Sunday, November 9, 2008

Why India cannot do big?

Can you think of any $1 billion plus construction project completed in India this decade? I trawled the Internet and could not come across anything. Apart from a few roads and bridges under the Golden Quadrilateral project, the Delhi Metro, Hyderabad Airport and a couple of oil refineries, there have been very few intergrated projects with investments of even Rs 1000 Cr, in both the private and government sectors. For all talk of massive real estate activity, I could not find a single billion dollar plus real estate development project, nothing to even remotely compare with the construction activity in Shanghai, New Songdo City or the Dubai Palms. India it appears has a major problem with doing big projects!

Though numerous Special Economic Zones (SEZs), Ultra Mega Power Plants (UMPPs), Irrigation Projects, airports, ports etc, with investments of over Rs 1000 Cr have been sanctioned, most of them are caught in the usual problems and are getting inordinately delayed. The contrast with the Chinese economy could not have been starker.

One of the most remarkable dimensions of the Chinese economic miracle has been their ability to concieve and execute in record time, massive construction projects with frightening regularity. Massive irrigation structures, power plants, ports, airports, railway lines, expressways, signature buildings, and so on have been springing up at breakneck pace. And most of them get completed well within the stipulated time, with no cost over-run.

In the context of the spectacular infrastructure investments made by China for the recent Olympics, Harvard Business School Professor Tarun Khanna reasons that China can build, or revitalize cities overnight, while Indians can't even build roads, because India is a "land of million vetoes". He writes, "Whenever there is a conflict between public interest and private rights, China tends to adjudicate in favour of public interest at the expense of private rights, while India opts to protect private rights even if public interest is compromised. Unlike In India, no small group of individuals can veto physical asset creation in China once the Party apparatud has decreed a course of action".

Citing the example of the massive success of China in the Olympic games, he also attributes Chinese success vis-a-vis India to the disciplined focus of the Chinese state in pursuing specific goals. Here are a few other more specific reasons why India fails this test:

1. Severe constraints on the supply side. This is the single biggest problem standing in the way of India moving into the big league in infrastructure and construction. Any large scale construction project would require massive amounts of cement, steel, sand, metal chips, and other materials. We face supply constraints on each of these materials. The depth of the market is so limited that a Rs 1000 Cr construction project would be enough to squeeze out most, if not all the supply from that area.

Consider these statistics. China produced 489 mt of steel in 2007, 9.5 times more than India's meager 53.1 mt. Chinese steel production has doubled over the last five years, whereas India's has grown by a mere 15 mt in the same period. In cement, China's production in 2007 was about 1.4 bn mt, more than 9 times India's production of 160 mt. Chinese cement production doubled from 704 mt in 2002, while India's grew by just 60 mt over the same period. In many ways, the annual increase in Chinese cement and steel production has been much more than India's total production.

A more detailed compaprison of the two countries is available here.

2. Scarcity in skilled personnel. There is an acute scarcity in skilled people at every level, from engineers to workers. Despite all talk of the largest pool of engineers and scientists, we suffer an acute shortage of skilled and experienced structural, environmental, and other engineering personnel. More distressingly, there have been a number of recent studies highlighting the poor quality of our professionally trained manpower, most of whom have been classified un-employable based on objective standards.

Similar problems affect the supply of skilled workers - rod benders, masons, plumbers, electricians, carpenters etc. While nurturing professional training in engineering and medicine has been a priority since independence, development of vocational and direct employment related skills has been badly neglected. In many respects, deficiency in basic skills like the aforementioned may be a much more immediate and greater cause for concern. The recently launched National Skill Development Mission may be a few decades too late.

3. Lack of professional project management practices. Though such practices have become increasingly common in recent years in the private sector, they are still to make their mark in the public sector. The market for supplying such services is still in its infancy and populated by very few players, and with limited capacity and reach.

4. Problems associated with land acquisition and R&R, and environmental clearances. This is a result of our democracy and its institutions, something which Prof Tarun Khanna highlighted. It is commonplace to have major project works running into stiff opposition and getting stuck up in court litigation over land acquisition, difficulty in removing encroachments on project lands, controversy over relief and rehabilitation packages etc. The small, but very visible and vocal group of environmental activists, using judicial and other civil society platforms have most often come in the way of major projects.

Ironically, most often the multiple levers of democracy end up helping entrenched vested interests than being of help to the really poor and exploited. More on this in a separate post.

5. Infrastructure deficit. The poor state of physical infrastructure by itself sets in motion a negative feedback loop, that besides strangulating economic growth also hinders further infrastructure development. Many analysts claim that infrastructure bottlenecks could end up severely squeezing India's economic growth. The inadequate internal transport logistics, poor quality of power supply, and heavily clogged ports are a virtual tax on our exporters and importers, seriously eroding their global competitiveness. Massive infrastructure projects most often involve significant import components. Despite some recent improvements, importing machinery and other inputs for mega projects remains a major challenge. Here is a comparison of where we stand in terms of infrastructure against our competitors.

6. Bureaucracy. I have outlined the problems in great detail in earlier posts here and here. The obsession with bureaucratic form and procedures imposes constraints that come in the way of expediting project execution. This lack of flexibility becomes even more of a handicap since many of the contracting procedures and concession models are being implemented for the first time and have no bureaucratic precedent. For these reasons, bureaucratic limitations and constraints are one of the major reasons why we find it difficult to push major projects off the ground.

7. Absence of adequate numbers of contractors. The supply side of the contracting market is very thin. There are only a handful of qualified major contractors in each sector, and all of them have overflowing project portfolios under execution. While the market is fast developing depth, there are significant entry barriers attached to infrastructure contracting.

Finally, there is also the cyclical arguement that the failure to achieve a few successes is the biggest handicap facing Indian construction/infrastructure sector. Once a few major projects get completed and become operational, the market will develop the required breadth and depth.


Abhinav Arora said...

A excellent one!!
keep going.....

Anonymous said...

On the subject of professional project management practices, the UK public sector specifies using the PRINCE2 methodology in its projects. This has been driven from the government as an attempt to introduce a best practice methodology.