How India Can Build Infrastructure

Don’t involve the private sector too early, says Rajiv Lall, executive chairman of India’s Infrastructure Development Finance Co. (IDFC).

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There's a way to create 21st-century infrastructure in India. Just don't do it through public/private partnerships — at least not the traditional way.

So said Rajiv Lall, executive chairman of the Infrastructure Development Finance Co. (IDFC), at a recent talk titled “India's Unfinished Reforms.” The talk was organized by the India Business Initiative at the Chazen Institute.

“The best way forward is for the public sector to take the lead,” Lall recommended. Rather than bring in partners early, “let the government develop greenfield projects, then sell them to investors and recycle the profits to develop new projects.”

Inviting private-sector participation at the earliest stages of development is a mistake, said Lall, who has chaired the Global Agenda Council on Infrastructure of the World Economic Forum and the Infrastructure Council of the Confederation of Indian Industry. Private investors attracted to early-stage projects are typically “swashbuckling risk takers,” he said — very different from backers found in regulated industries, who look for the predictable returns.

In addition, government entities are comparatively well equipped to carry out development chores such as getting permits, environmental approvals, and securing land. Perhaps most important, the cost of capital is typically lower for quasi-sovereign entities than for the private sector.

However, once a project is past the development stage, said Lall, the government needs to back away. This exit strategy provides cash flow for the public sector and puts projects in the hands of for-profit companies better able to drive efficiencies and provide expertise in specific industries. Lall noted several Canadian companies, in particular, have shown interest in electricity projects in India.

Another piece of the puzzle involves remaking “the twilight zone that is India’s financial system,” said Lall. This would give India's banks the ammunition and motivation to lend for infrastructure, and more noninfrastructure projects as well. He recommended carving out specific types of institutions within the public-sector finance framework, including agricultural and infrastructure banks, which would be better equipped to address their constituents’ needs.

Most importantly, India should pave the way for more private-sector banks that don't have to consider political issues in their approach, he said.

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