Energy Transition

5 ways India can overcome its infrastructure challenges

Dipender Saluja
Managing Director, Capricorn Investment Group
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India needs infrastructure. From the moment you set foot in the country, you witness the ageing roads and railways, the unreliable power and the absence of sanitation. The question is: what to do about it?

Progress in Indian infrastructure has been painstakingly slow in recent years. Mobile phone coverage is perhaps the only exception. In less than a decade, India went from a communications black hole to one of the leading telecommunication networks in the world.

What’s interesting with the development of telecommunication infrastructure in India is how it was conducted. The private sector deployed the required infrastructure with minimal involvement from government. Telecom companies acquired land for cell-phone towers and marketed cell phones to millions of eager customers. With more than 900 million mobile-phone subscribers in India at the end of 2012 (compared with 10 million in 2002), the change over the past decade is amazing.

Why did mobile-phone ownership and coverage make so much progress while other essential areas of Indian infrastructure, such as sanitation, remain stagnant? By some measures, fewer Indian households now have access to a toilet than to a cell phone. There is no single answer to this question, but a number of issues can explain the different history and point towards new development approaches.

First, cell-phone coverage and ownership were mainly driven by the private sector. The role of the government in bringing telecommunications access to hundreds of millions of its citizens was minimal. There is a crucial lesson to be learned here. The government can certainly play a role in developing infrastructure, but it does not have to play the central role in every sector.

Second, the rollout of the country’s telecommunication infrastructure was driven by entrepreneurial spirit. There was competition between various companies to install cell-phone towers in each neighbourhood, in each village, and to make sure that they worked independently from the electricity grid through back-up diesel (and more recently, solar-powered) generators. This last point also shows that the effort did not rely on the public sector to provide electricity: the contingency of a grid failure was built into the business plan from the start.

The effort to bring mobile coverage to the country was also successful because the Indian customer was willing to pay for this service (through a subscription), unlike other services that may be considered as “free”, such as usage of a road, or water from a well.

The telecommunication example is not replicable in all other aspects of Indian infrastructure, but here are five key elements of this success that are relevant to other sectors, such as energy and sanitation.

  1. Identify where government is needed and areas where the private sector is better positioned. The government needs to play a role in developing infrastructure, from limiting impacts on public health and the environment, to providing the capital for projects that are not attractive to private investors. In other areas, market forces can help shape better outcomes. For instance, private companies tend to structure projects in a way that maximizes the chances of success in terms of customer satisfaction and financial viability. Conversely, misplaced public-sector intervention can have negative consequences, as in the case of diesel-fuel subsidies in India.
  2. Consider a distributed model for infrastructure projects. Announcing large projects may make good headlines but the outcomes tend to fall short of expectations. Infrastructure development must meet the needs of local communities, and requires effective implementation on the ground. This is difficult to achieve with a centralized model. Projects designed with a local focus may seem less impressive but, put together, they have the potential to change people’s lives faster – in months, not years. An example would be the installation of solar panels on houses and buildings, rather than bringing a reliable electrical grid to remote villages.
  3. Go straight to the finish. India is less burdened by legacy infrastructure and has the opportunity to select innovative courses in development; the country can become a fast adopter of new technologies. For example, distributed energy and solar power are on a path to expanding power generation in India. They also reduce the need for a centralized grid and can help the country contribute to the global effort to reduce greenhouse gas emissions. India has the opportunity to benefit from large economies of scale brought about by a massive build-up of solar-panel production capacity in recent years.
  4. Focus on getting the project right, not on attracting investment. India’s savings rate is high, insurance companies and pension funds are eager to invest in infrastructure, international investors and multilateral development banks are also ready to contribute. What India is missing is well structured projects and transparency. Its high long-term sovereign rates are a hurdle. Corruption is a major problem: it cannot be mitigated, it must be eliminated. Anything short of that would be cheating the Indian people from the benefits of economic growth and development.
  5. Make the investment now and reap the benefits in the decades ahead. Many infrastructure projects will require a significant upfront investment but will yield savings over the long term. This is particularly true for renewable energies. India is currently spending giant sums on importing fossil fuels. By leveraging its renewable energy potential, the country could reallocate these financial resources to other areas of the economy. To support the development of renewables, novel payment schemes for investors should be considered, such as payment in kind. Here, solar panels could be exchanged for the diesel or coal that they substitute, priced at market, not subsidized, rates.

There is no easy fix for India’s infrastructure situation. By some estimates, $200 billion a year would be needed to tackle the problem. The nation’s savings rate is high and could be mobilized to meet that goal. Also, international investors are eager to invest in the country. But “more of the same” will not cut it when it comes to bringing electricity and sanitation to hundreds of millions. A fundamental shift must occur in the way the country looks at developing its infrastructure, and financing it.

So, where to start? The power sector and sanitation.

When to start? Now.

More on Indian infrastructure

Can solar panels solve India’s energy woes?
Two things India can learn from China
Can Modi reboot Indian business?
India needs a system reset

Authors: Ion Yadigaroglu is managing principal of the Capricorn Investment Group; Dipender Saluja is managing director of the CIG; Henry McLoughlin is the project manager of the Advancing Infrastructure Finance initiative at the World Economic Forum.

Image: A labourer works at the construction of a residential complex at Noida in the northern Indian state of Uttar Pradesh January 19, 2011. REUTERS/Parivartan Sharma 

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