Where have all the women gone?….

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The 15th Finance Commission in India has just been set up and the announcement includes five members. For the fifteenth time, and to no one’s surprise, the Commission is composed entirely of men. The most-recent membership of the Niti Aayog also does not include a single woman in its ranks. And so we have to ask – in this great country of one+ billion, how can the government remain unable to find any woman it deems worthy and capable of serving in these policy and planning capacities? Where have all the women gone?

It seems that our current Government, which has co-opted many good initiatives of past Congress governments and leadership (e.g., concept of Mission, Aadhaar, GST, etc), has left out the most important one: real action in the spaces of female empowerment and gender equality.   Rajiv Gandhi’s Office had Mrs. Grewal at its helm for many years with a large number of senior women in his team.  But today’s PMO has only one woman on staff in a leadership capacity, and that too at the Joint Secretary-level (though there are several more at Director-level and below).

Our current Prime Minister is very fond of ancient history and so this fact may help the cause of my tribe. The recent archeological evidence shows that until 9,500 BCE or until the onset of domestication of agriculture and animals, there was complete equality between men and women. Experts believe that this was because men and women carried out the same tasks of hunting and gathering food. And it is only when specialization led to differentiation in work — i.e., women tended to agriculture or managing house while men continued to hunt — that inequality between the sexes seeped in over time. So perhaps for the modern-day gender crusaders: maybe we should start with equal representation at work to recreate history.

Back in modern day India, it is not just the Finance Commission where we’re seeing gross under-representation of women in senior leadership positions. In 2017, India ranks 139th in World Economic Forum’s gender inequality sub-index for Economic Participation and Opportunities for Women out of a total of 144 countries, ahead only of Iran, Yemen, Saudi Arabia, Pakistan, and Syria. And omitting women altogether for opportunities like this, where they are elevated to the national stage and have the chance to make a lasting impact on policy, isn’t just confirming fears we all already knew. It’s also an opportunity lost.

Perhaps we’re living in an era of empty words: Because although the government seems to be working overtime to flood the national media with news about India’s improved rankings for World Bank’s Doing Business 2018 index, little publicized fact remains that India’s gender gap specifically for economic participation and opportunities under this government has worsened.

Most of us are too busy to notice the chasm that exists between the “alternative reality” – the world of words spun by the government, a “good” development narrative, or token empowerment for all achievement amplified to the national stage – and our own, everyday experiences. Fifteen successive Finance Commissions with just one single female member (that too in 2009) isn’t just an unfortunate coincidence; it’s a pattern. It’s our reality.

Light, Camera… What is missing is…..

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“If liberty means anything at all, it means the right to tell people what they don’t want to hear.”

 George Orwell

The PM’s agenda of Governance is wrapped up in six impressive sets of buzzwords.

  • Pro-people good governance is about putting people at the center of development process;
  • Minimum Government, Maximum Governance limits government’s role to that of a facilitator;
  • Need for Action, Not Acts is about bureaucratic shift;
  • PPPP (People Public Private Partnership) is about making people partner in policy formation and execution;
  • Sabka Saath, Sabka Vikas defines collective efforts for inclusive growth; and
  • Bring out Red Carpet, not Red Tape for investors.

I remember the old sentiment “Sometimes I’ve believed as many as six impossible things before breakfast” , but then, not everyone is in wonderland.

Unfortunately, good governance is not always available on order. Participation is not synonymous with transparency. Simply adding a fourth “P” in front of PPP does not automatically ensure accountability of the electorate. Getting India’s encumbered bureaucracy to take real action will require much more than the closure of one Planning Commission. Investors will definitely appreciate PM’s red carpet, but once they get to the end of that (very short) carpet, there will still be the same maze of red tape to navigate.

“Governance” is a popular term, but often imprecise and used to mean different things: a minimal state; the introduction of new public management; defining a new process or method of ordering a society, and so on. Similarly, to achieve good governance one will have to work on many ends simultaneously. An efficient, open, and accountable public service delivery will need bureaucratic and political competence, incentives, and most importantly, integrity.

There are many internal contradictions within these six strands too. The PM is silent on the way to resolve these trade-offs and conflicts. For example, how will minimum government be able to deal with the complex choices of PPPs (which seems to be a panacea of this government)? The United Kingdom, for example,had to set up many new agencies to deal with private infrastructure. Today, infrastructure projects are a series of opaque and very complex contracts between private sector sponsors and governments, providing pre-defined utility services. This approach to infrastructure presents major economic, social, and political risks for not only today’s consumers, but also for our future generations. Huge economic rents are inherent and so far neither politicians, nor bureaucracy have scored well on integrity scales anywhere in India, including PM’s “Janmbhoomi” Gujrat. The mere fact of people’s participation will not subsequently guarantee better governance.

100-day milestone for the new government is approaching fast and perhaps it is time for the PM to move away from the Humpty Dumpty approach: “When I use a word, it means just what I choose it to mean, neither more nor less.”

Good governance has to begin with meaningful participation by all stakeholders, open debate about options, and decisive steps forward, where integrity and accountability are demonstrated with…action.

 

 

 

 

Thinking Outside the Box

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Robert W. Fogel died on 11 June 2013.  He shared the 1993 Nobel Prize in economics with Douglass North and pioneered use of quantitative analysis to explain economic and institutional change. Why should anyone outside academia really care? A couple of interesting insights from two of his most famous works may make you think again.

Analyzing  long-term historical data, Fogel found that railways played a much more modest role in the overall economic growth in the 19th century America. In his view, the alternative network of canals and wagons would have carried on American expansion, albeit at somewhat higher costs.  Without going into the merit of his claim, an important lesson emerges from this debate that is worth remembering. Impact depends on the counter-factual assumed.  This is specially so for infrastructure networks where overall impacts are extremely sensitive to the ground realities.   Indian bureaucracy and political leadership are busy fast-tracking billions of infrastructure investments, underlying assumption being that this single action will spur the much-needed economic growth. Will it, really?

Fogel also created another storm with his work on slavery in America when he, along with Stanley Engerman challenged mainstream belief that slavery was inefficient, and in decline before the civil war.  They found that slave plantations were as efficient and profitable as free plantations because owners treated slaves as economic assets.  In their view, slavery would have continued, if it were not for the political change. While defending their work, we were reminded that what is economically efficient may be far from morally justifiable.

Fogel thrived on challenging prevailing dominant views.   We will miss Fogel who was one outstanding-outside the box thinker.

And Let the People Rule…….

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The Comptroller and Accountant General of India’s (C&AG’s) address “Social Obligations of Public Auditors” to the Kennedy School has created a mini storm yet again: C&AG chose to take debate about his mandate to what he calls “America’s most elite university”. The question raised is: should public auditors be mere accountants and do arithmetic over government expenditure or should they go beyond their (constitutional) mandate and seek to sensitize public opinions on audit observations? With this new mandate, C&AG hopes to  become an active participant in public governance rather than a mere report pusher.

 

In this new audit model, C&AG advocates broadening his stakeholders beyond the executive, legislature, judiciary and to include civil society, social organizations, media, and the public.  The new normal for C&AG includes three initiatives: first, “the fault-finding auditor”, “wiser at hindsight”, will be replaced with positive and balanced reporter. Second, “Noddy” type booklets and pamphlets on audit observations will awaken citizenry to demand better governance from various departments. And finally, participation of social groups in social audit will give better outreach and inclusion of wider groups.

 

Let me start with  some interesting takes on his approach. C&AG declared in the speech that “Today’s youth is discerning, demanding, and believes in respecting institutions. He is not willing to see politicians subvert these institutions. He seeks a new moral and ethical framework for sustainable governance.“ Seriously? Evidence in India seems to suggest otherwise: numbers at anti-corruption rallies are dwindling forcing Anna Hazare to take a short pause. Unless a critical mass of empowered youth leaders is allowed to emerge and they invest in their own future, their engagement on such issues will remain episodic.  They are more likely to be disillusioned and disengaged against continuous negative flows of global and local news, thus creating a wedge between their intention and action.

 

Second, respecting institutions also means that changes are brought in legitimately, following a due process, and not at the whims or the fancies of its leaders, however good these might be. One should never forget that the role of the rebranded US Government Accountability Office was changed over a very long period. And this was done at the behest of the US Congress, through an act in 2004.  As early as 1967, US Congress asked the then General Audit Office (GAO) to review federal government’s anti-poverty program. In 1974, GAO’s role was expanded to cover evaluation functions. With these changes, GAO no longer was staffed with accountants alone, but included scientists, economists, and other policy experts.  We do not have to follow these steps, but three lessons are worth noting: first, there was an explicit demand for professional and independent support from US Congress to see how government money was spent for the welfare of American people. Second, the change process took over 30 years from the first step in 1967 to the ultimate full recognition and rebranding of General Audit Office to Government Accountability Office.  Third, the organization itself changed to meet the rising challenge and now has become a multi-disciplinary expert agency, well respected by the media and the Congress. Some of these steps are inevitable if the role of India’s C&AG is to change to cover broader mandate.

 

Third, no doubt informed electorate is a key to effective democracy, but informed legislature will necessarily be the important first step towards this end. Even though technology has improved communications a great deal, it is really the Parliament that will have to be the supreme institution of accountability in our democratic society.  In fact Justice R M Lodha, in his famous judgment  “C&AG is not a munim” reminded all of us that C&AG is a constitutional authority and it is for the Parliament to correct the mandate.  Unless C&AG is seen to bring value to the Parliament as a whole, (as was the case for the US Congress), it can snatch a headline or two, but will not deliver the broader mandate of improving governance.

 

Fourth, creating trust requires credibility:  there have been many articles in the Press and in the academic world about the C&AG’s numbers, be that for 2G Scam, or for coal. There are also reports where C&AG seemed to have agreed to suggestions that some of the estimates can be debatable, but having the right number is what I expect from my accountant, more than anything else.  Don’t you?

 

Finally, media and technology enables information dissemination, may even raise social awareness, or assist in crowd sourcing, but certainly, it cannot replace the slow and painful task of institution building. Democratizing accountability sounds great, but will it address our fundamental challenge of development?

 

Beyond Numbers: Infrastructure in India and China

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Markets or Socialism? Successful infrastructure sectors require planning and coordination. In 1978, China chose an export-led growth strategy, and this required a focus on global connectivity. Today, China has become the world’s factory. Their government invested heavily in infrastructure to boost competitiveness of production networks, and the transportation sector in particular received massive investments. In essence, this was the result of much more than a shift in investment policy; it meant a shift in mentality. For China, this had meant a dramatic change to an economic reform agenda that was principally built on the philosophy of “getting rich first” (xianfu lun). China’s transport sector strategy extended this philosophy to suit their investment program: To get rich, build roads first; to get rich fast, build fast roads. As a result, China has over 83,230kms of expressway.  It is only in last several years that mobility for the masses has been prioritized in transport investments. In sharp contrast, India’s transport agenda pre-dates even its existence as an independent nation. The 1943 Nagpur Plan envisioned a connected India where, in twenty years, no village would be more than five kilometers away from an all-weather road. The philosophy behind this Plan has remained in many of India’s infrastructure programs and, as a result, today, rural roads account for two-thirds of the Indian road network. It is only in the last few years that India has embarked on program for high speed expressways.

Power for People? Power capacity is another area where there is a massive gap: China’s effective power capacity is more than five times that of India’s. India also has very high losses in transmission and distribution, estimated at 27% last year compared to less than 7% for China. And given India’s emphasis in providing its citizens with access to electricity, it is clear that it is not the transport sector alone where Indian policy makers have chosen individual welfare over growth and productivity improvements for the economy. Fortunately for more than one billion Indians, this has meant that differences in power capacity and high efficiency are not that large at individual household levels. Even though China’s effective power capacity is so much greater than India’s, average power consumption for a household in India is 40% of that in China: 145 kwh per capita for India versus 360 kwh per capita for China. This is because Chinese industries consume over 75% of China’s total power generated whereas this share in India is only 36%.

Roads or Schools?  Fiscal space is another factor where these two countries are far apart: Until early 1990s, India invested more than China in infrastructure. After the 1991 crisis, India faced serious fiscal constraints which resulted in a dramatic slowdown in infrastructure investments; Whereas China, with its high savings rate, was instead able to ramp up public investments quickly. The 1994 tax-sharing reforms in China placed more revenue resources in the hands of the central government and simultaneously these reforms transferred increasing fiscal expenditure burden on the local governments. Though investment data are not strictly comparable for these two countries, India invested $50 billion (about 4.7% of GDP) in infrastructure last year (2010-11) compared to China’s $635 billion (or close to 9%). Infrastructure was allocated 37% of China’s stimulus package of RMB 4 trillion whereas education and health received 3.5%. While China has tripled infrastructure investments in last three decades, the education sector’s share has only increased by 1% of GDP during the same period: from 2.5% in 1982 to 3.5% in 2009.

Rural or Urban? China’s infrastructure development model had urban bias. China invested in cities and monetized land assets to pay for the needed funds to finance urban rejuvenation. India, with its laws, some dating back 100 years, is yet to use land effectively for financing the huge demand for urban infrastructure. Last year’s McKinsey research indicates that India spends on average $17 per capita compared to seven times that amount in China for cities. It is only in the eleventh plan in China that rural development seemed to get the priority that India has struggled to deliver for last six decades.

Public or Private? India is using private sector in a big way to bridge large financing gaps, whereas China rejected this instrument a decade ago and has instead adopted a joint venture approach to finance, supported by loans from local banks. India’s current plans have seen over 36% of contributions to infrastructure investment come from the private sector. In 2009 infrastructure investment in China peaked at an all time high of 18% of GDP.  Most of this was financed through increasing local debt, bank credit expansion, and higher fiscal deficit.

Despite some recent changes, it is clear that China’s economic statism has nurtured and enabled markets through infrastructure development whereas Indian politicians have put people first in their plans. And although overall benefits of infrastructure development remain uncertain, both approaches imply large costs. It is these efficiency costs for China and India that I will explore in my next post.

 

 

Bloomberg: “In God we trust. Everyone else, bring data.”

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For the last two decades, China has grown four times the global growth rate and India three times. Infrastructure, and even the lack thereof, has been an important part of these growth stories. For China, the approach has been characterized by building ahead of demand and facilitating overall economic growth. But for India, growth has occurred despite woefully low infrastructure levels, and the majority of Indian business leaders now believe that infrastructure is the number one constraint on the economy, holding back economic growth by 1.5-3.0% every year−depending, of course, on whose figures you trust.

One of the best ways to trace India and China’s growth trajectories is through infrastructure data – After all, data, as Mayor Michael Bloomberg tweeted, is definitive. The table below shows us that China is leading India in every measure of infrastructure development except mobile density and rural road networks.

                        Six Decades of Infrastructure Development: India and China

 

Infrastructure Services

India

China

1951

1981

2011a

1952

1981

2011
Mobile Phones (Millions)
−
−
893.8
−.
−
986.3
Mobile Phone Density (per 100 people)
−
 −
76.9
−
−
73.2
Power Capacity (GW)
2.3
33.4
206.2
1.8
69.2
1,152.2
Power Generation(Billion kwh)
6.6
129.2
865.8
7.2
8309.3
3695.9
Roads ( 1000 kms)
399.9
1485.4
4,236.4
126.7
897.5
4,063.5
Rail Lines Route Length (kms)
53,600
61,200
64,400
24,500
53,900
93,345
Electrified Tracks (kms)
400
5,400
19,600
−
1,700
36115
Rail Freight (billion-ton-kms)
44.1
158.5
626.5
.08
571
2,946.5
Rail Passenger (billion kms)
66.5
208.6
978.5
.02
138.2
961.2
Safe Drinking Water
−
42
88
−
72
89
Improved Sanitation
−
7
31
−
85
85
Sources and Notes:   a2011 India data are for calendar year except when in italics. Indian data for 1951 and 1981 are in financial years. Indian data are from Economic Survey 2011-2012 except telecom data are from Telecom Regulation Authority of India.
Data for China are from China Online and Statistical Communique from Ministry of Statistics.
 −.= not available; Italics represent data for latest available

 

But data is only the beginning of, and not the complete, story. Sometimes, it raises more questions than it answers: What do these data mean with regards to the choices policy makers have made? Were these choices made intentionally and are these choices still relevant today? What conclusions can we draw about the facets of Chinese infrastructure policy? And are there lessons to be learnt for India?

The next few entries will highlight the different growth strategies available to China and India and the choices they have made.

Sources of Temptations

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For the first time, I find myself agreeing wholeheartedly with Arundhati Roy when she writes about her unease at the developments currently unfolding in New Delhi. Anna Hazare is leading a campaign for strong Lokpal Bill to make India corruption free. Delhi’s Ramlila Maidan is a scene of this protest and Anna is on fast for the last eight days. Generation Y is particularly mobilized and if the media is to be believed, this campaign’s online presence is orchestrated by a Canadian Indian who has worked in conflict zones such as Sierra Leone to Afghanistan, using technology to introduce people-powered politics.

My first concern is that assembling such an enormous crowd on an emotive issue like corruption (which is deceptively easy to reduce to moral absolutes but in reality immensely complicated) without clear leadership is always cause for alarm. To do so in India, which struggles to straddle any number of cleavages, is downright dangerous. Igniting unrest and tension along any one of these societal fault lines is a risk that India cannot afford. The media, in particular, has a responsibility to maintain a balance where all views are heard and debated. The difficult questions must be asked – and answered: Where are the voices of reason? Where is the much-needed political leadership?

Secondly, I agree with Roy’s assessment that Hazare’s fast will not help solve the crisis. Corruption is a major problem, in India and elsewhere, but the scope and means of the current debate are very narrowly focused. Lokpal Bills are not, unfortunately, magical solutions. Weak institutions and even weaker wills ensure that corruption cannot be legislated away; Instead, movements like Hazare’s will only raise false hopes.

Lastly, 2010 and 2011 have borne witness to the undoubtable power of social media to galvanize ideas and mobilize people, especially the youth. But let us be clear: The current situation in India is not and should not be swept into the rhetoric of the Arab spring, or any efforts towards oppressive regime change. India is a vibrant democracy: We allow for debate and dialogue. We do not need support or sympathy from the rest of the world to protest against our own government. In the past sixty years, we have used democratic processes to retire administrations that do not work for our people and to reelect those that do.

Instead, let’s mobilize against the sources of temptations. In the next five years, India is planning to spend a trillion dollars on infrastructure – and how we invest those funds will be crucial not only for our economic development, but also for good governance. Will the government adopt and enforce strong anti-corruption mechanisms? Will the government seek the help of civil society to stop potential leakages? And what will the government do to bring back money already stolen from India?

Ultimately, even if Hazare’s demands are met, corruption will not disappear overnight. Democratizing accountability through crowd sourcing can only be a means to raise awareness, nothing more. We have a long way to go and work has to begin on curbing major sources of corruption.

India’s trillion dollar challenge

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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.

Infranomics−What’s in a name?

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Traditional disciplines such as engineering, economics, finance, or law deal with infrastructure issues from somewhat narrow perspectives. I find that no single discipline, however comprehensive in its span of analysis, can be adequate to deal with infrastructure issues. Five years ago, I started a search for a concept that can go beyond a single discipline. That’s when I chanced upon Nomic, a game about changing rules. Most infrastructure issues have nomic-like characteristics where rules are changed during a play to win. I particularly liked the part of the game where any loophole in the initial rule set may give the first player the chance to pull a scam and modify the rules to win the game, something we see constantly in infrastructure. Finally, I had found a perfect title for this blog – Infranomics.

Why am I explaining this now? I saw an interesting technical note on Infranomics. The authors, Adrian V. Gheorghe and Marcelo Masera introduce “Infranomics” as a crucial discipline for this century and defined it “to include a body of disciplines supporting the analysis and decision making regarding the metasystems (e.g., the totality of the technical components, stakeholders, mind frame, legal constraints, etc composing the set of infrastructures).” For these authors, “Infranomics is the set of theories, assumptions, models, methods, and associated scientific and technical tools required for studying the conception, design, development, implementation, operation, administration, maintenance, service supply, and resilience of the metasystem. Because none of the currently existing disciplines provides a complete solution, infranomics will be the discipline-of-disciplines grouping all needed knowledge.”

My view of Infranomics is quite different. It is not a composite library of knowledge drawn from all disciplines. It is even less about integrating different meta systems, tools, or models because that may not add value for policy makers. Infranomics is about processes and interactions. It is about infrastructure institutions and their real life limitations. It is about inability of societies to create perfect contracts and about voice and participation of stakeholders. It is about empowerment of common citizen to understand possible impacts when ordinary decisions are taken to create infrastructure assets or policies. I cannot predict whether it is possible to develop a comprehensive discipline as suggested by writers of the technical note. I have a modest goal, to translate complex issues relating to infrastructure into simple understandable messages. At the end of the day, one needs to improve the accountability for infrastructure decisions that affects ordinary people and I hope Infranomics can begin doing this, even in a small measure.

Democratized Corruption?

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When Jawaharlal Nehru christened the Bhakra Nangal dam the “temple of modern India,” he foresaw today’s reality: Modernity is dependent on infrastructure. But sixty years on, India seems no closer to the dream he envisioned. And the question is inescapable: Why not? Where has the money that could have been used to build our dams, power plants, schools, roads, and research institutes gone?

$1.5 trillion in unaccounted funds parked in Swiss bank accounts reportedly belongs to Indian nationals. This is more than the total deposits of nationals from all other countries. And with tens of other tax heavens dotted around the world, the amount of national wealth that could have been recycled as investments but is instead tucked greedily away in private accounts is unknown. What we do know is that this can happen only in an environment where corruption is rampant. And as multiple scandals break in our newspapers and on our television sets, it is unsurprising that so many of them are infrastructure-related.

But for ordinary citizens like you and I, a figure of $1.5 trillion, while shocking, is ultimately abstract. It means little. So instead I thought of writing about the everyday cases of corruption that we witness personally.

Until just a few years ago, Delhi used to have power outages so often that waiting impatiently in the dark became part of our daily routine. Several legitimate factors were behind these shortages: Inadequate capacity, lack of investments in infrastructure, low power prices, inefficiency across power systems, and an ever increasing demand for power from a growing city. In recent years, energy provision has improved significantly because of sector reforms, new capacity, and the entry of private power distributors. But isolated black-outs continue. What is interesting is that these power problems persist in a number of wealthy residential areas, often affecting single homes – and, in the most unlikely of coincidences, when residents host parties. When a driveway full of visitors’ cars becomes the cause of a black-out, it is clear that technical or structural shortcomings are no longer at fault.

Christmas usually comes early to Manila: From early October carols are played on repeat in shopping malls, lights twinkle along every building edge, and Styrofoam snow sprinkles from rooftops. But along with the usual yuletide spirit comes the inevitable serge of traffic as the city slowly grinds to gridlock. But what’s the connection? Bus-loads of out-of-town shoppers surely add to regular traffic volume. Numerous mega-sale events tempt even the most conservative shoppers out of their homes. Limited public transport and the relatively low cost of driving certainly don’t help. Then there is the basic reality that existing roads are inadequate to deal even with everyday traffic and Christmas simply tips the scale. But these factors provide only part of the explanation. There is one more answer. Invariably, traffic lights are switched off at peak times and even with dozens of policemen on the ground to direct vehicles, traffic comes to a complete halt. But not everyone loses in these tough times: Street vendors make brisk business selling snacks, drinks, and trinkets to the exasperated drivers.

In both these cases, market and government agents have specific information from which to extract economic rent. In Manila, the story is that some traffic enforcers receive pay offs from street vendors benefiting from bored buyers trapped in traffic; In Delhi, some home-owners have to bribe local power company agents to ensure uninterrupted power supply during parties to prevent them from losing face in front of guests.

Clearly, it is not only large-scale corruption in infrastructure investments that raises the transaction costs of business, loss of employment opportunities, or cripples economic growth. And it is the commonplace instances of corruption, those that rarely make headlines, that are far more difficult to fix. In today’s democracies, no one individual or group has a monopoly on corruption.

Democratizing development economics. What Next?

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A new phrase was coined in Washington, D.C. this fall. In a speech at Georgetown University, World Bank President Robert Zoellick asked an important question: Is development economics today addressing the most important problems facing developing countries, or has it lost its way? No doubt, the question was addressed to academia at large, but in reality, it was intended to signal a process of introspection within the World Bank. After all, for the last sixty years, the World Bank has been at the forefront of the research agenda dealing with issues of economic transformation in Asia, Africa, and Latin America. His recommendation sought to end this intellectual monopoly and look beyond today’s “elite retail” model of research and analytics. Zoellick painted a powerful picture of the many possibilities available to development practitioners: Data, analytical tools, and real time local information that can lead to ground breaking results by linking economic theory to practical policy advice via broad based empirics. He presented a new approach for generating development solutions where no one will dominate and all can play a part. This is the basic premise behind Zoellick’s new phrase, democratizing development economics.

With this initiative, development economics too is joining the successful experiments of citizen journalism such as CNN iReport  or the MIT initiative of “unlocking knowledge, empowering minds”. Development economists now live in an exciting new era of “open data, open knowledge, open solutions”. People with hands-on policy experience can hope to be able to influence development policy designs and final outcomes at global levels. Having open access to World Bank resources is the first necessary condition to do so, but it will not be enough to generate results on the ground or on a global scale.  A number of crucial additional steps will be required too and some of these have large resource implications.

First of all, it will be important to make information resources available through one gateway portal otherwise, as Herbert Simon had predicted decades ago, “A wealth of information creates a poverty of attention”. There are very large numbers of sources that are supported by the World Bank with somewhat different mandates and many different identities. There is also a vast amount of data — lessons from other multilateral and bilateral donors supporting knowledge networks on development issues, like the International Growth Institute funded by DFID.

Second, in order to improve the quality of debates, dialogues, and cross learning, it is not enough that there is simply more information out there. There is, after all, no point of a search that returns tens of thousands of results, without discriminating among them. Even with efficient information systems there is a need for some intermediary institutional entity that will make this information usable for policy actions.

Third, how will anybody be certain of the quality of policy advice coming from all these sundry sources? Will there be some quality assurance function integrated in these experiments?

Finally, as one of the World Bank’s own blogs shows, over 70% of the demand for development knowledge generated by the Bank comes from the developed world. In reality, there must be greater demand from policy makers in developing countries themselves. And steps will be needed to overcome the real constraints of resources, capabilities, and internet infrastructure they currently face.

Ultimately, development will only be democratized when the basic power structure within a society is changed. Athens, after all, would have remained an oligarchy if not for the steps taken by Kleisthenes to turn to the common people for support against the aristocratic struggle.  Fundamental changes will be needed in the institutions of development within developing countries. Development economics is only a small part of this equation. Better information and policy analytics will need to be used by  domestic constituencies for effective development. We need to go beyond the “world of international development”.

Four fundamental limitations

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Incentives drive behavior. I believed in this completely and as a result, for a while, both my children grew up with an elaborate incentives framework. It was indeed a short-lived experiment because I found it extremely hard to tailor incentives for my teens.

And so it is no surprise that the era of using incentives for regulation of economic infrastructure seems to be up for a major revision. The process started five years ago. In his last book, Regulation and Development, one of the world’s best regulation specialists, Jean Jacques Laffont presented four limitations of the theory of regulation when applied to infrastructure in developing countries.

Limited capacity is about inability of country’s policy makers to implement policy due to a variety of reasons: lack of financial and human resources available to regulators or even capacity to audit costs that would lead to excessive returns to regulated firms.

Limited commitment by government often creates renegotiations of contracts. There is a widespread belief that institutional weakness makes it impossible for the firms to rely on contracts thus increasing risks regarding prices or demand conditions. Lack of commitment leads to adverse selection in the bidding process and the firms selected are often those who think they have the best chance of success in renegotiations rather than most efficient ones.

Limited fiscal efficiency arises from inefficient tax administration and high cost of public funds. Both these factors limit fiscal space available to government to distribute gains from sector regulations widely across different income groups or support public investments.

Limited accountability is the final institutional failure which leads to collusion and regulator capture. Often government agents are also not the benevolent social maximizers and the media is full of stories of economic rents and corruption linked to infrastructure projects.

Almost all infrastructure problems, be that lack of universal access, high cost of services, poor quality, or wide spread corruption can be traced to these four limitations. Laffont did suggest possible alternative structures, but the world is quite far from a relevant theory of regulation that can mitigate the daily problems faced by infrastructure policy makers.

Why do I bring these four limitations to the forefront today? First, to remind ourselves and academicians that even though five years have passed since the release of this book, we still do not have a workable theory of incentives and regulation of economic infrastructure in developing countries. Second, efforts to overhaul financial sector regulation comprehensively are ongoing but no such efforts are in sight for infrastructure. Surely, there is a need for greater debate. Third, developing countries are investing billions to improve infrastructure and the existing blueprints of regulatory structures borrowed from the developed countries are not delivering. Manila’s water tariffs have gone up four times instead of the promised 50% reduction by water regulator. India’s power costs are set to rise with one and half percent increase in base rate and additional incentive bonus of half percent for keeping the schedule. How many other industries are assured of 16% rate of return by regulators?

India’s growing pains

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Today’s global media is full of stories on India and most of it is certainly not what the Indian government had hoped for five years ago when it signed up for the mess that is called the Commonwealth Games (CWG). The first Asian Games, held in New Delhi too were delayed and had to be postponed from the original schedule of 1950 to March 1951 due to delays in preparations. India was a young nation and the World was perhaps kinder then. Learning from this experience, Delhi was fully ready for the Asiad, the 1982 Asian Games. The planned infrastructure, a new Asiad village with good road network, was all in place, on time. The country also launched color television at that time so that larger numbers of Indians can see the games. No doubt, there were several tense moments, but in the end, India was able deliver. So what is wrong this time? Is it just the scale of corruption?

And though CWG is getting all the attention these days, I want to remind ourselves that most public and semi-public infrastructure projects have suffered similar fate all along for the last sixty years. How would you otherwise explain another grim headline yesterday from New York? UN just released the Energy Poverty report where India tops the global list. Over 400 million people do not have access to electricity in India, the largest single country group. China has managed to give electricity to its billions except just about 8 million. Moreover, 855 million Indians use traditional biomass for cooking, twice the number for China. This is in spite of the fact that India has been planning to provide modern energy sources to all for last several decades. In the transport sector too, we have yet to achieve the pre-independence promise laid out in the 1943 Nagpur Plan connecting all of India to an all weather road-network. Overall achievements on all large infrastructure projects remain illusive, time and time again.

The usual comment one often hears is “a good plan implemented badly”. Prof. Mrinal Datta-Chaudhury in 1990 argued that this dichotomy between the formulation and implementation of a plan is usually false. “If a plan is supposed to be a feasible action program, then it must cover the expected behavior of all economic agents.” Some twenty years later, nothing is changed. India’s planning remains divorced from implementation. India is not, as yet, able to fill the yawning gap between plan and execution because the existing institutions and processes continue to provide perverse incentives: as is evident in the CWG episode, delays usually lead to a lax scrutiny with larger potential pay –offs for those who want to benefit from public money. In fact rent-seeking behavior thrives under delays and mismanagement of large projects. It is difficult to see India getting its seat at the World’s big table without addressing this fundamental flaw in her institutional structures.

Assurances are given to all of us by our political leaders that appropriate accountability will be established in the CWG episode and the guilty punished, hopefully severely. If the results of such a scrutiny helps to instill a better accountability through fundamental institutional changes across Indian political economy surrounding all large infrastructure projects, not all is lost. History will judge this episode, as an expensive treatment of India’s growing pains.

Private Infrastructure: Too important to fail?

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With rapidly rising shares of private capital in infrastructure around the world, an interesting question is whether private capital is indeed more expensive when compared to public capital. Since the cost of capital reflects the underlying risks, an even more relevant question that needs to be answered is whether there are significant differences in the risk profiles of a privately funded infrastructure project compared to other alternatives.

Most PPP sponsors spend considerable time and effort to manage any potential downside risks that may arise. Usually, most countries have a set of policies to guide risk allocation between sponsors and governments, but getting it right is usually the biggest challenge facing policymakers. A lot of interesting analytical work on PPP risks and their allocation among different stakeholders is going on. We will discuss these some other time. In this entry, I want to draw attention to something quite different: whether or not infrastructure policy makers are learning risk management lessons from the financial crisis.

If you surveyed infrastructure policy makers today, especially those based in developing countries, and asked what similarities, if any, there appear between the current boom in private infrastructure and the way overall risks were addressed in the financial sector before the crisis, two possible types of answers are most likely to emerge. A large number of policy makers will point to their elaborate risk assessment and management processes, including best practices, institutions, databases, websites, and experts cells as evidence of their efforts to deal with PPP risks. Another group will deny that today’s PPPs involve significant risks for governments since the current trend is to move away from public guarantees and to transfer demand risks to markets as much as possible. Unlike the private infrastructure of the 1990s, current models of private infrastructure emphasize selecting the right type of private sector projects. Today’s mantra is to leave major demand risks to markets and keep government liabilities, if any, within limits. In India, for example, viability funding adopted for the private infrastructure model keeps overall liabilities under a tight cap. But both these answers miss the lessons from the recent crisis that are staring us in the face.

Infrastructure projects have fairly complex risk structures and each group of stakeholders needs to focus on their own risks. Let us look at typical risks faced by two major stakeholder groups, private sponsors and governments, used as a proxy for all infrastructure users. Fundamentally, the private sector is concerned with risks that adversely affect cash flows of projects from the base case on which the project was financed. Governments, on the other hand, are trying to guard against service disruptions, either in terms of quality or quantity. Governments would also like the private sector to deliver at the lowest possible costs, whereas project sponsors would like to keep adequate margins in their costs to deal with any unknowns. In most developing countries, risk assessment and management processes do not typically target both these risk perspectives, and so in reality it is difficult to reduce risks for both groups simultaneously and that too at a reasonable cost. Whichever groups have better skills, negotiation capabilities, and political clout will be able reduce their own risks. At the central level of governments, there are at least some mechanisms in place for appraisal and approval; At the state and local levels, the situation is much worse. In India, for example, there is one central project for every three at the state level. Do elaborate processes and institutions help to mitigate underlying risks for all stakeholders? No, it really is chaos out there.

What about the ability of markets to address other risks? If there are no guarantees given by governments at least on paper, the project sponsors and debt holders bear the actual market, and other, risks. This is where the macro-risks begin: A large number private infrastructure firms are growing very quickly on debt, as in India. The recent financial crisis has shown us that growth of size through rising indebtedness combined with a “will grow out” attitude contributes to moral hazard risks, as more and more firms assume non-sustainable growth strategies. Indian Planning Commission’s monitoring system, for example, has only physical and financial expenditure targets for the year; What about the impact of these PPPs on market structure? Even more importantly, what about the fiscal impact of such a structural change? And given that a large number of projects are now borrowing from outside India, what impact will the creation of large foreign exchange risks have?

There are also sector specific risks. For example, a large number of merchant power plants, sized to take advantages of economies of scale in India, are hoping to cash in on current power deficits and the resultant high prices prevailing in power exchanges to mitigate SEB non-payment risks. This may be possible for a few power plants, but this strategy cannot work for a large number of market players without dampening the power prices and creating bankruptcy risks.

The financial crisis demonstrated that, beyond project specific risks, benefits that arose out of scale economies (as was the case in large banks and other institutions) were offset by the risk of portfolio, that is, the cumulative impact of too many risky projects. While the merchant power plants may not be very large in terms of market share, externality risks created by their potential failure will be difficult to bear and governments will inevitably have to bail them out. The basic assumption then that markets can address risk in infrastructure is only feasible to some extent. Given the dependencies and linkages of infrastructure with economy, employment, and quality of life, governments, as in the case of India, are holding large residual risks, even if this is not readily apparent as yet.

The financial crisis is an important reminder that, more than the consequences of individual action or isolated regulation failure, the cumulative impacts of individually risky projects are much more serious and difficult to diffuse with potentially large growth penalties. So who is hedging against this cumulative risk when countries are embarking on large infrastructure programs? The financial crisis had to deal with the so called “too big to fail” risks; with large PPP project portfolios, governments will be called upon to rescue firms and projects because these are “too important to fail”.

India’s new normal: from public finance to project finance

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Today’s media is full of stories about the ‘new normal’. The high profile failed bombing attempt at Times Square this month was splashed across headlines as the new normal of home-grown terrorism. Two million Boston residents had to adjust to the new normal of life without safe drinking water after municipal mains ruptured. The Huffington Post’s Caroline Dowd-Higgins penned five tips for navigating the new normal in today’s job market. Time reports on the growing prevalence of memory-loss diseases like Alzheimer’s or other forms of dementia: clearly, forgetting is the new normal. For military families, the new normal is repeated redeployments of their loved ones to ever-increasingly dangerous zones. Much closer to home, Suman Bery highlighted the issue of exchange rate as part of the new normal monetary policy framework. Strangely enough, the Indian infrastructure story has not been phrased in the new normal rhetoric. At least not as yet.

India has moved rapidly from public finance to project finance in infrastructure. In the first quarter of 2010, India topped the Asia Pacific region with eight out of the ten largest project deals, amounting to $15.2 billion or 46% of market share. Seven out of these are infrastructure projects. Globally too, India accounts for five out of the top ten projects. 2009 was a turning point: When the world responded to the financial meltdown with a 44% decline in project deals, India came out as the most active country for project finance with 72 deals totaling $30 billion, leaving the runners-up Australia ($12.6 billion) and Spain ($11 billion) far behind.  Moreover, the 2009 PFI award for Bank of the Year for Asia was taken by the State Bank of India. So what drives this new normal of Indian infrastructure?

A push from the highest quarter of the Indian government is surely a factor. The high profile Infrastructure Committee is chaired by the Prime Minister and is guided by the Deputy Chairman of the Planning Commission. There is also a bottom-up cry for more infrastructure services. Power availability in April was 14.6% short of demand at the all-India level, and seven states faced a peak deficit of more than 20%. High macroeconomic growth at home, global financial troubles, and PPP mania are some of the other impulses driving this new normal.

Most of these deals are highly leveraged: A typical PPP project has less than 10% equity from the promoter. But this is precisely what has changed globally after the collapse of Lehman Brothers. In March 2009, Ian Davis, the Worldwide Managing Director of McKinsey, characterized the new normal world as having two distinct features: It involves a fundamental restructuring of the economic order with, firstly, significantly less financial leverage and, secondly, a much greater role for government. So is there a quiet disconnect from the global new normal? Easy availability of project finance has made it possible to add infrastructure capacity without dealing with the much-needed sector reforms. Take the example of the Indian power sector: Overall subsidy which was $6.2 billion last year is expected to rise to $26 billion by 2014-2015, despite some moderate improvements anticipated in the next few years. The Indian states carry huge contingent liabilities because of power, and other, demands. Overall efficiency of the SEBs remains low and increasing the share of private providers in the sector will not change this. In fact it may even exaggerate fiscal problems, at least in the medium term. For example, SEBs which have not planned for capacity addition or taken steps for load management will end up relying on short term power exchange at a much higher rate than the cost of new capacity. The open access policy will allow the paying private sector users to contract with the new PPPs directly, leaving SEBs with loads that imply large subsidies under the current regimes.

One should always remember that PPPs carry much larger foreign exchange and fiscal risks compared to government financed projects. The new infrastructure model can work, provided the government undertakes important sector reforms, particularly tariff reforms, now. Let us not forget that the last two centuries have seen many waves of private infrastructure followed by state solutions that levied huge fiscal costs for tax payers. And most of the time, it is these highly leveraged infrastructure projects that were responsible for such swings. India’s new normal looks great at the moment, but how long will it last?

Infrastructure: what is right?

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Most of the current debates on infrastructure financing focus on two very different aspects: the enormous size of infrastructure investment demand, and the critical need to invest in what is considered the ‘right type of infrastructure’. There are multiple ways of looking at demand for infrastructure and so depending on the underlying assumptions and models, it is quite natural that there will be multiple estimates. It is hard to get a consensus on a single number. But once the numbers are in trillions, why waste time arguing about methodological purities? Whatever the differences, these would be well within a reasonable margin of error in any case.

And so this entry is about a long list of attributes that are currently used to illustrate the ‘right way to invest in infrastructure’. Local money for local infrastructure – which means no bailouts by Washington – is considered right. Emphasis on asset maintenance gets high marks. Partnerships with the private sector are essential elements of the right strategy. Mass-transit to reduce urban congestion costs and modernization of transport system are integral parts of right infrastructure investments. Information infrastructure, especially creating high-speed broadband is supposed to benefit innovation and so must be right. Green energy, clean technology, smart grid and other tools that modernize the energy sector are encouraged too. Reduced logistic cost, efficient and intelligent transport, including freight modernization, would benefit local industries and so are usually considered right. And for developing countries the right kind of infrastructure is, among others, inclusive, market expansive, regionally integrative, and sustainable.

So what is wrong with labeling everything ‘right’? Nothing, except that all these statements allude more to a religious discourse driven by faith and belief rather than professional substance. And this gives very little guidance to policy makers about the underlying trade-offs that need to be evaluated before making the ‘right’ choice. For China, which is spending heavily on infrastructure, the fear is the possible overheating of the economy – which is energised by infrastructure investment, but is in reality paid for by the enormous value generated by labor arbitrage.

And the Indian infrastructure investment model may end up paying a much, much higher fiscal cost of going the PPP route which, once embarked on, may be very difficult to regulate in the future, at least in the medium term. Rent seeking and corruption will proliferate because it is difficult to design the ‘right’ types of incentives for infrastructure. Is this a story of any one country in particular? Not really. PPPs bring additional resources for infrastructure investments, but often, elaborate financing structures divert policy makers from the fundamental issue of how new services are going to be paid for today and in the longer term.

Unfortunately, there are very large gaps in the analytics surrounding the current choices countries make. There is a fundamental asymmetry of skills, information, and incentives between the two deal-negotiating parties, at least in developing countries: the private sector use all three to ensure that they maximise value for themselves in any investment proposal; government representatives, on the other hand, often lack all three but do have the exclusive right to grant market access. And as elaborated earlier (infra101), market access alone has high potential for super normal profits. This, coupled with the high transaction costs of closing a single deal, is nothing short of a perfect recipe for rent seeking.

So, if you go back to the basics, ‘right’ infrastructure means remembering that there are only two possible ways to fund infrastructure: either by the service users, or by citizens at large through tax and other indirect payments. The third way, (i.e., paying for infrastructure with vast tracks of land and thereby allowing the private sector to create value from idle resources) is an option unlikely to be available in many countries today given the extreme pressures on land resources. Investing right is thus not a mantra, but instead detailed and often dangerous work for policy makers, who must examine counterfactuals and choose projects that generate maximum value for infrastructure consumers. So it’s not about faith or beliefs, you can’t simply wish a project ‘right’. It’s all about hard facts and figures.

Thousand Worlds.

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In spite of all the talk about globalization, we live in an increasingly fragmented world. Most of us are aware of the differences in income or quality of life between countries, but even within a country, children in Shanghai or Delhi face a very different future from their youthful counterparts growing up in a Tibetan village or parts of rural Bihar. But beyond regional disparities are the gaping inequalities within cities themselves: the latest human development report for Mumbai for example, shows that people in certain parts of India’s most prosperous city have a quality of life that is worse than that of some of the poorest African nations. The crucial difference is the opportunities available to people.

 

What shapes these opportunities? Income differences matter. Of course they do: Average per capita income in Shanghai is 13 times that of the poorest parts of China, and Chandigarh is 8.1 times richer than the poorest parts of Bihar. In Peru, for example, the poverty rate for districts at sea level is 46.1% compared with 63.3% for the districts that are at an altitude of 3500 meters above sea level. The Luxembourg Income Study for selected eastern European countries confirmed that capital cities and major urban areas closer to the rich western neighbors have much higher levels of income compared to those regions which are further away. But what accounts for such large differences in income and opportunities both across countries and within a country?

 

Regional geography plays an increasingly important role particularly now since globalization has created a premium for the regions with easy connectivity. Infrastructure provides the much-needed connectivity to help regions unlock underutilized resources and facilitate labor arbitrage. Infrastructure development, however, remains uneven across countries because remoteness adds to the cost of connectivity for two reasons: Physical attributes like higher altitudes and remoteness imply longer distances and much larger costs of connection, and the absence of scale economies make most of the infrastructure projects unviable in such areas. In addition, there are large inequalities in distribution of public money at the sub-national levels. For example, the richest county in China spends 48 times per capita expenditure for public services compared with the poorest counties. Such large inequalities lead to either virtuous or vicious cycles: Better connectivity can lead to agglomeration impacts, creating more inflows of investments, technology, and people, which makes the areas richer and in turn results in more money available for infrastructure improvements. But remote areas continue to lag behind in development due to lack of connectivity and investments. The key question for policy makers then is whether to move economic opportunities to these areas by reducing economic distance, or to move people to jobs in a connected world. From the 1980s, China has consistently moved its workforce into areas that are better connected to the rest of the world. But this is now being changed, given their focus on creating a harmonious society: large infrastructure investments hope to connect remote Western areas to economic opportunities.

 

In any democratic system, it is not the cost or economics alone, but rather political voice and participation by stakeholders in effective policy-making that also determine the ultimate outcomes. And this is where there is a flicker of hope: Mandated representation of women in India at the local level, known as Gram Panchayats, have shown some interesting impacts. Women elected as leaders, or Pradhans, invest more in infrastructure than men. This has been especially true for roads in West Bengal, and drinking water provision in Rajasthan. These results also confirm, albeit indirectly, that local governments do have effective control over policy decisions that affect them.


There is a long way to go to bring these thousand worlds closer to each other. A beginning, however, needs to be made by involving stakeholders and giving them a greater voice in overall resource allocation.

Does infrastructure equal jobs? Not Really.

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Even though countries invested heavily in infrastructure in the 19th and much of the 20th centuries, studies on the impacts of infrastructure on economic development have been inconclusive at best. Even when development economics began as a separate branch of economics, infrastructure continued to be referred to as a social overhead and often lumped as a source of technological change. Infrastructure continued to be ignored until 1989, when David Aschauer provided empirical analysis to explain the slowdown in US productivity with the slow down in infrastructure investments. Gramlich (1994) described Aschauer as hitting the magic button: “Aschauer’s papers were followed by an unusual amount of attention to infrastructure from politicians and economists.”

Twenty years have passed since Aschauer’s work, but it is still very difficult to establish clear links between infrastructure investments and economic growth or sustained employment. However, this fact has not stopped politicians from continuing to rediscover investments in infrastructure because of the promise of jobs – the firm belief that infrastructure equals jobs.

In January 2009, Christina Romer and Jared Bernstein projected that a $775 billion stimulus package would deliver 3.67 million jobs to America, i.e., a hefty price tag of over $210,000 per job. This number could not be taken seriously since there was a lot of uncertainty surrounding the structure of the stimulus package at that time. The same month, the Political Economy Research Institute and the Alliance for American Manufacturing provided detailed data on jobs likely to be created by investing in infrastructure. According to the study, each billion in infrastructure investment would result in 9,819 to 17,784 jobs, depending on the sub-sectors. This implied a much more modest expenditure of $56,000 to $100,000 for each job-year created. Their recommendation was to invest, on an annual basis, $87-$148 billion for the next five years to rebuild America’s crumbling infrastructure. The American Recovery and Reinvestment Act of 2009 (ARRA) allocated more than $150 billion so that infrastructure investments of this level would create the much-needed jobs for the construction and manufacturing industries.

The latest report of the Council of Economic Advisors (CEA) estimates that overall spending under ARRA has now stabilized at the rate of $85 billion per quarter and in their counter-factual world, the program is on track, generating overall GDP growth at the rate of 1.8% to 3.8%. Nearly two million jobs were saved or created as well in 2009. Several other forecasts had similar results too. In reality however, actual direct jobs created or saved was about 640,000 and only a very small part, just about seven percent in infrastructure sectors.

And this should come as no surprise. The relationship between growth and investment changes with the level of infrastructure. At lower levels of provision, infrastructure investments have strong positive effects on long-term economic growth, employment, market expansion, and competitiveness. The US’s own experience showed that once the inter-state highway network was completed, additional productivity gains from new roads were insignificant. It is perhaps not correct to follow the Chinese or the Indian models of infrastructure development in the US at this stage because overall impacts are so context specific. It is very difficult to see a lack of infrastructure investments as a major source of loss of competitiveness. After all, the US holds second position on global competitiveness and has a very large stock of infrastructure assets.

The time has come to de-link infrastructure investments from the job-creation program, which only leads to inefficiencies and over-provision. A better, more accountable policy framework and basic cost-benefit analysis may help to select the right projects that will generate long-term global benefits. Investing in energy efficient transport may take much longer to plan, but is essential to ensure that the billions spent will not be in vain. A series of disparate shovel-ready projects will meet expenditure targets, but will deliver neither the jobs nor the long-term productivity gains the US needs so badly.

Lost Decades?

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The fortunes of PPIs (private participation in infrastructure) move in line with the health of global finances: Last year, financial and real assets amounting to nearly $29 trillion have been wiped out globally. (MGI Capital Report, 2009). Cross-border flows too have declined by over 80% reversing the fast pace of financial globalization that began in 2002. Compared to $10.5 trillion in 2007, cross-border financial flows plummeted to $1.9 trillion in 2008. A major casualty of financial turmoil usually is private infrastructure and this crisis is no exception. Overall project finance volumes came crashing down by 58% in the 12 months from September 2008. If it was not for the dominance of Indian deals, accounting for a quarter of total global volumes, project finance would have been back to 2004 levels.

It was only recently that investors had begun to return to PPIs after the 1997 Asian financial crisis. According to the World Bank’s PPI database, it took nearly a decade to come close to the global private interest in infrastructure achieved in 1997 and yet, the peak of 351 projects closed in 1997 is not surpassed since then. The 1997 crisis impacted PPIs at three different levels: The projects that were in the pipeline remained so for a long time; many projects that were under construction slowed down with significant cost implications; whereas those under operations were put up for re-negotiations on a large scale.

A fundamental difference between the 1997 financial crisis and today is the importance policy makers and politicians alike attach to infrastructure investments. In 1997, PPIs were seen as the only politically acceptable instrument for investing in infrastructure, and hence, at least in Asia, the 1997 crisis led to shrinking fiscal space available for new investments. The governments stepped in much later to reverse the decline in infrastructure investments when PPIs paused. This time, infrastructure, public, private, any infrastructure is seen as the savior of the economy. Private sector’s role in infrastructure is supported in almost all countries, be that USA or China, but the actual cash for projects is coming largely from the public purse.

This trend is indeed a worrisome development since the history of PPIs is curiously discontinuous. Different forms of private infrastructure investments were so common in the pre World War I era. For six decades, however, PPIs disappeared until their reemergence in the late 1980s. Are there similarities between the problems being faced by investors then and now? What should be appropriate public policy response to ensure that PPIs continue to remain as alternative model for infrastructure investments?

Infrastructure Matters. As a Fiscal Stimulus?

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Ask a set of housewives braving summer in Delhi without reliable power or a group of people carting a heavy load of kerosene on their back, walking on narrow mountain lanes for two days to light small lamps in their homes in Nepal. The simple answer is – infrastructure matters. About half of infrastructure generates services that are directly used by people: the other half is used to produce goods and services. A more precise way of stating the obvious is that infrastructure matters for modern life and infrastructure matters to improve production efficiencies in the economy. Infrastructure matters for economic development.

Precisely because of this, the next few years will see a global boom in infrastructure: everywhere governments seem to see infrastructure spending as their way out of the current recession. The US expects to spend $150 billion, China some $585 billion and India close to $500 billion. There is an implicit belief here that some $2 trillion spending on infrastructure will generate high impact in the next 24-60 months because of the underlying positive macroeconomic externalities: Large infrastructure spending will make industries and services more competitive globally in the medium- to long-term and it will create the much needed jobs immediately.

However nobody seems to worry about small details at this stage. Even though there is ample empirical evidence to show that infrastructure bottlenecks affect the growth potential of any region, positive linkages between infrastructure and growth rates are neither certain nor automatic. One must not forget that there are large and often undefined lags. It takes a fairly long time to identify and approve the right type of infrastructure projects. Once done, projects usually take a few years to build, and even when projects are completed, the final growth impacts are realized only in the long term. The previous experience of the great depression confirms this, at least in the US. Though a large part of public expenditure was spent on building highways, parks, water and sewage, schools and public building, creating jobs and building physical assets, it did not immediately lead to economic expansion. According to Michael Bernstein, “New Deal traditionally has been given high marks for its relief policies, and to an extent the same can be said for its reform components. But economic recovery was not one of its accomplishments.”

So why do people support investments in infrastructure without having any idea about linkages with economic growth and development? A simple answer is that what people value are services infrastructure provides, delivered reliably – and that too at a reasonable cost. Most also believe that governments need to ensure that these basic services are made available to citizens. At individual level, infrastructure is seen to be too complicated to worry about: i.e., the common citizen is not going to worry about these details. Politicians everywhere love infrastructure projects (well, almost everywhere) so there are not going to be many questions about these linkages from that quarter. Civil society groups ask these and many other questions, but most go unanswered. There are large lobbies, comprising associations, chambers of commerce, and others who support the infrastructure boom because it is good business. Academics usually debate about these important issues but often messages get lost in long and often frightening models. There is just not enough material available for meaningful public debates: for informed public debates, even less so.

Even if we agree that infrastructure matters for economic growth and development, at this juncture, debates should be about the efficacy of infrastructure spending as a fiscal policy tool. If creating jobs and stimulating aggregate demand is an important and immediate objective today, which infrastructure initiatives are best at delivering these outcomes? One year on, how many new jobs are actually created from these billions? These questions are important in their own right, but they are even more crucial because fast-flowing infrastructure money often end up in political rents, corruption, or at best, in unwanted projects.