India’s trillion dollar challenge

Preparations for the Twelfth Five Year Plan have begun in India. Infrastructure will need trillion dollar investment if India is to nudge up its growth rate to 9-9.5% per year in the next plan. One of the usual questions puzzling the planners is whether we will find resources to create world class infrastructure. Similar concerns were also raised for the current, Eleventh Plan − will India be able to double infrastructure investments? Or will infrastructure become a binding constraint for accelerating economic growth?

As per the Mid Term Appraisal of the Eleventh Plan, there is nothing to worry. India has already invested $340 billion and with expected $117 billion of investments this year, actual will be $457 billion, missing the target by only $3-4 billion. And the role of the private sector has been an important one in meeting the current plan targets. Private sector will account for a significant share, 36% or $167 billion of total infrastructure investments during Eleventh Plan. No wonder, at yesterday’s Planning Commission meeting, the Prime Minister once again called on the private sector to supplement public resources. It will not be possible to meet India’s trillion dollar infrastructure challenge without active support from private sector.

Good News? Well, it depends on your perspective. I am very worried looking at a recent news item.

The economic regulator has agreed to the demand of Delhi International Airport Pvt. Limited for $225 million in additional passenger levies. The news report quotes regulator’s response from their website. “It is also noted that the project has already been implemented. Therefore, any corrections or remedial measures do not appear feasible at this completed stage of the project.” The regulator adds, “Further, the auditors have expressed their inability to assess the monetary impact of the issues raised by them…..”

In the past concerns were raised about rising costs of this project. The overall cost of the Delhi airport has gone up from Rs 3500 crores at the initial bid stage to, Rs 6000 crores in 2007 to Rs, 9000 crores in 2008. The current costs are estimated at Rs.12,700 crores. The government has already given a number of financial concessions in favor of the private sponsor. It is not clear whether such deals make economic sense at all for all the stakeholders.

Even 101 economics will tell us that in theory, PPI instruments offer value for money, provided the procurement process is efficient, and there is true competition to drive the overall costs down. Once the project is selected, government hands over a monopoly to the selected bidder for a long period of time. Competition for market does not ensure economic efficiency within the market, unless the underlying instrument, in this case, a contract is designed to ensure such efficiency. Such long duration contracts are bound to be renegotiated and hence the possibilities for moral hazard are very large indeed. It pays the bidder to get the contract at low price and then renegotiate. This seems to be a very common practice in PPIs and India is no exception.

It is important that planners worry on how to meet the trillion dollar challenge, but this time round, let us not focus on the quantity alone, we need to examine the price tag of this trillion dollar. The government or apex institutions in India are just not ready to deal with the complexity of PPI risks. Model concessions and bidding documents bring standardization, not necessarily economic efficiency.

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