Emerging economies face challenges in providing functional and efficient infrastructure. Infrastructure has evolved into a national aspirational good, a job creation mechanism, and a necessity. The cost and public good component are the two most significant constraints on infrastructure provision. This national champion’s model seeks to encourage private-sector participation in infrastructure investments, but it is not without its own set of challenges and limitations.
Traditional Financing Methods and Their Drawbacks
- Traditional infrastructure financing methods have relied on tax revenues or government borrowing.
- However, this creates a vicious cycle because poorer economies generate less tax revenue, which limits infrastructure investment, resulting in a further spinoff that affects economic growth and keeps the country poor.
- Increasing domestic public borrowing tends to crowd out private investment, exacerbating the problem.
Problems with the Public-Private Partnership Model
- In the early 2000s, the Indian government attempted to encourage private sector participation in infrastructure investment by introducing the Public-Private-Partnership (PPP) model.
- While the PPP model resulted in a lot of infrastructure being built, it also resulted in an avalanche of non-performing assets with public sector banks, private sector bankruptcies, accusations of widespread corruption, and a change in government in 2014.
The National Champions Model and its Innovations
- The current administration has modified the PPP approach by allocating the majority of infrastructure provisioning for roads, ports, airports, energy, and communications to a few select industrial houses.
- The national champions model is one in which the government selects a few large conglomerates to carry out its development priorities.
- This model incentivizes national champions to build projects by providing cost-covering subsidies.
- The National Champions Model now includes the following new features:
- To encourage investment in projects with low returns and negative cash flows, national champions must have control over existing projects with strong cash flows.
- The public association of champions with the government’s national development policy provides the champions with a competitive advantage in obtaining domestic and foreign contracts.
- Access to cash-rich projects enables national champions to borrow from external credit markets using these entities as collateral, lowering the cost of finance for others.
The Advantages of the National Champions Model
- Economic growth can be aided by national champions by generating revenue, creating jobs, and investing in research and development.
- Strategic significance: The model can assist in ensuring that the country has a strong presence in strategically important industries such as defence or energy, which can be critical to national security.
- Export competitiveness: National champions can become market leaders and compete effectively in global markets, increasing exports and improving the country’s trade balance.
- National champions can invest heavily in research and development, resulting in technological advances that benefit the entire economy.
- Capital access: National champions may have easier access to capital than smaller companies, allowing them to make larger investments and pursue growth opportunities.
The National Champions Model’s Issues
- Too large to fail: Conglomerates are treated as too big to fail in the market and by regulators. This means that these companies are so large and important to the economy that their failure could have far-reaching consequences for the financial system and the overall economy. This opens the door to market hysteria, delayed problem detection, and sectoral problems spilling over into systemic shocks. The recent difficulties of the Adani companies in India highlight the potential risks of this approach.
- Encouragement of market concentration, which can be detrimental to efficiency and productivity: Concentrated markets reduce competition, which can result in higher prices, lower quality, and less innovation. When a company has market power, it has less incentive to improve its products or services, cut costs, or innovate. This can lead to lower overall economic productivity.
- The danger of the country devolving into an industrial oligarchy: A small group of powerful and influential conglomerates control a large portion of the economy in an industrial oligarchy. This has the potential to harm economic growth, social mobility, and political stability. An oligarchy may be resistant to change and less responsive to the broader population’s needs and aspirations.
- Uneven playing field: The perception of an uneven playing field in terms of market access and selective regulatory forbearance, which can be a major deterrent to foreign investors.
@the end
Infrastructure is a necessary but not sufficient condition for growth. The issue is effective demand, as seen in the power sector, where the inability of power distribution companies to recover payments was a problem. India is at a crossroads in its development, and the national champions model has advantages and disadvantages that must be considered before adoption.
Source: https://indianexpress.com/article/opinion/columns/will-the-national-champions-model-of-infrastructure-development-work-8502004/