Oxstones Investment Club™India’s economic reforms of 1991, loosening many restrictions on business operations, are considered a landmark in a country built on central planning after the British left. Deregulation, however, did not include any provision for infrastructure spending. As a result, infrastructure spending, most of it the domain of state-run entities, declined to as low as 3% of GDP in 2003. The central government is correcting this situation by investing $500 billion in the infrastructure sector from 2007 until 2012 and around $1 trillion for the next five years after that. When these measures were announced in 2005, private firms were invited to participate in this gold rush. And they have. About a third of infrastructure finance comes from the private sector currently from less than 5% in 2003.
Adani Enterprises, for example, spent around $11,000 in 1993 to buy land in the western desert. Over the years and many infrastructure projects later, Adani has grown from a small textile company to a group worth $7 billion. GMR, founded by G.M. Rao, is another private company that benefited from the opening up of the economy. From a gold and jute trader, GMR won the right to build the Hyderabad airport, never before having built an airport. GMR’s market capitalization is now around $4.5 billion. There are plenty more examples of small family enterprises that grew into giants because of winning infrastructure projects in the past fifteen years.
Despite the success of these private groups in building India’s infrastructure, huge gaps remain. At least 600 million Indians still live without electricity and those that are connected to the power grid still don’t get enough of it. To satisfy its need for power, the country would need to add 150,000 megawatt of capacity at a cost of $400 billion in the next 7 years. Urban infrastructure like sewer lines and mass transit is also very much underfunded. A recent report by McKinsey highlighted that “across all major quality of life indicators, Indian cities fall well short of delivering even a basic standard of living for its residents”.
The success of private companies has demonstrated the risk-taking capacity of Indian entrepreneurs but there are a number of failed infrastructure projects. The law allows the government to expropriate arable land if farmers are compensated. In practice however, many simply do not want to relocate because they believe the compensation is inadequate. In August of this year a planned expressway linking the 165-km between Agra and Noida was halted because farmers demanded higher compensation. In Orissa, a $11 billion steel plant that was to be commissioned in 2005 has been derailed. Construction of the new airport outside of Mumbai has been delayed many times by protesters.
The issue is this: are infrastructure projects too big to be handled only by the private sector? There are signs that the answer is yes. Rising user fees at airports and highways run by private companies is already making headlines because no one has figured out, a priori, how to cover costs. This means that government subsidies in many projects are essential.