Bangalore's airport still taxis for take off

Bangalore's airport still taxis for take off
Financial Times

As a warning of the pitfalls facing private investors in India's state infrastructure, the seven-year saga of Bangalore international airport has been hard to ignore.

Politically charged battles have caused serial delays to the greenfield project. International flights to India's high-tech hub, due to start at the end of this year, will now not be landing until 2008.

The contract, finally signed in July 2004, took years to negotiate, highlighting the bureaucratic hurdles that investors have faced.

Ajay Prasad, secretary of the civil aviation ministry, said the extended talks offered a “learning process” that would show the way for other public-private infrastructure projects.

Even now, with construction work due to start in weeks, the Siemens-led consortium that owns 74 per cent of the flagship project struggles to establish reasonable terms for minimum performance.

S.N. Subrahmanyan, joint general manager of Larsen & Toubro, an engineering and construction firm in the consortium, said expecting Bangalore's airport to be like Singapore's ultra-modern Changi was unrealistic.

“If the water in the bathroom stinks, there is nothing I can do about it,” says Mr Subrahmanyan, pointing to a host of factors, including “corrupt-looking” customs officials and idle policemen, beyond the control of the private airport operator.

Larsen & Toubro also maintains that archaic ground-handling services will need to be overhauled if the consortium is to meet its performance targets.

Getting such public-private partnerships to work smoothly is a priority for a cash-strapped government that has been compelled by its Communist partners to rule out straightforward privatisation known as disinvestment in India.

The coalition's Common Minimum Programme excludes sales of majority stakes in profitable state-owned enterprises, such as the Oil and Natural Gas Corporation. Unproductive public sector enterprises that have traditionally provided the left with sources of jobs and loyal voters dubbed “vote banks” will be largely protected from market rigours.

The accord does, however, allow the government to find private buyers for minority stakes. This approach has, for instance, allowed Praful Patel, civil aviation minister, to revive plans to sell at least 10 per cent equity in Air India and Indian Airlines to help fund a long overdue fleet expansion.

Otherwise, P. Chidambaram, finance minister, announced plans in January to invest proceeds from asset sales in a National Investment Fund to be managed by professional fund managers. No details have followed, although the government has said the money will go to social andrural infrastructure.

To finance other types of infrastructure, the government plans to harness private savings and to draw on the country's foreign exchange reserves.

In his much-awaited budget presentation in February, Mr Chidambaram, said: “India's most glaring deficit is its infrastructure deficit.” His comments surprised no one but there was disappointment at the meagre quantity of new funding allocated to infrastructure.

This came to roughly $4bn (€3bn, £2bn), not all of which would necessarily be spent within 12 months. Set against estimates of the infrastructure needed to sustain GDP growth at about 8 per cent, the sum is trifling.

According to estimates cited by Sunil Bharti Mittal, chairman of Bharti Group and one of India's leading businessmen, the country's power sector alone requires $75bn during five years. Its telecommunications industry needs $25bn by 2010 and its railways and airports more than $5bn by 2015. Yet if private investors are to help bridge the funding gap, they will require government assurances that they will not be subjected to what Mr Subrahmanyan calls unexpected “policy jerks”.

The long gestation period of infrastructure projects means private investors require as much due diligence on the governance of a country and its political trends as on the project's financial viability.

“A transparent regulatory framework that promotes public-private partnerships in infrastructure is the need of the hour,” says Mr Mittal, whose group controls India's most successful private mobile operator and is bidding for contracts to modernise Delhi airport.

“Investors are prepared to take on market risk in the form of poor demand and competition, but not regulatory risk arising from ambiguous policies.”

Kishor Chaukar, managing director of Tata Industries, says India's regulatory culture remains hidebound by “the problem of permissions”. In many cases, government departments insist on the right to issue a “no-objection certificate” before giving their consent to a project. “We need to do away with that culture.”

At the request of Manmohan Singh, prime minister, Montek Singh Ahluwalia, deputy chairman of India's planning commission, will address the vital question of how best to reassure private investors.

His department has been chewing over the matter since August 2004, but anyone hopeful of a quick answer may be disappointed. At a recent conference on regulation last week, Mr Ahluwalia said he needed more time to reflect on international experience.