The Hindu Business Line : Getting back into building mode

One of the defining moments in India’s economic reform occurred in the time of P.V. Narasimha Rao, the Prime Minister rightly remembered as the sponsor of Indian economic reform. But one of his unintended missteps was in the case of an invitation to the international private sector to invest in India’s power utilities.

A high-powered mission went to the US to hold discussions with prospective investors. At that time itself, public opinion had been against it. Some of us had raised objections, pointing out that if we are to invite equity on guaranteed return, we could as well build the sector on borrowed money. But the attraction of foreign direct investment in the power sector was strong.

The outcome was the ill-fated Dabhol Project, which went into a colossal loss and is being rescued by governmental action and pouring in public funds.

Be this as it may, all this was the result of an ideological fixation of the reformers that the private sector was better fitted to handle the infrastructure and foreign investment would afford the solution.

There followed a series of initiatives encouraged by the World Bank of private-public partnerships in building roads, water supply and power projects. There has, however, been rapid learning from the failure of Enron and Dabhol.

There is much less enthusiasm lately about public-private partnerships in general and the role of private sector in infrastructure. The Government of India has set up the Infrastructure Development Finance Corporation (IDFC), which has got off to a good start. There are also other Government-sponsored financing facilities, which have been set up in the recent past to cater to the gaps in financing.

The idea of the private sector as a solution of choice for building infrastructure seems to have been based on fragile foundations. Not many private sector initiatives have so far been successful.

Ultimately, the ball is back to the court of the good old Government, which has to fund, execute and maintain the country’s infrastructure. At least, this is the position, by and large, in India. The question of financing is, of course, intrinsically difficult. Various initiatives are being considered to solve that problem.

Infrastructure bank

In this context, it is useful and instructive to reflect on some of the developments in the US, which point to the return of the role of the state to a prominent position in infrastructure. After all, it was the neo-conservative revolt in the US that led to the reformers’ consensus against State intervention in infrastructure.

The ideologues of the World Bank and US Administration were strongly against the expanding role of the State. They felt that such a development could hand over the levers of power to the Government. Fortunately, realism in infrastructure management has won. Even in the US, there has been a sea-change in thinking on the problems of infrastructure financing and management.

News has come of a new Act (entitled The National Infrastructure Bank Act of 2007) proposed by two prominent US Senators, Chris Dodd and Chuck Hagel. The proposed bank will be initially authorised to issue debt of $200 billion — a small beginning, no doubt. It is proposed that the new bank will fund infrastructure projects of national, regional and other projects of type. It can raise more capital from private sources.

A state-sponsored enterprise to finance infrastructure in the mecca of private enterprise and market capitalism is, indeed, a historic event. Ideological exhortations from the US to make the state withdraw from all economic activity sound hollow!

Rationale for move

In a recent article in the Financial Times of August 23, Felix Rohatyn (himself a former Adviser to Lehmann Brothers, the famous investment bankers) and Warren Redman (a former US Senator) have made a well-argued plea for the retur n of the Federal Government to its rebuilding of America.

They cite the outstanding contributions of former US Presidents, such as Franklin Delano Roosevelt and Dwight Eisenhower to infrastructure building in the US. In particular, they refer to Eisenhower’s contributions in building the highway system, which enabled the US to bring a single market into reality.

They cite recent events, such as the collapse of a bridge in Minneapolis, as evidence of sustained neglect of infrastructure. They also refer to the ordeals of New Orleans after Hurricane Katrina because of the Government’s failure to maintain the levees — the structures that would have prevented the ingress of flood water. The failure of the levees led to the collapse of a whole city and considerable loss of life.

The authors cite a recent assessment by experts of the Government Engineers, who give a C (-) grade to the level of maintenance of the US’ infrastructure. The cost of restoration of these essential elements of infrastructure would run into billions of dollars.

The authors wryly reflect that it has been easier for the US Federal Government to spend billions of dollars in Iraq than in repairing and restoring the bridges, roads and essential infrastructure of the country. They call for determined action by the Government to invest in infrastructure.

Fortunately, the policy-makers of India do not have hang-ups about the diminution of the state’s role in infrastructure building. Leave alone a few initiatives in public-private partnerships, the Government is well set in its willingness to undertake both financing and implementation of infrastructure projects.

It is another matter that some of its ventures, such as the electricity undertakings, are not running at a profit. That is more a reflection of public policy — of the populist policy of free power, which leads to fragile finances for all electricity distribution companies — than the efficiency of public undertakings, as such.

In our polity’s preoccupations with the 123 Agreement and the Hyde Act, which no doubt have a great deal to do with adequacy of power, let us not ignore the new Dobbs-Hagal Act, which marks a return of the Government to financing infrastructure in the US itself.

Long maturity bonds

Our policy-makers, who have been consistent in this regard, can teach the US policy-makers a thing or two. They had long ago recognised the inability of the market by itself to solve infrastructural problems. The state has to intervene in a massive manner. That, of course, does not mean the problems of finance will disappear. The Dobbs-Hagal Act has a provision that the new institution will issue long maturity bonds, guaranteed by Government. The long maturities are needed to align the bonds with the long gestation of infrastructure projects. Our policy-makers have already incorporated this feature in their formulation for infrastructure financing facilities.

It is to be hoped that the Government will not be too miserly in the tax concessions necessary to induce people to invest in its long-term bonds. In conclusion, let us celebrate the return of commonsense to the US policy-making establishment, which has recognised the role of the state in infrastructure — both in its building and its maintenance. India has nothing to be apologetic about the role of the state.

The only cautionary note is let the state become more efficient. The Delhi metro and the Indian Railways have shown that Indian Governmental entities can be efficient. May their tribe increase!