September 25, 2010 / 5:04 AM / 9 years ago

Analysis: Games chaos exposes India infrastructure challenge

MUMBAI (Reuters) - The chaos surrounding the Commonwealth Games exposes how far India still needs to go in executing on big-ticket projects and building infrastructure of the kind that helps make China an economic powerhouse.

It also provides an extreme example of the limitations of a bureaucracy wracked by red-tape and corruption in delivering on the expectations of an economy that is fast-modernizing but still plagued by frequent power cuts and choked, potholed roads.

India ranks 51st overall in the World Economic Forum competitiveness index, but for infrastructure it fell 10 places to 86th this year. Inadequate supply of infrastructure ranked as the most problematic factor for doing business in the country.

India’s infrastructure deficit acts as a brake that knocks an estimated 2 percentage points off growth and forms a constant unflattering comparison with China and its ability to complete the sorts of projects that made the 2008 Beijing Olympics a showpiece.

“If I use the word ‘appalling’, that would be a bit of an understatement,” said PepsiCo Chief Executive Indra Nooyi, the highest-ranking Indian-born woman in corporate America.

“When we talk about reaching every nook and corner of India we need an infrastructure ... We need power 24 hours a day in every part of the country. We need water,” she said this week.

In its current five-year plan, India is behind targets on road-building and has scaled back plans to build power plants.

Many investors, deterred by delays and a dearth of attractive projects, prefer to limit their exposure to holdings in listed infrastructure firms. An underdeveloped domestic bond market limits other sources of finance.


Investors that take the plunge in greenfield projects adjust their expectations and valuation demands to account for the execution risk in a country where rules and processes vary by state, and having a strong local partner can be crucial.

“We always knew there was an additional equity risk premium required to invest in India,” said Ranveer Sharma, principal at Eredene Capital, a London-based private equity investor in Indian ports and logistics.

Investors, drawn by an economy growing at 8.5 percent and a young and fast-urbanisiurbanizingng population of 1.2 billion, have long factored in the difficulties of doing business in India, where experience and flexibility are crucial to success.

“When you are setting up your first 500 megawatt power project it takes you some time, but when you do your second, if the first one’s taken you four years, the second would take you 36, 40 months,” said Amit Tandon, managing director at Fitch Ratings in Mumbai.

Progress on making projects easier is mixed. While securing finance has gotten simpler, land acquisition has become an increasingly sensitive political issue in the world’s most populous democracy, with high-profile protests by farmers. A plan to shift allocation of coal blocks to an auction system adds uncertainty for power projects.

Early stage delays can be especially problematic, with permissions from multiple bureaucratic bodies are needed.


Pressure to make projects more attractive to investors will only grow, with India doubling its infrastructure spending target to $1 trillion for the five years starting in 2012 — half of which it hopes will come from the private sector.

“I wouldn’t say it’s getting much easier, but there is improvement. The red-tapeism is going down and government is realizing that to beef up infrastructure the clearances have to be faster,” said Shobhit Uppal, managing director of Ahluwalia Contracts, a New Delhi-based construction firm.

Asia’s third-largest economy boasts many shining examples of what is possible — modern cities like Gurgaon, a gleaming new airport terminal in Delhi and the Sea Link bridge in Mumbai, but successes often expose the missed opportunities.

Visitors to Delhi’s new Terminal 3 this summer had to wade through virtual rivers running through its parking lot caused by heavy rains and poor drainage. In Mumbai, one end of the Sea Link’s first phase — which opened five years later than originally planned — terminates abruptly in a T-junction.

The Commonwealth Games stadia themselves are world class, but the roads around them and the games village are a mess, underscoring the difficulties India’s multi-layered bureaucracy faces when it comes to tying together the pieces of big projects.

“Our policymakers, our regulators, are quite behind the times,” said Surjit Bhalla, head of Oxus Investments.

The shortfall is especially acute in cities, with India spending just $17 per capita on urban infrastructure, compared with $116 in China, according to McKinsey.

The notion of “jugaad,” or flexibility and making do, served India during its decades of shortage but can also engender a lack of rigor that jars with its global ambitions.

“Trying to build a residential tower in Bombay (Mumbai) — the amount of approvals you need ... you just assume that: I’ve got the timeline, I will get the approval in time, which rarely happens,” said Fitch’s Tandon.

Editing by Alex Richardson

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