Build Some Roads?
To remake its creaky infrastructure, India is banking on public-private partnerships
When the skies opened up on July 26, dumping more than three feet of water on Bombay and the surrounding area, the creaking infrastructure of India’s financial center collapsed under the strain. The aging suburban train service froze, the airport halted flights, and waterlogged roads forced commuters to abandon cars and buses. "It was as if someone had turned off the switch; everything just stopped," says Ann Iype, a teacher at downtown Cathedral and John Connon School who waded four hours in waist-deep water before she was given refuge in a friendly stranger’s apartment.
It was a disaster, but one that woke up the markets to India’s acute need to upgrade its infrastructure. So it is no surprise that when a new company called the Infrastructure Development Finance Co. Ltd. went public in an initial public offering, the event was lustily cheered by investors. The share price of IDFC, which will lend to builders of roads, ports, airports, energy, and telecom projects, doubled on its first day of trading Aug. 12. "Investors realize the huge investment potential in Indian infrastructure," says Partha Bardhan, a New Delhi-based executive director at consultant KPMG. "The Bombay rains are the trigger that will get governments to act."
If India’s state and national governments do accelerate their plans to rebuild the country, it will be in close partnership with private contractors and finance outfits like IDFC. The biggest, and most visible, such public-private enterprise is the massive $38 billion project to rehabilitate India’s roads. Companies now build highways with government assistance, then operate them for profit by charging tolls. Competition is stiff to bag the contracts. A fifth of the planned 30,000-mile road network is complete, with the rest scheduled to be finished by 2012.
Roads are just the biggest of India’s public-private infrastructure projects. The government is also inviting private investors and contractors to build airports and ports, water systems and electricity distribution networks. The idea is to match China, which is leagues ahead of India. "Compared with China’s infrastructure spending of 20% of its gross domestic product," says Chetan Ahya, an economist at Morgan Stanley’s (MWD ) Bombay offices, "India spends just 6%. It needs to increase that to at least 10% to prime economic growth further."
How do the public-private partnerships work? One variation is a "build-operate-transfer" arrangement in which the private company operates a toll road or other facility until it has recovered its investment and made a profit, then turns it over to the government. In other cases, the builder gets a partial capital subsidy from New Delhi. That’s true of a new 62-mile, six-lane expressway that replaced a potholed stretch of National Highway 8 from Jaipur in the Rajasthan desert to Bombay. The project, led by Indian engineering giant Larsen & Toubro Ltd. and Hyderabad’s GVK Industries, cost $141 million, with $49 million provided by New Delhi. Operated as a private road, the four-month-old length of new highway collected $62,000 in July.
Sometimes the government acts as an investor in a private project. That’s the plan for the New Delhi and Bombay airports. The government is now accepting bids for expansion and renovation of the two facilities, at a price of about $1 billion each. The airports will then be owned and operated by the bidder who agrees to pay the biggest slice of landing fees and other revenues to New Delhi as royalties. Construction will be financed through bank loans, vendor financing, and by selling shares in the airport corporations. Suitors from Australia to France have put in bids together with local partners. Whoever wins, New Delhi will retain a 26% stake in the airports and maintain regulatory authority. In the south, new airports being built at Hyderabad and Bangalore will also be owned by public-private consortiums and operated privately.If India is to be a manufacturing and export power, nothing is more important than efficient ports. To get dilapidated shipping facilities in shape, the government has sold the right to operate several ports and terminals, with the private operators collecting shipping fees and paying the government royalties. Private port and terminal managers now handle more than a third of the country’s cargo. On private docks, the loading or unloading of a cargo shipment that might have taken three days a few years ago now takes 10 to 12 hours. The Netherlands’ P&O Nedlloyd, a global shipping company, runs one terminal in Bombay’s Nhava Sheva Port and another in Madras. And in 2003 it paid $212 million to buy an entire small port at Mundra in Gujarat on the Indian Ocean. Danish shipping giant A.P. Möller-Maersk Group runs a terminal at Bombay together with state-run Container Corporation of India Ltd. Port investors paid the federal Shipping Ministry $107 million in royalties over the past three years.
Novel projects are being attempted in the public-private sphere by local governments, too. The city of Tirupur (population 900,000) in the southern state of Tamil Nadu is India’s knitwear capital, exporting over $1 billion worth of garments a year. But the city’s mills are hampered by an inadequate water supply. So the local state government has formed a joint venture with Bombay financial firm IL&FS to build a $220 million water system that includes a pipeline to Tirupur from the Cauvery River 43 miles away, plus pumps and a purification plant. The system will be owned and operated for profit by the private New Tirupur Area Development Corp., in which the state government, the Asian Development Bank, IL&FS, and other private companies are all investors. An added benefit: The project includes installation of a sewer system and new municipal pipes that will provide clean water to 60% of Tirupur’s households.
Despite the government’s efforts to clear the way for private operators, India can still be a frustrating place. Ashok Kheny is an engineer-builder who ran a successful business in Philadelphia, then returned to India in 1994 to build a 106-mile, $525 million expressway between Bangalore and Mysore. In the decade since, Kheny’s Nandi Infrastructure Corridor Enterprises Ltd. has been harried by no fewer than 336 lawsuits from farmers, other landowners, and government allies trying to prevent the builders from gobbling up their land. The expressway, now seven years behind schedule, is expected to be completed by December, 2007.
New Delhi is working hard to make sure Kheny’s experience is not repeated. The federal Planning Commission is consulting with World Bank experts to finish a set of watertight contracts for private-sector infrastructure projects. "The main bottleneck is [the lack of] predictable regulation and standardized systems," says Montek Singh Ahluwalia, the commission’s deputy chairman and a key architect of India’s economic reforms. The contracts won’t stop all the lawsuits, but they could help India reach the next level in its quest to build the infrastructure it needs