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India’s Stillborn Infrastructure Dream

The deadly combination of a rapacious government and overreaching crony capitalists means that zombie projects will haunt the infra sector for long

Once upon a time, infrastructure stocks and mutual funds that specialised in the infrastructure sector were the great white hope of investors. Back in 2006-07, infrastructure was the way of the future. On every count, whether it was new projects, new businesses, massive IPOs, or infrastructure-dedicated mutual funds, it was a sector that seemed to encompass everything that was exciting about India’s potential. From an investor’s perspective, it was like tech used to be in the late 90s, except that this was clearly destined to be a much bigger story.

Today, a short half-decade later, the whole thing is in shambles. From the investor’s perspective, no matter which way you look at it, infrastructure is a disaster zone. In Value Research’s Infrastructure funds category, all funds have negative returns for almost all periods above six months. Unlike the broader categories encompassing Large or Mid cap funds, infrastructure funds have never risen again.

However, over the last few months, the whole mess has started looking far deeper than it used to. Investors are beginning to believe that they can no longer hope for infrastructure companies to do better in any foreseeable time period. It’s no longer just a question of fundamentally sound businesses recovering from cycles of over-hype and over-reaction, as it was with technology companies a decade ago. It’s also not just a question of over-stretched balance sheets needing some space and time to regain shape again.

Each aspect of the infrastructure story is now suspect, and not just in the short or medium term. Whether it’s telecom, power, energy, roads, airports or something else, the problems are far more fundamental. This is now becoming clear even outside the obvious disaster zones of telecom and power, and even in projects that are actually operational.

Take the Delhi-Gurgaon toll road, which has been in the news last week. This road, euphemistically called an ‘expressway’ by its operator, seems expressly designed to generate revenue for the operator while offering no net benefit for the users of the road. You gain time while driving and then lose more of it while waiting to pay your toll. Now, the Punjab and Haryana high court has forbidden the road’s operator from collecting toll for 15 days because they seem unwilling to put in any serious effort to reduce the waiting time. From the perspective of daily users, the project seems to have gone directly from delays caused by its construction to delays caused by under-capacity. Just a stone’s throw away, the operator of the shiny new airport wanted a hike in charges which, if accepted in toto, could mean up to 15-20 per cent of the cost of domestic air tickets going as airport ‘development’ charges at just one end of the journey. Notably, both these projects should have been trailblazers in India’s infrastructure story, because there are thousands of kilometres of toll roads and dozens of airports that are yet to be built.

Unfortunately, the infrastructure business model, as interpreted by many businesses, seems to be that you become a government-guaranteed rent collector. From the operator’s perspective, the users have to pay up no matter what so there’s no real need to try and optimise the business for them. Add to that is the problem of deep indebtedness that is universal to all infrastructure companies in India. So now, even if they wanted to, many of these businesses just can’t enhance operational projects or finish others. This problem is fundamentally insoluble unless many of these current operators are willing to let go of ownership to someone else who is willing in to put in equity.

No matter how you slice and dice it, projects that cost say, Rs 50,000 crore cannot be implemented by people who have one 20th that amount of their own. In theory, there should have been a huge amount of business to be done filling India’s infrastructure hole. In practice, those who were supposed to do so have dug themselves into a hole so deep that there doesn’t seem to be a way out anytime soon.