Tag Archives: Infrastructure Investments

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.

 

 

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.

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.

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.