Infrastructure Stimulus, part-2

I truly thank friends who posted comments on my last article.

Few of my learned friends raise valid points: There are larger, most critical, issues exist that need continued focus, such as incidence of hunger, inequality, quality of life, etc. etc. Totally agree. Those issues are dear to me as well, and given a chance, I would love to add direct contribution to resolve these, however, until such time, there are no dearth of learned policy makers, Govt. machinery and Govt. executives to create relevant policies and implement those to bring country to a rightful deserving place in the World’s high table. 

And till that time, I will ‘keep on keeping on’ on my topic of interest, Infrastructure.

My focus, previous article or this one, primarily is to touch upon potential economic vibrancy that an accelerated Infrastructure asset creation, whether invested by private or public, can bring to us.

Economists have widely written that nations created models, policies, and implemented those to create varying quantity of infrastructure. These countries continued research, experiment, iteration, and developed policies to add and create infrastructure assets (be in power, transportation, agriculture, healthcare, education, telecom, IT and such) to thrive and accelerate economies.

India, however, started focusing on an accelerated infrastructure creation in late 1990s (remember NHAI’s Golden Quadrilateral Project connecting 4-megapolis with quality roads?). Realizing inability to fund a high pace requirement of the infrastructure creation, India began PPP initiatives early 2000s, for example, first set of policy guidelines, the Model Concession Agreement (“MCA”) in Roads (NH,SH), and Ports (major, minor) sector were introduced circa 2006 (to be precise Oct 7th 2006, by erstwhile planning commission of India, and fortunately I was part of that team at that time) and later in 2007-2008 MCA for Metro Rail etc. were created, foundation of which still in use by various Govt. agencies / States in India.

Multitude of research (available on internet) suggest that India lags in the curve of infra creation, spend as % of GDP very low, compared to what the policy makers think is needed to take the country to sustained economic growth. Lack of funds (public or private in India- and that’s why focus on FDI and ECB for Infra has been ON for long time), is well known fact as a key reason for low rate of asset creation in India. Take for example, Public Works Dept. of Govt. of Maharashtra, that owns the Mumbai Pune expressway, and more than lakh km of State highways including main district roads, has very little budget allocation to up-keep, maintain and expand its roads, let alone creation of brand new artillery network. However, in last year, Public Works Dept. of Govt. of Maharashtra signed close to 100 contracts in Hybrid Annuity Model, delivering the required road infrastructure, and moving cash flow requirement by the Govt. to future years. The PWD Govt of Maharashtra deserves applause for the initiative.

There is no denying India needs much needed ‘equalizing’ quality infrastructure, and given lack of resources (especially funds as discussed earlier, and lack of human resource capacity of the Govt. to undertake many simultaneous initiatives), a robust policy framework ensuring “risk sharing among participants, and ability to stand by contractual commitments” will add significant impetus to the economic vibrancy fueled, not only by near-term spending but also sustained benefits of continual presence of that infrastructure. And that’s why I still bat for private participants on infra creation. 

Coming back to the stimulus question: Very large set of literature exist that corelate economic benefits to the infrastructure creation, and while I don’t claim to be an economist, I did get a chance to study economics during undergrad, and graduate level, and that little training whatsoever allows me to appreciate principles that drive decision making while designing alternatives.

I wish to put across few of my learnings into perspective:

Economic benefits of infrastructure are captured from both demand and supply side analysis.

Demand side analysis is straight forward: identifying non-cash external benefits converting those in monetary terms, mainly consumer surplus, reduction in emissions, congestion and accidents etc. in case of creation of more efficient infrastructure compared to existing one. Capex and Opex form part of the cost side of the economic IRR calculation. Govt. of India (Ministry of Housing and Urban Affairs, MoHUA) guidelines suggest priorities be given to Infrastructure projects that have economic IRR >14% (compared to lower rates in developed countries such as 3% to 7% in USA).

The key analysis that deserve greater attention is the supply side benefits. Short term benefit (due to spending), and long-term benefit (due to presence of infrastructure asset) are critical facts of the supply side economic gains.

Few key benefits captured in many such economics literature are as follows: 

Short, medium and long term:

1)     Employment growth, direct and indirect, due to the project

2)     Personal income improvements (direct, and indirect)

3)     Real property value growth and Real property tax growth in key nodes of the project

4)     Local, State and Central Income Tax growth (direct, and indirect)

5)     Agglomeration benefits for high speed transport infrastructure

6)     Few innovative Infrastructure sectors project may also enhance new manufacturing capabilities 

Supply side benefits mentioned above have been quantified mainly for specific projects, however, an overarching, data-centric, data-driven research needs to be instituted to pin-point quantum of supply side benefits of various infrastructure sectors in the Indian context.

While concluding, I wish to add a point for researchers to deliberate: On ‘equalizing’ front, the private sector seems to me has to do its part: Value allocation to all participants creating infrastructure (from last person on construction line to the chairman of promoter firm) looks skewed. For example, cost of creating 1 lane-km of road in developed nation, and that in India are very similar, then why does an engineer make one tenth in India compared to say, US. (entry level Indian engineer for example make INR 30,000 to INR 40,000 per month, while minimum salary of similar personnel in US probably is US$4000-US$5000 per month. At current exchange rates, US salaries are INR 300,000 to INR 375,000 per month)? What about the un-skilled, semi-skilled labors? Question is where does that money saved in labor wages go? And if one assumes level of salaries all across (including raw materials) to be what it is, would that reduce the cost of infrastructure creation in India? It is a topic of its own and need further research.