Raising India: Why More Infrastructure Isn't Enough

Chiara Goia for Time
India: Working on the power grid in Mundra

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By betting on companies like Adani, IRB, GMR and others, Lall's IDFC has built an $8 billion balance sheet of projects. IDFC plans to triple that over the next four years, and announced in September that it will raise $700 million through bonds, India's first retail long-term, tax-free infrastructure bond offering. Last year, IDFC earned $240 million on revenue of $440 million. That success has "demonstrated the risk-taking capacity of the Indian private sector," Lall says.

The Nation Builders

Yet huge gaps remain. More than 600 million Indians still live off the power grid, and those who live on it don't get enough. The boom has widened the shortfall between electricity supply and demand to as much as 15% at peak hours. To satisfy its power hunger, India would have to add 160,000 megawatts of capacity by 2017, an investment of $405 billion. The National Highways Authority has set a goal of building 30,000 miles of roads over the next four years but has completed only 3,223 miles in the past year. Despite the obvious need, two of India's largest cities, Chennai (formerly Madras) and Kolkata, have rejected private airports altogether. Worst of all, urban infrastructure like sewer lines and mass transit is woefully underfunded.

One big obstacle is land acquisition, a conflict at the root of some of India's most dramatic failures in infrastructure projects. A $12 billion steel plant in the eastern state of Orissa, for instance, has been delayed for five years. There are also issues of speculation and insider trading. Many land deals are done under the table, depriving India of tax revenue that could be used to fund urban infrastructure.

One solution has been viability gap funding--using profitable projects to underwrite unprofitable ones. It was most recently used in the bidding for the Hyderabad Metro Rail project, a 44-mile railway with 66 stations, designed on a model in which the developer, Mumbai-based Larsen & Toubro, must pay an annual lease to the government, relying on real estate revenue to be profitable. But some worry that the shift toward private infrastructure has gone too far, too fast, and that only the most profitable projects are being funded while basic services are neglected. Raghuram Rajan, an adviser to the Indian government and a former chief economist of the IMF, warns that if clear incentives and safeguards are not in place, "it's essentially a way for the private sector to take even more from the public sector," leaving it even less able to fund public infrastructure.

Despite funding, land-use and return-on-investment issues, if India gets that public-private calculation right, more of its cities may look like Hyderabad. Arijit Sarker, head of Google's online sales operations, which are based in that city, says that while the new airport "sends a message out that we are serious about our infrastructure," it is the soft infrastructure--the schools, short commutes and public spaces--that keeps him and his company there. In Hyderabad, companies are not expected to provide their own backup power and water supply because of poor public services. The effectiveness of Google's Hyderabad campus means that Sarker is actively trying to expand the company's presence in the city, asking his counterparts in the U.S., "What more can we get done out of India?" Failing to get infrastructure right could have profound consequences, and private financing alone won't be enough.

The private-infrastructure kings, for all their ingenuity and enterprise, are realizing the limits of their power. Adani can build power plants, but he found himself humbled by the challenge of improving Mundra's school system and delivering health care for the elderly. "To privatize everything in the social sector is not advisable totally," he says. "It is not a businessmaking game." For India, there is still the old business of nation-building, and for that there is no substitute.

This article originally appeared in the November 22, 2010 issue of TIME.

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Raising India: Why More Infrastructure Isn't Enough

Investors are funding airports, roads and utilities. But basic services are lagging