Budget 2019: Navigating India’s Next Generation Infrastructure Challenge

Why Rajiv Lall believes India needs to follow the Chinese model and not the American one for infrastructure financing.
Support columns for a flyover stand under construction on a road in Patna. (Photographer: Prashanth Vishwanathan/Bloomberg)
Support columns for a flyover stand under construction on a road in Patna. (Photographer: Prashanth Vishwanathan/Bloomberg)

The past 25 years have been noteworthy for the success and failure of our efforts in infrastructure development. The first decade of this century was especially remarkable for the sheer volume of private participation in infrastructure development.

Most have forgotten the state of our airports only 15 years ago. Today the Delhi airport manages one of the heaviest passenger throughputs anywhere in the world. The bulk of the country’s container handling capacity is now managed through private ports. The idea of toll roads has taken hold across the country, although it has left its scars on the banking system.

The immense expansion of renewable energy in the country has been driven largely by private investment. But as the experience of conventional power generation has shown, let us not be fooled that private capital is the solution for our country’s infrastructure. The main reason why we are facing difficulties in this sector is that the state electricity distribution companies, despite repeated efforts, are still financially very weak because they are unable or unwilling to collect sufficient tariff revenues to cover their costs.

The underlying political economy for this not about to change anytime soon.

The fundamental challenge of attracting private financing for core infrastructure development is the public good nature of infrastructure services. While private capital chases market returns, in most cases it’s not feasible to recover the development costs incurred and deliver a market return on investment by charging citizens a user fee.

Think of water distribution, waste management, rural and urban roads—the list goes on. One of the basic reasons why we have so many difficulties with private power generating capacity is that state electricity distribution companies, despite repeated efforts, are still reluctant to charge higher tariffs from retail consumers. The political economy of infrastructure service delivery is not about to change. The Delhi Metro miracle would not have been possible without heavy government investment. Likewise, the economic—as distinct from financial—returns from government spending on the rural roads program have been huge.

What we should learn from this experience is that there are distinct limits to private financing of infrastructure services—the scope for successful public-private partnerships in infrastructure is relatively narrow.

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Urban India’s Urgent Needs

The core public infrastructure that needs to be developed over the next decade will be largely urban related. Urban India—which is orders of magnitude larger than what the official numbers for urbanisation suggest—is choking. Sanitation, water, low-cost housing, public transportation are all under huge stress or are non-existent.

Not to say that agriculture is not important, but the future of India lies in its towns and cities, especially when it comes to job creation. Urbanisation is not only inevitable, it is essential for a prosperous India. If we do not embrace this reality, our cities will continue to degenerate. To navigate this transition successfully we have to find ways of raising vast resources for government and municipalities.

China Versus America: The Model To Follow

The traditional solutions for this all pertain to taxation. User charges and property taxes can, and should, contribute to the government’s urban infrastructure kitty. But a lot has already been written about how to go about doing this. I instead want to draw attention to another potentially huge source of financing public infrastructure and that is, land.

The value of land accretes as its use changes from agricultural to non-agricultural. Since all land was government-owned, it was not so hard for municipalities to unlock the value of rural land around an expanding urban core. Some cities and their infrastructure were created in this manner from scratch as a matter of conscious government policy. When I first went to Shenzhen in the early 1990s, it was a still a small town albeit in the vanguard of the country’s SEZ policy. But to see it now, is pretty mind-boggling.

As in the case of even older cities like Shanghai, government or municipality owned corporations created land banks that they monetised as the reach of the city spread. In India, the vast bulk of the accretion in land value linked to urbanisation is captured by private players who are adept at acquiring land in peri-urban areas in anticipation of regulatory changes in its end use from agricultural to non-agricultural.

Many propose that India pursue the U.S. model of financing for urban infrastructure. The United States relied mostly on municipal bonds. But for bonds to be serviced the municipality needs to be creditworthy, which in turn implies a strong revenue base anchored in property taxes and user fees.

It would take too long for Indian urban local bodies to become creditworthy enough to raise municipal bond finance at scale. On the other hand, the fact is that central and state governments are by far the largest landowners in the country. Although not easy, the China model for urban infrastructure financing is one we must learn from.

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The MMRDA Template

The challenges of pursuing this line of action are many. As the Modi government learned early in its first tenure, land acquisition is a hugely emotive issue. The reality is that government land ownership is fragmented across different levels of central and state governments and across different departments and ministries, none of whom are willing/able to work towards a shared objective. Thus, cantonment lands, land belonging to port trusts, and to various ministries of central and state governments remain chronically under-utilised.

There exists no inventory of government-owned land. No-one wants to cede control. And encroachment is pervasive. In fact, one of the biggest sources of litigation in our already over-burdened judiciary is disputes over land in which at least one of the parties to the litigation is the government.

Despite these difficulties, I believe that we must build on the successful examples of the few development authorities in India that have done precisely what the Chinese did.

The Mumbai Metropolitan Region Development Authority is one such an example. It is investing heavily in infrastructure across the greater Mumbai metropolitan region using resources generated from the sale of its land bank. India needs to fine-tune this model. Our goal must be to create at least 100 government-owned land development authorities that focus on monetising land already owned by the government and on developing land banks, in a fair manner, to facilitate the planned development of our towns and cities. This, supplemented of course with efforts to widen and strengthen the revenues base of our urban local bodies, is our best bet for raising the financing necessary for the biggest infrastructure challenge of the next generation.

Rajiv Lall is on the Advisory Board of IDFC Institute. Views are personal.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.

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