Abstract
Optimal approaches that recognize the specific kind of market failure/s, in the policy and design of infrastructure, greatly reduce the financing costs and improves the ability of to attract finance in the private provisioning of infrastructure. When state systems are weak organizationally it is first best to strengthen the state capacity so that it can minimally perform the roles of design, regulation, development of frameworks, and of monitoring, for the private provisioning of infrastructure. This is particularly so in the case where there are dual market failures arising out of both the natural monopoly and the appropriability failure aspect. The challenges in design and policy are large and with many false starts it is only now barely beginning to be considered in India. Thus infrastructure design rather than debilities in financial markets remain the key problem. The potential to use of foreign capital to finance infrastructure is often overstated. The forces leading to the current mess-up of the Indian banks and FIs in lending to infrastructure are brought in perspective. The key issues in developing state capacity, and the changes required for getting the design of infrastructure right, as also to bring functionality to the role of financial institutions in the private development of infrastructure are highlighted. Governance reforms that make for better development of infrastructure are highlighted.
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Notes
- 1.
One of the reasons for the governments’ reluctance to divest out of electricity, despite all the state systems being ready for divestment is that then they would not be able to bad but populist policy unless they took the cost on to their own budgets. The ability to pile up the deficits, and then pressure the central government to debt forgiveness continues. It was hoped that the debt forgiveness instituted once in 2002, (GOI 2001, 2002) would not have to be done again. But then that has not been the case since now after nearly 15 years the state DISCOM’s balance sheets have been muddied with another similar dispensation now being proposed, without real reform on the distribution and subsidization side, by the government. Clearly reform has to be real. Similarly, large investment heavy sectors like irrigation, sewerage, bus transport, which could be easily divested from to reform and enhance public value, continue to be used wastefully, even when reform could actually have been politically rewarding.
- 2.
Public procurement has its frailties and cannot be replaced by procurement that is akin to procurement by private parties. See Pandey (2003) to for a discussion on the issues of relating to the private sector in public procurement.
- 3.
As for instance to access cheaper labour markets, given the “schism” in labour markets that is widely observed in many late industrializing countries.
- 4.
Markets that go beyond this tenure are very thin, and/or are very heavily discounted in India.
- 5.
For the role of DFIs in a liberalized market that leads to development of financial markets, see Varma (2004).
- 6.
It is important to realize that in competitive industries where revenue streams can rise due to price changes, as in the cases where there are no market failures, lending can be over much shorter tenure, and equity proportions can adjust, or be made to adjust to reflect these risks.
- 7.
An insight due to Prof. Ajay Pandey, shared with me over several discussions. See also Pandey (2014) for risk shifting behavior more generally by the private sector.
- 8.
Many of the UKs PPP were contracted for during the period of high interest rates. Since then rates have fallen, especially so after the quantitative easing that followed the GFC. That has made annuity out payments very large to the chagrin of those arguing for PPPs. Had the annuities been indexed to bond rates, this should not have happened.
- 9.
Unfortunately the NHAI has not recognized the opportunity that is there even now (despite low network densities and alternatives today). Thus on the Ahmedabad Baroda stretch, the very large 6+ lane national highway sees very little traffic because the tolls are higher than on the Expressway (4+ lane). Had the tolls been rationalized to give trucks a lower relative toll on the Highway, and cars a relatively lower toll on the Expressway, the separation of truck and car traffic, would have improved the value to both (including safety), and enhanced the revenue as well.
- 10.
Today though this would only be of academic interest, since the tolls are very high in India constituting a significant part of cost to operators and road users. Equally importantly when a highway is being expanded, or in part redone to provide for underpasses or service roads, tolling continues without the value to road users, which actually could be challenged in a court of law. It is important that tolling is not carried out when the road is broken, under construction, or under large scale traffic diversion.
- 11.
Already the limitation of the current approach of by-passes, ring roads, (which all get quickly ribbonised and to become part of urban system) with regard to urban transportation, and radial (star) arrangements on highways, which come close to or intersect urban/rural habitats to bring about conflict between local and regional/long distance traffic takes away much public value in contrast to system design in almost any other country. The sacrifice of safety that the current approach entails is the reason for the almost 10–15 times higher loss of life due to road accidents that is there in India over the advanced countries, when correctly measured in terms of fatalities per vehicle km.
- 12.
See for instance Tilotia and Pawar (2004).
- 13.
Though most are in the public sector, the listing of such companies allows for secondary market participation. Cf. Thomas White (2010).
- 14.
See also Varma (2002).
- 15.
“Regulation” in the form of Antitrust had just come into the railways in the US. This was by no means price regulation but actually kept the competing “natural monopolies” from merging into a few dominant monopolies. For a discussion on the evolution of natural monopolies (industries with sub-additivity of costs) from competition to the textbook natural monopoly with pricing power see Morris (2002). See also Varma (2001).
- 16.
Aliber (1993) argues that multinationals (MNCs) could have an advantage in being able to take advantage of the uncovered parity being positive, even as portfolio capital is not able to close the gap. In other words the so-called “country risk” when used to denote this deviation from uncovered parity, could be penetrated in part by MNCs.
- 17.
However for MNCs in host countries from where exports take place (operating in areas with no market failure), the positive deviation from uncovered parity becomes an “advantage” allowing it to finance/take over local firms, using foreign sources of funds, even when these are otherwise on other real factors like technology, organization and management no inferior to the MNC.
- 18.
An additional consideration is the so-called “real economy” advantage that MNCs have which arises out of imperfections in the technology and product markets, and in organizational structure and practice. Kindleberger (1969). When the advantage that MNCs have is of such kind and especially when technological, rather than arising due to the fischer open (positive deviation from the uncovered parity), then the spillovers would naturally be large to benefit the host economies. Infrastructure sectors do not show large technological differences, which are also not appropriable. Hence foreign direct investments too into infrastructure tend to be low if these are not be dysfunctional.
- 19.
One’s own experience being on the board of a PSU bank during this period of lax lending was that it was almost impossible to argue against lending to infrastructure. If ILFS had cleared a particular infrastructure project, for the mangers of PSU banks, who behaved more like bureaucrats over long years of an abused interface between the government and the bank, there was no question of seriously re-examining the proposal. Even if glaring risks like in the case of a power project projecting revenues with no firm PPA but through sales in the market at assumed prices based on past prices for short term deals, were pointed out, they could be easily overruled because “another PSU bank” had already taken the decision. RBI representatives would not typically be critical enough to look closely at endogenous risks being much more concerned about any ticks as laid out in the assessment procedure not being met.
- 20.
Government for example, carpet bombs the banks with office memos and Government Orders (some compulsory others advisory) and there could be as many as a few score over quarter, swamping the boards of the weaker banks (with very little countervailing power), so that response to these, as well as credit assessment much of which should have taken place lower down, uses up all the top management time. Most of these are internal and pertain to operations rather than strategy or policy, which leads to PSU banks being not able to maintain their boundaries—a necessary aspect of any “living” firm or system. Indeed the bane of government in India, is that it is singularly unable to distinguish strategy, plan and policy from operations.
- 21.
Pure populism without either a developmental or inclusion aspect is also partly the result of the state not having the capacity to strategise and pursue developmental goals. The lack of ability then makes politicians turn to the quickies that populist measures are.
- 22.
One of the major plus points of the NHDP was that it had its own legislative basis both in the NHDP Act and in the special provision for land acquisition that the NHAI could use. As the Congress came to power displacing the Vajpayee led NDA government under whose leadership the NHDP happened, the initial reaction of the Congress government was to critically examine the NHDP. But finding the same to be successful in creating public value and being well entrenched in law, the new government actually enhanced the investments! On the other hand poorly crafted private investment arrangement for generation in the electricity sector under the IPP policy c.1995 which allowed returns up to 32% (much of it in the form of rents), invited a severe backlash, from which a partial recovery could happen only after 10 years with much change, and new policy in the form of the “Ultra Mega Power Policy” (Pandey 2010). Similarly, the two metro airport privatisations which involved much rents that were hidden in the earlier format. This is because the bid criteria was the share of revenue when the revenue was ill defined. There were other issues as well (Pandey et al. 2010). These, inter alia led to a period of retreat from privatization of other airports. And it is only now that the matter is back on the burner with an attempt to overcome the vast rent seeking opportunity created because of the bid criteria being the share of revenue, when revenue itself was ill defined. However since public value was enhanced considerably by the professionalization of design and management that these privatisations brought about, there was no adverse public reaction as such, and the realization of the mistake is confined to official and academic circles. Also the intervention of the court to deny a part of the rents, much after the project was completed, took some part of the sting away. But the matter can still be brought on into the public domain if the same is seen to provide a political opportunity.
- 23.
In the budget of 2014–15 government proposed an organization called 3PIndia with these roles but was unfortunately also saddled with a developmental role, which would negate the primary purpose of being an expert organization!
- 24.
Civil servants are not experts. The high value placed “generalists”, the frequent transfers, the disdain with which knowledge is considered all make for non-learning organisations. Also by design there is very little embedment of knowledge other than of the procedural variety. The result is person dependence rather than system dependence. In most other LDCs though with poor governance the reasons more often like in a politics that misdirects resources, or in a undertrained civil service, not in the kind of organizational failure that become the hall mark of Indian administration.
- 25.
For example, Pandey and Morris (2009) lays out the framework for the design of electricity markets most appropriate to the needs of the country.
- 26.
The standards too have to be realistic. For sewage disposal a BOD of 10 ppm would be very expensive, while 30 which is very good would allow most cities have near 100% coverage via PPPs.
- 27.
The core difficulties with both Cases I and II of the UMPP has been this. See Pandey (2014). Also being cast as PPPs with demand risk being completely taken off their backs, the policy has resulted in the ballooning of the capacity created to well above the realistic demands.
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Morris, S. (2019). The Problem of Financing Private Infrastructure in India Today. In: Kathuria, R., Kukreja, P. (eds) 20 Years of G20. Springer, Singapore. https://doi.org/10.1007/978-981-13-8106-5_11
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