Will the national champions model of infrastructure development work?

Source– The post is based on the article “Will the national champions model of infrastructure development work?” published in “The Indian Express” on 16th March 2023.

Syllabus: GS3- Infrastructure

Relevance– Different models for infrastructure creation

News– Infrastructure is understood as an important necessity in modern times. But, providing functional and efficient infrastructure has always been a struggle for developing economies.

How is infrastructure perceived in emerging economies?

Infrastructure in emerging economies is considered a magic bullet. It works as a national aspiration, a barometer of national progress, a mechanism for job creation, a vehicle for crowding in private investment.

What are the constraints in infrastructure building?

It needs to be built to a minimum scale, which makes it expensive.

It often has a public good component. The social value of infrastructure is higher than its private value to individual users. Hence, private investors tend to find such investments relatively unprofitable.

The traditional approach to financing infrastructure has relied on tax revenues or government borrowing. But poorer economies generate less tax revenue. It limits infrastructure investment.

The poor infrastructure due to limited investment reduces returns to private investment which further affects the growth of the economy.

Attempting to break the cycle by increasing public borrowing domestically tends to crowd out private investment.

What has been the approach towards infrastructure financing in India?

India introduced the PPP model in early 2000s. It incentivised private sector participation by providing targeted subsidies for infrastructure investments. Government facilitated the acquisitions of land and primary commodities, and access to credit from public sector banks for infrastructure projects.

The PPP model ended in creation of non-performing assets with public sector banks, private sector bankruptcies, accusations of widespread corruption, and a change in government in 2014.

The NDA government modified the PPP approach. It assigned the bulk of the infrastructure provisioning for roads, ports, airports, energy, and communications to a few chosen industrial houses.

This is the “national champions” model. The government picks a few large conglomerates to implement its development priorities.

What are the new aspects of the “national champions” model?

First, infrastructure projects take a long time before they start generating returns. The returns are also low. To incentivise their investment, infrastructure firms need to be given control over existing projects with strong cash flows. It helps them to maintain profitability.

Second, the public association of the champions with the government’s national development policy generates a competitive advantage for the champions. It helps them in getting domestic and foreign contracts. This too guarantees some stable cash flow.

Third, access to some cash-rich projects allows these national champions to borrow from external credit markets by using these entities as collateral. This lowers the cost of finance of the other projects. It also frees up domestic savings for private investment.

What are the problems associated with the “national champions” model?

First, there is direct association of these conglomerates with government policies. It creates the potential for markets and regulators to treat them as too big to fail. This opens the door to market hysteria, and spillovers of sectoral problems into systemic shocks.

Second, it encourages market concentration. This can often be bad for efficiency and productivity at the economy-wide level.

Third, these projects take a long time to generate large cash flows. The state needs  to provide the champions with access to additional cash flows. The country can turn into industrial oligarchy.

Fourth, it can generate the perception of an uneven playing field in terms of market access and selective regulatory forbearance. It can become a significant deterrent for foreign investors.