Wednesday, August 25, 2010

A "big push" in roads?

I don't believe in the magic-pill route to development or eliminating poverty. However, if asked to name the one area where investments could potentially have far-reaching impact, I will stick out my neck and choose transportation infrastructure.

This would include state highways, rural connecting and other internal roads that links the basic habitation unit to atleast the nearest state highway. A network of roads - atleast two-lane, preferably four-lane - connecting villages to the national or state highways would have a dramatic long-term impact on the economic prospects of those areas. In fact, it may not be a hyperbole to claim that such roads can single-handedly (since other accompaniments invariably follow) turn around the fortunes of large parts of interior rural India.

The closest parallel is with the development of the Interstate Highway road network in the US. It is now widely accepted that this Interstate Highway System has been one of the most important foundations for America’s phenomenal post-War growth. It dramatically increased the country's economic competitiveness and promoted the rapid spread of economic activity across the country.

In a country without a decent network of national highways, the Government of India's decision at the turn of the last decade to invest heavily in the Golden Quadrilateral and other NHAI projects was understandable. This initiative has spurred large investment inflows into the sector, including a surprisingly high share of private sector investments. But the remarkable development of national highways over the last decade has only served to increase the stark contrast with the abysmal condition of state highways.

In fact, the full potential of the NH system itself can be realized only by extending the network downstream to the rural and urban population centers. A "big push" investment drive in sub-NH road network, in turn integrated with the national highways, has the potential to be a game-changer by creating the required conditions for sustainable economic growth.

The mere presence of a good connecting road would itself dramatically transform the economic prospects of even the remotest of village and enable it to compete at a more or less even footing in the market for economic opportunities.

Here is a list of immediate and first-level of productivity/efficiency improvements and economic activity simulations that can be the result of a massive expansion of sub-NH road network.

1. Primarily, it immediately increases the accessibility of remote locations to urban and nearby industrial/commercial centers. Businesses benefit by way of the dramatic reductions in the cost of transportation of inputs and finished products.

2. It dramatically improves mobility and lowers all barriers imposed by distances. Workers find it easier to commute longer distances for their jobs, students can attend schools and colleges in the nearby town, patients can seek better care and lives can be saved by taking the services of the hitherto distant tertiary care centers, and so on.

3. It increases labor market efficiency by removing distance related frictions. Good transport facilities have the effect of forging closer integration of labor markets across distances and occupations. It arbitrages away labor market inefficiencies and facilitates more effective matching of supply and demand.

4. It promotes better price integration across the country by easing out transport-dependent arbitrage opportunities. The significant transportation costs often translates into substantial price differentials on many items between urban and interior India.

5. It lowers the cost of providing various government services. Lower transportation costs exerts a downward pressure on construction and maintenance expenditures on infrastructure assets, welfare goods (like PDS, by reducing the cost of moving and storing stocks) and services (by increasing the number of villages an extension officer, or ANM, can cover).

6. It enhances the quality of services delivered by the government. A good transport infrastructure will enable teachers, nurses, doctors, agriculture officers, and other officials to reach their workplaces quicker and spend more time there. Its productivity improvement effect on field functionaries can be considerable.

7. It is a force multiplier for the government's supervisory apparatus. Monitoring officials find it easier to visit schools, clinics, and farms in the remotest areas. Conversely, the easier accessibility (and the attendant higher probability of a surprise inspection) of such areas could exercise a considerable deterrent on now commonplace practices like absenteeism and shirking. Increased mobility effectively expands the span of control of monitoring officials.

8. Finally, apart from increasing the mobility of labor and capital, improvements in roads and related transportation facilities also facilitates faster and closer social and cultural integration of the remotest parts with the remaining areas and of villages with cities. Improved transport infrastructure immediately and most saliently exposes Bharat (interior parts) to the opportunities of emerging India.

9. The immediate trigger for the development of the Interstate Highway System in the US was to expedite the massive war time mobilization. A good network of roads can be an invaluable contributor towards enhancing national security, both from external enemies and against natural disasters. Connectivity enables swifter manpower and resource deployment, from and into the nations interiors, in case of national emergencies.

10. A comprehensive investment plan in sub-highway roads would by itself drive massive capacity expansion on the supply-side. It would require huge mobilization of material inputs and skilled and unskilled manpower. Downstream investments in petrochemicals, cement, steel, heavy equipment, engineering colleges and polytechnics are natural accompaniments.

How do we finance these massive investments? Unlike the National Highways, these roads are not going to generate much private sector interest for any toll-based investment model. And as experience from across the world, even from the homelands of free-market, would indicate, finances for such roadways will have to come from governments.

The fuel cess, which was recently enhanced to Rs 2 per liter of diesel and petrol sold, is an important source of investments for the national highways. A share of such cess, coupled with a specific road tax on new vehicles, can generate some share of the resources. In this context, a carbon tax on petrol and diesel, can be used to both mobilize resources and also address the climate change problem.

Another source of financing would be for state and local governments (or their Special Purpose Vehicles) to float 15-20 year "Build India Bonds" (both taxable and tax-free) to mobilize resources from the growing debt market. This would enable project entities raise the huge upfront resources required without putting large one-time strains on government budgets.

The annuity payments can be financed from budgetary support and from revenue streams that emerge consequent to the development of the area. Such revenue streams include road impact fees levied on commercial (and residential) developments in the aftermath, share of the property and other taxes that follow the road, etc. Finally, at some point in time, in cases where the areas development exceeds the critical mass, it may become possible to even introduce tolls to cover the remaining debts.

And this "big push" into the debt markets, would, in one stroke, contribute more towards increasing the depth and breadth of the India's debt markets and improving the overall balance and stability of its financial markets than any other financial market reform.

Update 1 (13/12/2010)

An estimated 40% of the road traffic in the country plies on the National Highways, though the NHs form less than 5% of the national road network (only 70,000 km out of total road network of 3.3 m km). About 30% of NH netowrk is single lane, 53% double lane, and only 17% four-lane and above. Of the 70,000km of NH, only 15000 km are being developed and maintained by NHAI, while the rest are built and maintanined by the road transport ministry through the state public works departments. It is estimated that the country's roads will require $75-90 bn investments in the next five years.

Update 2 (29/1/2011)

A World Bank working paper evaluated the aggregate and spatial economic impacts of China's newly constructed National Expressway Network, focussing, in particular, on its short-run impacts, and found that "aggregate Chinese real income was approximately 6 percent higher than it would have been in 2007 had the expressway network not been built".

Another working paper by Gael Raballand, Rebecca Thornton,Dean Yang et al finds that good roads alone may not be enough to generate traffic in rural areas. It writes from a randomized experiment in Malawi that subsidized a minibus service over a six-month period over a distance of 20 kilometers to serve five villages,

"Using randomly allocated prices for use of the bus, this experiment demonstrates that at very low prices, bus usage is high. Bus usage decreases rapidly with increased prices. However, based on the results on take-up and minibus provider surveys, the experiment demonstrates that at any price, low (with usage) or high (with low usage), a bus service provider never breaks even on this road... this experiment explains that motorized services need to be subsidized; otherwise a road in good condition will most probably not lead to provision of service at an affordable price for the local population."

Update 3 (19/5/2011)

The World Bank reports of a bridge built across Loange River on National Highway No. 1 between the cities of Kikwit in Bandundu province and Tshikapa in Kasaï-Occidental has had a dramatic impact on lowering food prices and generating economic growth. The Loange Bridge provides a continuous road link across six provinces in DR Congo and it also enables a connection between Central Africa and countries in East and Southern Africa. It was built over a period of 18 months at a cost of US$36 million.

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