Infrastructure In India@75

In 1990, after four years of investment banking with ICICI in Mumbai, I was moving to HSBC in Delhi. I decided to drive the 1,400 km in my red Maruti car, with a friend. National Highway 8 was two-lane, and some stretches were horrendous. We took four days, halting at Vadodara, Udaipur and Alwar-Sariska. Today, the entire distance can be covered on an excellent four-lane or six-lane divided carriageway, taking about 22 hours.

It was a few months later, after joining the IAS, that one realised the abject state of India’s infrastructure, and how little was being done about it. Till the late 1990s, infrastructure was not a priority, even though there was much talk: classic MAFA syndrome (Mistaking Articulation For Action). As Secretary, Public Works Department, in 2003, I encouraged our engineers to videotape major highways from a moving jeep every six months. Thereafter, running two videos on a vertically split screen was easy for monitoring progress. After rejoining the private sector a decade ago, one has been a private equity investor and lender in infrastructure. I also did project development and conceptualization, and have now rounded it off with execution and construction of urban infrastructure.

In the last 25 years, much has happened in India’s infrastructure in every sector except railways and urban infrastructure. Much more important: what could happen over the next 25 years. Let’s look at 2022, to use C K Prahlad’s India@75 theme, at the end.

Indian infrastructure, as commonly understood, has four components—transport, energy, telecom/ communications and cities. Transport is surface (railways, highways and roads), water (sea and inland) and air. Energy includes power/ electricity, coal, oil and gas and renewables. Telecom is landlines, mobiles and internet. Cities have the entire range of urban infrastructure, where we should perhaps include the real estate industry as well. Agri-infrastructure, cold chains and warehousing are very important, but not usually discussed as infrastructure.

The major takeaways:

• 1991 was a landmark year for India. Supply was unleashed by scrapping stifling regulations. Conversely, demand was unleashed with the arrival of satellite TV channels.

• From a shortage economy, we have reached on-demand provision of many services. An example, landline telephones used to be “allotted” by Members of Parliament as a discretionary favour. Increased supply is the answer, not restricting demand.

• Infrastructure (except telecom) did not see many visible positive outcomes from 1991 to 1999.

• The big infrastructure push was during PM Atal Behari Vajpayee’s term 1998-2003. This imparted a momentum that kept India going even post 2004.

• Then India got bogged down in Public Private Partnerships (PPPs), good in theory but very different in practice, becoming TTTs—Taxpayer-Tycoon-Transfer. This led to currently incomplete projects and bad bank loans.

• Since 2014, the derailed infrastructure story is coming back on track.

• Transport saw the biggest anti-poverty scheme in the PM Gram Sadak Yojana (PMGSY), started by NDA and continued by UPA. There have been improvements in national highways and state highways, in air travel and airports, in ports, especially private ports. Till very recently, there is not much improvement in railways, while inland transport is a big blank.

• Energy had large additions to generation capacity, including in the private sector. Apart from coal- and gas-based plants, hydel plants and renewables increased as well. Transmission improved, but distribution remains the weak point. The spike in global coal prices post 2002 led to a crony gold rush, now over. The recent auctions and efficiency improvements will help. Price distortions in diesel-petrol-kerosene seem to be getting over; energy efficiency has improved.

• Telecom and communications have truly transformed, from a landline era to always-connected smartphones.

• Cities are the big tragedy: while India has urbanised, its cities have become more squalid, except the well-maintained “Civil Lines” in each Indian city where senior government officials live, cocooned from the realities and miseries of urban living.

• In general, departments with centralised execution have seen more traction, especially those belonging to the Union government. State governments, save a few, have shown less change, especially in “rent-seeking” departments such as transport and urban land.

• The next wave of infrastructure improvements will have to come from dynamic state governments and operating efficiencies.

• While much more attention is needed in infrastructure execution, most management bandwidth (and op-ed commentary) have been taken up by infrastructure finance.

Transport

The big jump in rural roads and highways was in 1999, when PM Vajpayee set up a road development fund, through a Re 1 cess on every litre of petrol and diesel sold. This led to the Rural Roads Programme and the Golden Quadrilateral (GQ) of highways connecting the four metros.

The transformative rural roads programme of PM Gram Sadak Yojana was launched in 2001. Roads built under PMGSY have better processes and quality controls than most state PWD roads.

The NDA1 Highways Minister, ex-Chief of the Border Roads Organisation, Gen. B.C. Khanduri, and NHAI Chairman Deepak Dasgupta and others galvanised the National Highways Authority of India (NHAI) and executed the GQ on a government-funded EPC contracts basis. Subsequent UPA ministers using PPP contracts did not see similar completion rates. With NDA2 Minister Nitin Gadkari, construction is reviving.

Dynamic state governments have ensured state highway programmes in their own domains. However, passenger road transport—especially buses—have not improved, with the exception of some South Indian states.

The many failings of the Railways have kept economic growth down. Low railway passenger fares have contributed immensely to the Indian economy by enabling easy mobility and migration within India. However, management inefficiency, poor safety and lack of dependability in freight have pulled economic growth down. Things seem to be changing for the better with Minister Suresh Prabhu, but outcomes need to be visible. Railway station modernisation, for instance, has yet to achieve traction. Railway e-ticketing is a runaway success, though.

Sea ports have certainly become better but have some way to go to achieve global benchmarks. Most container traffic from Indian ports goes to transshipment hubs at Colombo, Singapore and Dubai. Never-ending legal disputes and railroad connectivity to ports remain big hurdles. Coastal shipping, or cabotage, could be much better. Inland water transport has been a big miss, though Gadkari will perhaps make something happen. Air transport has certainly seen major changes. India’s top six airports, handling more than 80 per cent of its traffic, have improved. The flip side is that expensive, gold-plated airports levy high landing charges, making Delhi and Mumbai among the most expensive airports in Asia. The other major drawback: these airports should have been hubs connecting domestic and international travel. However, because of “mysterious” allocations of bilateral landing rights, the bigger hubs for Indian travellers are Dubai, Abu Dhabi and Singapore, taking away Indian jobs. The Ministry of Civil Aviation could ensure that Indian airports replace these three as hubs. The new aviation policy of 2016 does not seem to address this issue.

Perhaps it’s high time to emulate the British and privatise the State air carrier. For a pro-poor government that Narendra Modi leads, it’s scandalous that it still operates Air India, meant only for the top 2 per cent of our population.

Energy

Even in 1991, domestic energy sources comprised six states where most Indian coal is situated, and five hill states where most hydel power potential is located. India should have focused only on these states to set up thermal/hydel power plants there. An example is the Tala hydel power project in Bhutan, supplying power to Delhi.

State governments control the energy sector in India, except coal, and oil and gas. The 1990s were not a good time for Indian energy. States exercised competitive populism in power provision and “free power” became “no power”. The ‘push for private power generation through IPPs produced much talk and one white elephant—Enron’s Dabhol. Sadly, in this hype, public sector capacity additions were discouraged. The much-needed Electricity Act of 2003 mandated “unbundling” of state electricity boards into generation, transmission and distribution entities.

However, in effect, these three remain under common control, with state electricity regulators not enforcing provisions of “open access”, under which one could buy electricity from competing providers.

The over-hyped ultra mega power projects (UMPP) saw three out of five bid-out projects being scrapped, and two operational projects seeking re-negotiation. Worse, fuel availability for thermal and gas power plants had become a major problem, resolved over the last two years under Minister Piyush Goyal and Secretary Anil Swarup. The UDAY scheme seems to be succeeding. There is surplus electricity on the national power exchange at a reasonable price. We have seen how management changes in distribution companies can lead to efficiencies and better customer service.

Coal India’s efficiency levels have gone up. The Ministry of Petroleum under Dharmendra Pradhan is much more objective than before. Fuel price rationalisation is happening. Inefficient generation plants are being upgraded with better boilers and there is a focus on energy efficiency. It’s surprising, though, that the Union government and state governments are not talking of PPPs in their existing generation plants. Asset recycling would be ideal here, but despite talk, there is not much action.

Finally, renewables are a success story after long years of tokenism. We have moved beyond solar power cookers to solar plants and now to solar rooftop panels. Better technology and plunging prices of solar panels have scaled up ambitions. India has one of the largest solar programmes in the world today.

Telecom and communications have been truly transformed. From a teledensity of 2.3 per cent in 1999, India has moved to above 80 per cent today, with a billion phones. Perhaps the rapid expansion was helped by the fact that telecom requires bandwidth, not land-width.

Cities and urban infrastructure

The average Indian city was less crowded in 1991, with largely informal urban public transport. Many older readers would have grown up cycling to school; today their kids would be apprehensive cycling on open roads. Urban areas were much smaller. Old-timers fondly remember Bangalore, as it was called then, where the city could be traversed in a 20-minute cycle ride around the Majestic area. City governments—“urban local bodies”—could manage their solid waste management, storm water drainage, sewage, public spaces and parks, and leisure and recreation better. But growing urbanisation has led to a decline in such public services. The housing problem, in particular, has gotten more acute since 2003, with zooming real estate prices riding on the back of foreign and/or unaccounted-for money. Till recently, most private sector real estate developers catered to the top 10 per cent, and the state housing boards largely failed to deliver low-cost housing. Poor public transport and mushrooming private cars have created a catch-22.

Some cities have become better. Jaipur, Ahmedabad, Surat, Pune and a few others have worked hard to upgrade their services and facilities. Delhi as the national capital got much higher funding and has better infrastructure. But most urban populations in India have seen their cities changing for the worse. The one thing that has not changed in almost all cities: the railway station, which should be the nucleus of the city centre, is an unruly mess.

Various reasons are attributed to such an urban decline. But few ask why India does not have a single successful two-term mayor. The answer is rotational reservation, the fatal flaw in Article 243T, in the 74th amendment of the Constitution. While Urban Development Minister Venkaiah Naidu has done much good work on smart cities, AMRUT and Housing for All, his repeated emphasis on good local leadership would get stymied on this issue.

Infrastructure execution and finance

Over the last decade and more, there has been much more discussion on infrastructure finance than construction and execution. During bull- runs and PPP booms, financial engineering starts dominating civil engineering, inevitably leading to a bust. This happened in Latin America in the late 1980s and early 1990s, and in ASEAN in 1997. India is currently experiencing a similar collapse in private investment. Very simply, all infrastructure is paid for by citizens, either by paying taxes to the government, or by their bank deposits, which are then lent to private developers, and by their toll/user fees payments for using infrastructure. The truth is that good projects have never lacked finance, and all infrastructure finance is project-specific. Yet we devote our energies to a mythical “trillion dollars” and macro analysis.

What is much more reprehensible is slow construction and execution. All infrastructure execution can be divided into “hard-hat” construction and the much more dilatory “non-hard-hat” activities. Hard-hat construction is the same the world over; most infrastructure construction can be completed within three years. Construction technology is easily adopted, as we have seen in various sectors.

It is the non-construction activities that delay projects. The usually under-funded initial—and critical stage—of project conceptualisation, development and design is not carried out effectively. The bidding out process was, till recently, riddled with cronyism. Worse, private sector bidders tend to game the system by undercutting other competitors with unrealistic, suicidal bids. After winning the bid, change of scope or re-negotiations are good to increase their own returns and cash flows.

During construction, supply of material like sand and stone have their own issues, such as the recent quasi-judicial pronouncements from National Green Tribunal (NGT), in effect declaring all sand mining in India illegal. Every small-time local leader (and worse) wants to make some quick money by stopping projects. Of course, the large judicial risk of public interest litigation is always a clear and present threat. In a labour-surplus country like India, various regulatory issues make procuring adequate labour a challenge.

The construction contract used is not yet the internationally accepted FIDIC (International Federation of Consulting Engineers) format in most cases. Contract execution suffers from delayed decision making. Yet, for most of these issues, there is little executive attention. If even half the attention lavished on infrastructure financing had been devoted to these issues, India would have been in a different league by now.

india @ 75: roti-kapda-makaan to bijli-paani-sadak and beyond

We’ve already seen the transition in our public discourse over the last 25 years moving from Roti-Kapdaa-Makaan (food-clothing-shelter) to Bijli-Paani-Sadak (electricity, water, roads). The next 25 years will see a much greater public demand for better governance and better infrastructure.

Sensible state governments and the Union government will do well to strengthen predictability in execution and approvals. Construction should be under only FIDIC contracts. Above all, better contract enforcement will help Indian governments and businesses. This includes reducing judicial risk and NGT “tyranny”.

Transport

India should have an integrated Ministry of Transport, headed by a senior and dynamic minister. I recently met with the German Minister for Transport and Communications Infrastructure, who has five counterparts in India—Ministries in charge of highways, sea ports, railways, civil aviation, and IT and communications. An integrated Transport Ministry can rise above petty silos and turf issues of the current ministries. The European Union had brought out a white paper on integrated transport in 2003. While the Rakesh Mohan committee did produce a National Transport Policy document in 2014, it is being implemented in silos.

Railways will become far more efficient by 2022. The Dedicated Freight Corridors, both Delhi-Mumbai and Amritsar-Kolkata would be operational, improving logistics dramatically. This will increase the modal share of the railways in freight, and enable faster passenger train services on the existing tracks. The high-speed rail (HSR) between Mumbai and Ahmedabad will be near-complete, with other HSR routes being taken up. HSRs in Chennai-Bengaluru-Mysuru and Delhi-Varanasi are being talked about. Instead of treating Railways as a separate business, we should do away with the fiction of a separate Railway Budget and treat it like highways or education, contributing to economic growth without expecting a “financial” rate of return.

Railway station modernisation will have taken off in at least one city in each state, where the city and state governments will work in close partnership with the railways to develop integrated multi-modal transport hubs around the railway station.

Rural roads will be fully completed under the PMGSY targets of linking all villages with 500+ population with all-weather roads. The various NHDP programmes, including in the North-East, will be complete. While high-cost expressways are not very desirable in an Indian context, we’ll see a few completed. The big change will come in the passenger road transport sector, with much better passenger service and road safety. Aadhaar-linked driving licences will help safer driving.

Both in seaports and airports, turnaround times will improve to global standards. Inland waterways in the Ganga basin will be better. Coastal shipping and overall logistics would improve to 4PL levels. The current hubs of Indian sea and air traffic, which are outside India, will hopefully be replaced by Indian hub seaports and airports.

Energy

Emulating the Jyoti Gram scheme of Gujarat, more than half our states will go in for separating HT and LT feeders, ensuring 24x7 electricity supply to homes, especially in rural areas. UDAY will lead to healthier distribution companies in states. Distribution reforms will also include rooftop solar installations in cities, with a feed-in feed-out tariff system, where you will be able to sell your surplus power to the grid. LPG for cooking will be widely available to the poor in rural areas, which will help women’s health, replace bio-mass and conserve forests. We hope that fossil fuel dependence on petrol and diesel vehicles will decrease, with a greater emphasis on shared public transport and electric vehicles.

As research has shown, very large projects have much higher risks, and perhaps it will be better to go in for four separate 1000 MW plants instead of a single 4000 MW UMPP. Similarly, pit-head power plants and hill-state hydel plants need to be promoted, rather than creating generation capacity in states far away from fuel.

Telecom and communications

India will have more than 1.5 billion phones, with most users upgrading to cheap smartphones. Internet speeds will increase, network coverage expand. Connectivity and data will become faster and affordable, with widespread wi-fi. This will lead to most transactions shifting to handheld devices.

One only hopes that governments will leverage this smartphone boom. One easy step is to provide smartphone-based menus of public service delivery for specific services to be selected by citizens. If documents are required to be obtained, specific kiosks may be designated. A good example is how Indians now get passports and visas through Passport Seva Kendras or VFS centres.

Urban infrastructure

Unless state governments decide to dramatically empower city governments, no great changes will happen in cities, which will continue to decline. The 100 smart cities will have implemented their projects in their limited chosen areas. For example, Bhubaneswar will have redeveloped its 985 acres. There will have been an increase in affordable homes. Most urban residents will have homes of varying sizes with electricity, water and sanitary facilities. The real estate regulator will have become operational by 2022, increasing transparency and ensuring that home buyers are not bilked. A cleaner real estate developer industry will rise up to deliver.

However, since there will be little local ownership by the city government, the impact on municipal services will be patchy and different across states, depending on the dynamism of the state government. Smart Chief Ministers will actually delegate much more to their best ally, the Mayor of the corporation.

Well-run and vibrant cities are the best contributors to job creation. India is missing out on better growth through efficient cities. This needs political attention at the highest levels at Union, state and city government levels. The Supreme Court’s Bommai judgement of 1994 stopped indiscriminate use of Article 356 to dismiss Chief Ministers. It is only since then that India has seen two-term and three-term CMs. Similarly, it is only when Article 243T is scrapped, ending rotation in reservation, that we will see two-term and three-term Mayors, taking urban leadership forward. Will this happen only through a court order?

There is so much to do in infrastructure, with no time to waste. India needs to think big, and execute with speed and scale. Which PM Modi is known for.

On infrastructure finance, given Indian realities, perhaps the best way forward is asset recycling or reverse PPP. The government should finance construction and creation of infrastructure. The infrastructure assets, once created and operational, will be snapped up by secondary, long term investors like global pension funds. The funds thus raised will be recycled into new construction. This is an easy change.

Some things are more difficult to change, perhaps. On the second day of my April 1990 drive, the Maruti’s coolant system and fan malfunctioned. In those days, service stations were few and far between. In a deserted town, I stopped to ask for help from a lone bystander. He sternly urged us to get out of town, saying there was a curfew on, since there were frequent communal riots there. What’s the town called, we asked while pulling away. I still remember his answer after all these years: “Godhra.”

Shailesh Pathak is into cities, infrastructure, finance and public policy, with 14 years in the private sector and 16 years with the IAS. He tweets at @shypk