Foundering of the Indian Infrastructure
By Staff News & Analysis - January 06, 2012

For the past half decade India's infrastructure industry has enjoyed a Sea Link moment; a blast of growth when one could imagine that the private sector could deliver all the new roads, bridges, power stations and airports that the country needs so badly. The government says the boom will continue. Over the next five years it predicts that infrastructure investment will reach a new high relative to GDP, with some $1 trillion spent, half of it by the private sector. The trouble with this rosy prediction is that the balance-sheets of many Indian infrastructure firms are as potholed as the roads they resurface. The backdrop is a slowing economy—growth has dipped below 7%—and a deep ditch of debt at infrastructure firms (which typically build, own or operate projects, or do a combination of the three, sometimes in partnership with the state). Government decision-making has slowed, partly due to drift at the top and because officials are scared of being accused of graft. – Economist

Dominant Social Theme: Yes, there is a setback here in India. But it's all due to an absence of bold leadership! Politicians have to think "outside the box"!

Free-Market Analysis: We learn from this Economist article that the situation in India is even worse than has been portrayed. Like China and Brazil, the enormous floods of money created by central banking have been applied inefficiently and without much attention to the actual necessities of modern life.

The Economist newspaper – which analyzes everything from a (disguised) command-and-control point of view, is puzzled that this should be so. The solution its writers and editors propose is that the government should get "better" – bolder and more efficient so as to increase the competence of the infrastructure.

But this actually would contravene the way government works when it comes to infrastructure in particular. Governments and their bureaucrats do not "plan." Yes, governments do create infrastructure in most if not all economies these days, but the idea that the government ought to be doing this is increasingly not supported by the facts.

In communist China, for instance, the building-spree that the ChiComs have embarked upon is so out-of-control that local governments are building entire empty cities. In America, the "infrastructure epidemic" is so bad that some have estimated the entire national system of roads, bridges and sewers needs to be rebuilt. And now in India we read that infrastructure efforts are riddled with corruption and have not kept pace with industrialization. Here's some more from the article:

[In India] firms get paid when they begin a project and when they reach milestones towards finishing it … During the boom, firms bid recklessly for contracts (including an extension to the Sea Link bridge, won by the Reliance Group, run by Anil Ambani). With high interest rates and inflation a number of these deals may turn out to be duds. Some completed projects, including Delhi's new airport, are losing money …

It gets more fiddly. Firms may lend money to projects they own no stake in and to contractors. They invite in minority investors at multiple levels in their holding structures, including private-equity funds that may use debt to finance their purchases. And overlaying all this is sloppy disclosure and a habit of focusing on firms' "stand-alone" accounts. Roughly speaking, these try to capture the core business, pretty much as defined by the managers, rather than the "consolidated" accounts which try to include all subsidiaries and investments, warts and all, and which are the accounting benchmark globally …

Two things need to happen. The government needs to unsnarl stalled projects. And infrastructure firms need to raise lots more equity—not debt. That might dilute the stakes that are held by some of the magnates who control these businesses, but would be a fair price to pay to resuscitate the balance-sheet of a vital industry. Even on selfish grounds it makes sense, hastening the day when an honest Indian oligarch can at last put the pedal to metal in his supercar for more than three miles in a row.

What the above excerpt describes is mercantilism, the situation that occurs when government creates demand and pays private companies to provide solutions. Inevitably the results are chaotic and India's case the chaos is overtaking projects even before they are finished.

A better way of dealing with infrastructure is to let private interests take care of it. If land were privately owned instead of publicly, business would find a way to thrive and prosper using the right infrastructure in the right places.

The argument against this approach is that only government can enforce the eminent domain that is necessary to create brand new projects that are necessary for modernity. But many of these projects are probably NOT necessary.

In countries that have an immense amount of monetary stimulation, chaotic change is inevitably a byproduct. But in countries where central banking is not so aggressive (Switzerland comes to mind) the larger infrastructure often changes less quickly.

There are no hard and fast rules about infrastructure. There is no necessity to replace a four-lane highway with a six- or eight-lane one. If the super-highway network built in 20th century America had not been implemented, the US would still have survived and thrived.

The other problem with government-initiated and supported infrastructure is that government does not properly plan for the future. Most people in government have entered the bureaucracy for personal reasons and not for public service.

Accordingly, most laws are initiated and most building is done for mercenary purposes – to create wealth for mercantilist wealth seekers who benefit from a particular project. The larger issue of whether these projects are necessary is not much of a factor in decision-making.

There is usually little or no attention given to the sustainability of such projects. The idea is to get them built and to take a profit. The result is that while public works may look magnificent and perform as intended, the long-term result may be disastrous as such projects prove impossible to maintain or retain.

In Spain and Greece, for instance, two European Union countries that spent considerably on public works in the mid-2000s, the results may be seen in numerous fabulous public amenities. But over time these efforts and facilities shall degrade – for there is now no money for upkeep.

Public funding for infrastructure is a kind of dead end. Inevitably, in modern democracies grand projects are erected with little or no care as to the future. When the downturn comes, not only does the region struggle for prosperity, it must do so against a backdrop of crumbling roads and bridges, decaying parks and plazas, etc.

After Thoughts

The Economist typically calls for MORE state involvement in Indian infrastructure to solve the problems that the mercantilist approach has caused. This will actually only compound the problem. The best way to build and maintain industry is to let those who are directly involved plan and execute what is necessary. Private solutions are inevitably better than public ones.

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