Needed: Unclogging Stalled Public Projects To Revive Economy

There is an urgent need to build and nurture project management capability within the government and public sector. Otherwise, all the money spent in trying to pull in private investment may well go down the drain.

A debate that started a little over a year back has resurfaced again. Once again, it is the annual mid-year review of the economy by the chief economic adviser (CEA) that kicked it off.

In December 2014, the Mid Year Economic Analysis 2014-15, CEA Arvind Subramaniam’s maiden mid-year review, made out a strong case for “reviving public investment as one of the key engines of growth going forward, not to replace private investment but to revive and complement it”. Questions were immediately raised about what this would mean for fiscal consolidation.

One year later, the Mid Year Economic Analysis 2015-16 signalled a continuation of this approach by noting that the strategy of “increasing public investment is an unambiguous success both in contributing to demand and in increasing the economy’s long run supply potential”.

Finance minister Arun Jaitely has also indicated that the government is going to rely on public investment to pull in private investment. “Public investment will continue to remain stepped up. When one is fighting a global slowdown, public investment will have to lead the way,” he said while kicking off the tenth anniversary celebrations of the India Infrastructure Finance Company Ltd (IIFCL) in Delhi last week. Enhanced public investment in the roads sector, he had pointed out earlier in his speech, had led to private investment coming back.  

A December 2015 International Monetary Fund working paper, Crowding Out or Crowding In: Public and Private Investment in India, points out that every one rupee increase in public investment crowds in private investment by 30 paise after four quarters, Rs 1.24 after eight quarters and Rs 1.07 after 12 quarters. These aren’t random numbers picked out of a hat, but the result of some modelling exercises. So clearly there is a case for stepping up public investment in order to get the private sector investing again.

But instead of announcing a slew of new projects that will take time to deliver results, can the same pepping up effect not be achieved by unclogging stalled infrastructure projects, which stand at Rs 16,500 crore, according to the Centre for Monitoring Indian Economy (CMIE)? If these get going, then there may be no need to forcefully step up public investment.

There has, no doubt, been significant progress on this front. The Rs 16,500 crore figure in the October-December 2015 quarter is, says CMIE, 86 per cent lower than in October-December 2014 (though one reason for this could be the shelving of 60 projects).

But a January HSBC Global Research note, Investment Cycle Update: Suspended in Time shows a less optimistic picture. It points out that while stalled projects were on the decline between March 2014 and June 2015, the number went up in the July-September 2015 period and remained at heightened levels in the October-December 2015 quarter as well (see table below).

Source: HSBC

The HSBC study also looked closely at 613 stalled projects to identify the reasons they are still not getting off the ground. It found that government policy/action was the single-biggest factor and did not spare even government projects, though private projects faced the brunt (see table below).

Source: HSBC

In fact, more government projects (10 per cent) than private projects (7 per cent) were stuck due to lack of non-environmental clearances. For private sector projects, fuel/feedstock/raw materials supply and land acquisition were the main problems. These don’t require any government expenditure and getting these projects moving is going to have significant spin offs to the economy.

And what of public sector projects that just drag on inordinately?

Take a look at the October 2015 flash report on central sector projects worth Rs 150 crore and above brought out by the infrastructure and project monitoring division of the ministry of statistics and programme implementation. Out of 782 central sector infrastructure projects, 235 were delayed, six of these mega projects involving investments costing Rs 1000 crore and above. The time overrun ranges between one month and five years and more. Fifty-three projects have been delayed for five years and more, two of them railway projects that are stuck for over 20 years. The combined cost overrun of these projects: a whopping Rs 2 lakh crore.

And what are the reasons for delay: land acquisition, delay in forest clearance, delay in supply of equipments, fund constraints, geological surprises, problems in equipment erection, geo-mining conditions, slow progress in civil works, shortage of labour, inadequate mobilization by the contractor, Maoist problems, court cases, contractual issues, law and order situation, among others.

Some of the issues listed show that the real problem relates to efficiency or lack of it. It points to a lack of project management capacity in the government and public sector. This issue had been flagged by T. N. Ninan in this article when the Mid Year Economic Analysis 2014-15 first spoke about stepping up public investment in December 2014. The capability used to be there – NTPC set up a power plant in four years in the late 1970s against the prevailing norm of five years in much more trying conditions than there are now. But a lot of talent has moved away to the private sector.

The Prime Minister has been monitoring the progress of stalled projects through the PRAGATI (Pro-Active Governance and Timely Implementation) platform. It is a sad commentary on our governance systems that a Prime Minister has to get involved in such nitty-gritty, but if that is the only way out, then this needs to continue.

New infrastructure projects are needed but there has to be a very sharp and continued focus on getting earlier ones off the ground and completed without undue time and cost overruns. In addition, there has to be an equally focussed attempt to build and nurture project management capability within the government and public sector. Otherwise all the money spent in trying to pull in private investment may well go down the drain.