Wednesday, 17 February 2010

Build baby, build

Build and they’ll come. Economists hate this phrase. They won’t come; they say. Maybe not to the land of the politician who said "Drill baby, drill" and to whom the title of this post owes apologies to. But in most parts of the world, they will indeed come.

Infrastructure development is surely the policy area where most countries have performed poorly in. In developing countries it is because of lack of prioritisation (wasteful subsidies are considered more important) and rampant corruption. In developed countries – it is the NIMBY problem – do it anywhere, but not in my backyard. Everywhere infrastructure has been allowed to dramatically deteriorate (witness America’s airports, Britain’s M25, California’s power cuts, …..) Two stellar exceptions – Britain in the colonies in the early twentieth century and China of today.

That a robust infrastructure is fundamental for economic growth is well known. But I argue here for infrastructure building as a great way of creating jobs.

China has created a huge number of jobs in the construction sector. It cushioned the unemployment caused by the recession primarily because of stepping up infrastructure development to an even higher level. In India, despite the leakages, the National Rural Employment Guarantee Scheme has been successful primarily because of the big jump in road building happening in various parts of the country. China is successfully exporting this concept – it goes around the world scouring for minerals and oil and offers infrastructure development in return, which incidentally also sucks up a fair amount of Chinese labour.

India has a crying need of infrastructure development – both urban and rural. It can safely be depended upon to provide millions of jobs for the next 20 years Bottlenecks such as land acquisition and corruption can be overcome and should not be conveniently explained away as the “price of democracy”. That’s sheer bunk.

Developed countries have allowed their superb infrastructure of 50 years ago to wither away. No country typifies this more than the US. Because any lobby with half a dozen supporters can block anything, America has allowed its infrastructure, especially airports, railroads and power plants, to drop to third world levels. With its high potential for adding jobs, the current economic climate is a great opportunity to correct this aberration.

What about the money ; the sheer size of investment required. Much of this can be recouped by economically pricing the services – tolls on roads, fair price for power, etc etc. Capital is always available if there is a possibility of adequate returns. Its unbelievable that infrastructure investments cannot yield a proper return – after all what competition can there be for an airport or a road or a port ?? The trouble has been mistaken pricing policies for generations which have made infrastructure seem a dead investment.

Build baby, build; for the legions are coming !

10 comments:

gils said...

//Its unbelievable that infrastructure investments cannot yield a proper return – after all what competition can there be for an airport or a road or a port ?//

all points ok..aana this point..bit doubtful i the think...it depends on project completion and other stuff right..indiala infra bonds yeilds are very less..atleast my exp is pretty bad in that.

gils said...

environmental lobbynu Chinala does anything exist?? i think they are the biggest stumblers (as in devils advocate) nowadays...it cud be for rite or raang reasons..but one report saying it wl displace tribals or destroy trees is enough to poke a spoke

gils said...

athukaga enna anti environmentalistnu nenachukathenga..i luv trees ..still at times i feel..some anti development lobby does all this jus because they didnt get their cut in the lanjam share

Sandhya Sriram said...

For India, the money spent on Infrastructure is not less. it is just that there is no effective mechanism for measuring spend effectiveness or return of investment - whether one calls it corruption or absense of effective rules on the so called rule books to measure compliances or lack of management accountant department in the government of India.

Privatization of Infrastructure is definitely a great option, but there must be effective mechanisms to monitor. when you travel in Maharashtra, you have more toll bridges and collection points than proper roads. and while pune mumbai express highway could be an exception, there are lots of very poorly maintained roads with attached toll points only adding inconvenience to the whole process.

but as you said, infrastructure is definitely a positive ROI provided we let it become so.

RamMmm said...

It is a landmine. (California should not be taken into account as an example for anything except decadence. Everything has been stalled there in the name of environment or politicking.) I am still a tad sceptic that it would work here.

The problem in India is that of accountability. I am yet to see a project that was within bounds of acceptability either in cost or time overruns. Bengaluru has its own set of projects that are either useless, very slow, stalled half-way or politicians upending it. Most of our vision for urban dev is either tunnel vision or myopic. There is definitely a huge amount of investment in roads especially the national highways and I don't mind paying the existing toll of around Rs.250+ to traverse a 350 km distance between Bengaluru and Chennai. But then how many can and how many will, if the concept is applied to all the major roads? It is a domino effect and the impact becomes wider than the problem. The trend however is for making the golden quadrilateral and the North-South, East-West corridors tollways on a BOOT (Build, Own, Operate Transfer) basis.

// Bottlenecks such as land acquisition and corruption can be overcome and should not be conveniently explained away as the “price of democracy”. That’s sheer bunk.

Unfortunately, cannot be wished away. :-( China has tremendous political will, a single party rule and a centralized administration.

Ramesh said...

@gils - If an infrastructure project were priced properly ton the consumer then it would return a profit and your infra bonds will yield more !! The environment issue is live in China too - its all a question of getting a right balance between industry and environment

@Sandhya - Right; India spends a fair proportion of GDP on infrastructure, but corruption is a big leakage. Still a lot has been done. I am a firm believer in economic pricing for infrastructure. By mistakenly subsidising them you only ensure that no infrastructure is built.

@RamMmm- Yes, California is not the US, but still .... On the democracy arguement - its quite possible even in a democracy for infrastructure projects to go well. Taiwan is an example - they are a robust democracy and yet they have a market model for land acquisition and getting projects going. Democracy should mean the will of the majority and should not mean the right of one dissenter to block everything.

thethoughtfultrain said...

Catchy title ... :-) I agree India needs a good building session. But the people who own their land, can't see them budging an inch! I often tell my folks, all we need to do is send the US folks to India - they are small in number and our India will be just perfect for them. As for us ... :D Take space in the vast vast vast US!! :D

Ravi Rajagopalan said...

Infrastructure as fiscal stimulus is not new. The big projects of the 1930s commissioned by the Roosevelt Administration were completely Keynesian in scope and context. In 1932, only 25% of the United States was electrified. In ten years time, the coverage was close to 95% thanks to the Rural Electrification Authority. Similarly you have the examples of the Federal Highways, the Tennessee Valley Authority - you name it. Even Social Security was a Rooseveltian innovation. In a country that was deeply troubled due to the Depression, the President brought jobs through works and hope through his Fireside chats. (I am of the firm belief that Roosevelt was probably the greatest President of the United States). However the role of pricing is not clear. A road is valuable, but how do you price it? What is the intention of pricing a road - to recover investment, to pay for upkeep? I believe it has to be the latter, while the raison d'etre for the project per se has to be more than just the IRR of the investment. It has to be the commitment made by a government that looks long term driven by a technocratic vision, that makes investments in such a way that it delivers the capability for people to earn incomes and thereby create tax revenues.

Ramesh said...

@thoughtful train - Ha ha - exchange the populations of US and India. Nice thought. Biharis in California ?? Texans on the banks of the Cauvery ?? Intriguing thought !

@Dada - I am suggesting that road pricing should recover IRR. Subsidising it only means taxes have to pay for it - either way we pay. Better to let users pay rather than the general population.

Vishal said...

Very well said, Sir!

There are exponential opportunities of infrastructure development in India for next few decades. The amount of work being done in NCR is heartening to see and even more heartening to see is the jobs that these activities are providing. Thankfully, the price of democracy concept is not so common in this part of country at least. I don’t see any reason how infrastructure development can be a loss making business. Well, the loss can be severely attributed to misappropriations and inefficiencies. A recent study stated that less than 50 paisa of a rupee is actually spent on the allotted work in almost all Indian states except few ones like Gujarat. The problem lies here perhaps.

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