The new Bengaluru (Bangalore) International Airport at Devanahalli is just about ready for take-off, with regular flights scheduled to commence in early May. Several years in the making, the dream of a world-class aviation hub for India’s Silicon City has finally been realized. But there’s just one small problem: How exactly are people supposed to get there? In what has become a symbol of the country’s severe infrastructure shortage, the planners neglected to consider the need to efficiently connect Bengaluru to the airport. Now, with the airport complete, the city is scrambling to find makeshift and longer-term solutions to circumvent the sorry state of the existing road network.
Every Indian region has its own version of this story — newly built concrete overpasses coexist with lunar-surface dirt paths, rickety bridges crumble under the onslaught of monsoon rains, and daily power cuts hardly raise an eyebrow. These projects — highways, ports, dams, power plants, water supplies — are essential for any modern nation to run effectively. So what’s standing in India’s way? In a recent discussion at the Wharton India Economic Forum in Philadelphia, panelists from both government and private enterprise explained the challenges and described creative ways to get the job done.
The Public-to-Private Vision
Historically, the government had controlled most of India’s large infrastructure development. During the 1990s, as liberalization got underway, the idea of public-private partnerships (PPPs) began to take hold. Nasser Munjee, chairman of Development Credit Bank, and former managing director of Infrastructure Development Finance Corporation (IDFC), noted that at the time IDFC was created, people recognized that the public model was not working and that government could not continue to be the sole provider. “Some 90% of the infrastructure was owned, invested, and managed by government, and the trick was to figure out how to manage the transition,” said Munjee.
The government could hand over projects to the private sector using three methods, but not all of them were politically acceptable. “You could privatize it — sell the asset and let others get on with the job — but that was hard, because the left wing wouldn’t be happy,” said Munjee. “You could commercialize it, so the government wouldn’t sell the asset but rather sweat it. Commercialization of ports, airports, etc., would fall under this category, and user charges would be possible here as well as in the first model.” The third option, said Munjee, was a private finance initiative (PFI): “Rural schools, some roads, urban utilities — these would go into the PFI box. The government would pay and ask a private company to design, build and operate the project.”
Nearly all the infrastructure developed in the last six to seven years, Munjee said, has been based on this [three-prong] approach. But most projects have really been in the second bucket (commercialization): “Apart from a few instances, little has been done on a purely private basis, and the government is still a major player in power and in the railroads. We have also done precious little with the PFI model.”
The important question to ask is, “Who’s setting the vision?” added G.V. Sanjay Reddy, vice chairman of GVK Industries, one of India’s largest infrastructure developers. “Nowadays, everyone is affected by infrastructure policy. But in the past, politicians’ only vision was to be re-elected. Since election results were often a function of how the rural masses voted, infrastructure wasn’t a driving force. In the last 10 years, things have changed,” said Reddy. “Now there is road connectivity to rural areas too, and other infrastructure has improved, so it is affecting rural residents and they are demanding change. The government will act on pressure from the masses.” Back in the day, observed Reddy, when presented with an infrastructure issue, politicians would ask “Why? Why does the private sector need to be involved?” Then, the question changed to “What?” and today the question is “When? How fast can we do it?”
Structuring the Proper Frameworks
Both China and India are major players when it comes to PPPs in infrastructure. “But China is using infrastructure proactively to drive GDP reform,” observed Munjee. “India is reactive. It reacts to shortages or gaps, and the country is still struggling to find the minimum level of infrastructure that needs to be built. Telecom has become an amazing success story, but on the other hand, we don’t have a single sanitary engineered landfill site in the country. We need to fill the gaps before we can really become proactive.”
The most successful countries, Munjee added, created PPP units at the central levels of their government: “Britain has created such units at the Treasury level; these are called ‘UK partnerships,’ and the capital market finds the structures acceptable. Australia and South Africa have also developed similar structures. In India, I would propose a PPP unit that sits at the nexus of the prime minister’s office, the Finance Ministry and the Planning Commission.”
In some sectors, such as telecom, frameworks have worked well, agreed Anil Baijal, senior advisor to the IDFC and former secretary of the Ministry of Urban Development. For other sectors, like roads, seaports and airports, they are evolving; at least legal frameworks are available. “The most lagging area is urban infrastructure. There is no policy framework there,” said Baijal. The reason? It’s inhibited by two things, he noted. “The political economy of the urban sector is somewhat more complex, because there is a third tier involved [besides central and state governments], that is, the city administration. They have huge capacity constraints. Also, in some service areas, like water, private delivery has become an emotive issue and the government can’t handle it.”
Baijal noted that the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), which he had helped roll out a few years ago, will be of assistance, but money also needs to come from the capital markets since there will be a gap in the projected required funding. “We need PPP frameworks in the urban sector as well that will make these projects transparent and acceptable,” he added.
Reddy pointed out that for many projects, the frameworks are now largely in place. “In 1992 when we built the first private power plant, we had U.S. lawyers coming from all over to teach us how to draft the contracts for infrastructure in India,” he said. “We followed those guidelines, but they were too complex and they didn’t work. Since then a lot has changed. India has learned the right frameworks — and what’s applicable to India is not always the same as what works in the U.S. or Europe.”
Of more concern today than the frameworks, Reddy added, is the government’s unwillingness to let the private sector make too much of a profit. Reddy noted that if the private sector starts making money on a project, the government tries to renegotiate the contract. “But the important thing is to get the job done,” said Reddy. “After all, the private sector is in this business fundamentally to make money, and the government has to accept that. If the private firm does make money, they’ll simply reinvest it. Many projects get stuck because the government thinks the private sector is making too much and wants to reinvent the whole thing — it’s a waste of time.”
Is Government Capacity Lacking?
Panel moderator Vikram Limaye, executive director of IDFC, noted that institutional capacity in government might yet be insufficient to handle and plan the multitude of desired PPPs. But Munjee argued that predictability in government and policy risk are the most important factors in how much got done and how soon: “Continuity is most important. The investor doesn’t want the framework to change every time the government changes. Most investments happen at the state level, after all.”
India needs more clarity and structure, especially in power, integrated logistics and related areas, said Munjee. “We have a number of ports, but still 70% of India’s containers are transshipped out of Colombo, Sri Lanka, and others out of Dubai,” he noted. “I asked the Sri Lankans whether they were worried about the progress being made on Indian ports. They said, ‘No, because the left hand doesn’t know what the right hand is doing.’ This is how we’re perceived. We have to make much quicker progress in making sure the frameworks are there and everyone is comfortable with them.” A proliferation of regulations is not going to help, observed Munjee. “It would be much better to consolidate the regulators.”
Reddy, too, did not see a capacity problem as the main bottleneck. “The problem is deal flow,” he said. “There is easily a trillion-dollar infrastructure opportunity in India, but there are simply not enough deals on the table for the private sector to bid on and execute.” Currently, so much competition exists that 20 to 30 consortia bid on each Indian project. Pricing is so aggressive that one wonders if the private sector will make money, he noted. “The focus should be on execution. As an example, the chief minister of Uttar Pradesh, Mayawathi, wanted to build the Ganga expressway — 1,000 kilometers and 25,000 acres of urban real estate development. It took her just 30 days to bid it out and pick a developer.”
Wanted: Construction Workers
Money and frameworks can’t do the work alone, warned the panelists — enough companies and workers need to be there to execute the projects on the ground once the approvals and investment come through. Foreign companies find it hard to do the actual execution of infrastructure projects, said Reddy: “Multinationals often fail — they don’t understand the local environment. More than corruption, the challenge is to manage egos and to know, say, when nodding the head really means ‘no.’ Nuances matter in India.”
The international markets, added Reddy, have already recognized the funding opportunity — Indian infrastructure-focused funds are being created. “Most large U.S. firms on the Street are there. The biggest question they ask is, ‘What is the execution capability?’ The construction industry in India is at capacity. They are evolving, but they’re not large enough yet for complex projects.”
Munjee agreed. “There is definitely huge interest, and funding isn’t the problem. But there is a worker supply constraint. There are big projects going on in Dubai and elsewhere, so we’re seeing companies having to bring workers back from the Gulf. We need people to do the construction.”
The Urban Landscape
City centers in India face a unique challenge, said Baijal, when it comes to infrastructure: “Some 30% of the country is urbanized; 3% of the land mass houses this 30% of people, who contribute more than 60% to India’s GDP. That’s the role cities play, so rapid economic growth must be concurrent with growth of infrastructure.”
The urban sector falls in the domain of state governments, Baijal explained. “The central government isn’t obliged to take up this issue, but it has launched this initiative [JNNURM] with $12 billion and matching grants from state and local levels. And we will leverage this to get some market capital as well. After two-and-a-half years, it’s going reasonably well. Asset creation has been linked to long-term trusts linked to a reform agenda. Money may only be used from the funds when the local government bodies agree to reforms.”
Baijal noted that a one-time grant wouldn’t have the same effect — maintenance might be neglected after operations commenced, and then the service would deteriorate without user fees. “Projects could also suffer from bureaucratic fatigue,” he noted. “So far, most of the funding has gone to water supply and sewerage projects — with Maharashtra getting perhaps more than its deserved share, even without implementation of a reform agenda, due to the fact that it has the city of Mumbai, followed by Andhra Pradesh and Gujarat.”
Baijal said that the slowdown in infrastructure, at least on the urban side, over the last few years has not really been due to a capacity issue. “In the urban sector, where capacity building is dealt with by local city administrators, we had a worry: How would mayors access market capital and involve the private sector? They had no clue. The level of ignorance in the urban local bodies is huge. There is enough money to take care of the urban sector for the time being, but we have told multilateral funding programs to include financial engineering, capacity building etc. in their plans. Political leaders need to understand that PPPs and sustainability will win votes.”