Within the enormous caverns of the Barack Obama's $787 billion stimulus plan is a nugget for US companies to spend a few billions to construct roads and bridges, mass transit rails and national parks. The US president is right in expecting a massive spin off for his economy from the measure that will improve the top lines of construction companies, if not their profits and lead to a surge in job creation. In more or less the same period the European governments too plan a similar push to their infrastructure investments.
This is one part of the plan that should be of most concern to India, probably even more than the proposal to cut tax breaks for firms which ship jobs overseas. Because, in the same time frame ie within the next two years or 2012, we also plan to spend about $500 billion to develop our infrastructure in a massive way. The dampener on outsourcing will be moderated as Indian and US companies will be on the same wave length on this—cut costs. But that benefit will not work in the race to capture the global infra funds.
Put simply, after a nice lull of several years, companies planning to invest in Indian infra sectors will now face steep competition in attracting the attention of global infra fund managers. They will have to sound convincing that India offers a better deal than the US or Europe in the infrastructure business, in the next few years. This will include the rules for doing business and the rules for raising finance. All this has to be done, in the midst of the ripples that have already begun in the global financial markets about the Obama plan. At least one global fund house has already begun mobilising finance at Libor plus 500 bps to invest in US infrastructure.
We also have to remember that even for domestic infra funds, the rules for investment abroad have been simplified. Few fund managers at this stage will be able to say that given a chance they will prefer to invest in a special purpose vehicle to develop a road project in India than one in the US. These are not academic exercises but real bread and butter choices that companies in very harsh financial markets will be making very soon.
If that sounds challenging there is no doubt it is and talking to the Indian companies has made me sure that they too think the Obama plan will impact them big. So it is very urgent that we get our act right on the stuff that crimp infra investment in India.
And here, instead of moaning about the problems, I feel there is cause for cheer if one looks at some things we have recently got right. Of these, the one that needs a big round of applause is a government proposal to allow single bidders for projects, especially for roads and highways. This might seem like playing with government money but it is not. Of the 34 projects that the NHAI had advertised, only 16 have received any bids. Of these, six stretches have got only one bid.
Before readers begin to draw pictures of cartels playing cahoots with rules, it is worth recounting that the railways face the same problem. Its flagship project to construct a locomotive factory at Madhepura in Bihar has received only one financial bid out of the three companies that had put in technical bids. The phase II of the Mumbai metro project has done worse. It has got no bidders from among the seven companies that put in technical bids.
The central government is plainly waking up to the sudden drying of funds in infrastructure sector. But what is most needed at this juncture is similar realisation among state governments too. Indian infra projects with the glorious exception of the Delhi Metro have consistently been delayed in completion, largely due to state level bottlenecks. The latest flash report of the ministry of programme implementation shows that 47% of the 523 biggest projects involving the government are running delayed. The more important piece of statistic is that this has raised the cumulative cost of these projects by over 11%. The implications are obvious. Since infra project developers rarely get funding at less than 14-16% rate of interest in normal circumstances, an 11% cost over run means adding one more per cent to the project cost.
So, it is quite pleasing that governments, both at the centre and states, have revised their take on land acquisition. On February 23, for the first time in nearly two years states and the Centre publicly acknowledged that they need to go for the jugular to get land for projects. Infra projects were almost paralysed as a fall out of the problems in acquiring land from 2007 onwards. But at a meeting of the state chief secretaries with the cabinet secretary to work out ways to make the government stimulus package work, ministry officials, to quote the government release, told states to give "special attention to land acquisition wherever projects are stalled on account of this reason". In Indian government speak that could mean a big step forward.
Would these be enough? I doubt it. In the next few months, several Indian entities will approach the international markets to raise debt to finance their projects. To ensure they have any reasonable chance to compete, the entire infra project approval and delivery mechanism needs to be redrawn very fast
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