these Real time (RT) maps to the public in a pocket GPS/Galileo system, and also display in all platforms. If a train is delayed everybody should know where it is delayed, and WHY. No lies.

    Can anybody think more to add something relevant?

  12. One more thing building a Just in time infrastructure will make sure NOT MANY people are retrenched. There is a standing hiring freeze for railways which is broken only for recruiting people who can help in automating such processes.

    A massive amount of effort will be needed to ensure trains do not breakdown when they are run n times more than before. A big reason train frequencies are limited is due to maintenance overhead. We should institute a global 24 by 7 shifts.

    IIT’s have done a lot of work in redesigning train compartments for high density metro places, this should be implemented as test framework, get feedback of people and then redesign. I believe that with modern manufacturing techniques it won’t be too hard to just mold panels quickly into any shape. They shouldn’t be made of metals like steel but some blend of materials which allow quick redesign. I have no clue what they are called but I read that it is being done in the car industry worldwide. Mechanical engineers anyone?

  13. And on the same topic, I think once the public transport is built well, they should hike up the road tax and insurance for two wheelers, so that people start opting for public transports. I for one, don’t want my children and grandchildren to be born into this thick puff of smoke in the cities. But, we need a mass means of transport ready before making that move.

    my two cents.. ah, paisas 🙂

  14. First you want Indian Railways not to have any fatalities, and to be modern. All those require bullet train technology. So What is this technology. First, dedicated tracks (but can be shared). Second, lines are welded together in order not make noise. Carriages are joined together via the wheels. Third, computer controlled tracks. Forth, hight speed is only possible on straight lines but slows down when that is not the case. So if you don’t want any deaths, the rail system has to be upgraded. Speed is just added bonus. Just like in the US, speed limit in highways were introduced to save gasoline, fact that death rates were reduced was bonus that no one expected. In any light, technology is needed to save lives period. Cost should be irrelevant, and might cost less than what every one here thinks, All the locomotives that Chittaranjan Locomotive Works produces has it’s origin in foreign companies. So CLW will have to license the technology from foreign manufacturer and produce it in India.

  15. I agree with Amit above. I am not sure if we need trains that go faster, I am more of the opinion that the railways needs to cut out unnecessary stops/choke points.

    For example the average time from Bangalore to Mysore by Rail is 3 hours. But by cutting out most unnecessary stops one train does it in 2 hours and 20 minutes(including mandatory slowing down at all junctions/stations) . The fact is, most folks travel from Bangalore to Mysore, not to all those intermediate stops that are encountered.

    As much as the railways should plan for higher loads and speeds(which might reflect 10, 20 years down the line), there is a crying need for efficient utilization of current resources, to serve immediate needs!

  16. It is surprising to see that thoughtful Indians still think that somehow India is poor and low tech because all the smart people are elsewhere. If all those apparent smart people move back to India, will it suddenly become a rich high tech nation? It is like saying that the west is full of smart people and Arabs and Africans are mostly dumb. Did Japan, Korea, and, now, China suddenly become smarter in one generation? What makes a nation rich and prosperous are not smart people but smart policies and smart institutions. These policies and institutions allow people (smart and otherwise) to be productive, contributing their most to the society. India is changing in this regard, but not fast enough. And there are plenty of people in India who can make the country rich and prosperous. Don’t short change them.

    As a side, the discussion about bullet trains in India is bit amusing to me. I would rather have ordinary trains that are timely, run safely, and don’t use their tracks (i.e. pretty much the entire nation) as sewer lines.

  17. argod,

    It is pretty easy and DOABLE to bump up average speed of all trains. Building bullet trains is a distant dream, it is totally unrealistic. A speed of 130-160 Km/hr is possible for Shatabdi etc TODAY on existing tracks. Your suggestions are sound suggestions: i.e welding joints..

    But you are mistaken that we have to import foreign tech. Once you start solving a specific problem, you implement incremental improvements. These small changes done constantly add up so that after a few years you get a extremely efficient product. During this procedure you may also find a new and better way to do things.

    And there are plenty of people outside who can help. If I have a problem and post it on a blog, I am sure people with wildly different perspective would do some constructive criticism and help me find a better solution.

  18. I hope they learn from the mistakes foreign countries had while implementing their tracks so that we don’t have to make our share of sacrifices in lives to learn that lesson.

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