600 million (!!!) without power in India–the negative investment case in a nutshell

Indian power outages

Media reports tell us that 620 million in India have no power, due to widespread failure of the country’s electricity grid.  That’s half the population of that country–and almost 10% of the world!  And we on the East Coast of the US think we have power problems!

For the twenty years or so that I’ve been following India, the south Asian giant has been touted as being the next big thing for emerging market investors.  But the dream has never become reality.

investment plusses…

The attractions are obvious:

–a mammoth domestic market,

–a significant number of entrepreneurs,

–a large pool of hard-working, well-educated workers, and

–the fabulous success of the IT outsourcing industry in Bangalore.

…and minuses

Three negatives, however, are just as prominent:

–the immense power wielded by a small number of industrial conglomerates that control much of Indian commerce, and which are not particularly interested in foreign competition,

–highly bureaucratic government at the national and regional levels, which tends to be highly inwardly focused and which is subject to religious, ethnic and class tensions, and

–the resulting lack of infrastructure, particularly roads and electric power.

the post-WWII development model

The classic post-WWII development pattern for emerging countries is to encourage technology transfer from highly skilled foreign firms.  These are typically induced to set up operations in the emerging nation through government incentives (tax breaks and red tape slashing) and by the availability of cheap labor, good roads and ports and sufficient electric power/clean water.  Underlying all this is a national consensus to make the sacrifices needed to foster economic development.

India doesn’t fit

India doesn’t fit this model.   In fact, according to the World Bank, India has recently been losing ground in important areas of infrastructure.  In its 2012 Logistics Performance Index, the Bank rates the second-largest country in the world by population as #46 in the quality of its logistics.  That’s just below Brazil, and slightly higher than Mexico and Argentina.  It’s also an improvement of one position since the 2010 report.

If we look a little deeper, however, India has fallen to #65 from #47 in the quality of its infrastructure, to #54 from #46 in international shipping and to #56 from #52 in its ability to track and trace shipments.

Its boost in the ratings comes from the timeliness of the shipments it does make (#44, up from #56) and its skill in using the logistics apparatus it has (#38, up from #40).  In other words, the ratings improvement comes from more efficient use of what little there is, rather than having an expanding logistics infrastructure.

The country hasn’t helped its reputation either with the Vodafone cellphone network affair, where it decided to retroactively change its tax laws to subject the UK firm to a multi-billion dollar levy on profits from a sale.  True, Vodafone may have exploited a loophole in the existing laws.  That’s irksome.  But changing the rules after the fact, rather than just closing the loophole, must give potential foreign investors pause.

By the way, India does have a program that allows private companies to build their own power plants.  In theory, they could use the electricity to drive their own operations and sell the remainder to the public grid.  But the latter prices are controlled by law, and set at a level that forces private power companies to lose money.  …oh, well.

 

China: infrastructure spending will boost Western growth. We’ll help.

CIC investing in Western infrastructure

Today’s ft.com contains a commentary from Lou Jiwei, chairman of the mainland sovereign wealth fund, China Investment Corporation.  In it, Mr. Lou argues that global economic recovery can’t come from developing countries alone.  Developed nations must expand as well.  To help this latter effort along, the CIC is preparing to participate in Western infrastructure projects as  “investor, developer, operator and contractor.”  Projects could be in “energy, water, transport, digital communication, waste disposal…”  The CIC’s first stop will be the UK.

In a companion article, the FT says that a proposed high-speed rail line between London and northern England has caught China’s eye.

Why?

Why do this?  …and why the UK, of all places?  After all, it isn’t that long ago that China was demonizing the UK for invading China in the mid-eighteenth century to force the mainland to accept opium imports from British colony, India.

I can see several reasons for the CIC proposal, aside from the salutory effect infrastructure spending may have on Western economies:

–infrastructure projects can provide higher returns for China’s massive foreign currency holdings than government bonds will.  China is such a super-size investor that liquidity may not be that different,

–successful infrastructure upgrades can buy public goodwill and political influence,

–reversal of the “normal” flow of equity investment funds from developed to developing is a sign of China’s increasing importance in the world economy,

–Chinese industrial and service companies may have a greater chance to win contracts for such projects than they might otherwise,

–the UK is small enough that Chinese spending can have a significant, highly visible impact,

–the UK may be a showpiece.  It could provide entrée into the Eurozone and ultimately to the US,

–the UK is apparently willing to accept Chinese money and not raise spurious “national security” objections to prevent mainland investment.

investment considerations

CIC-backed projects could provide a mild–mostly psychological–boost to the UK.  It’s possible that private investors may be allowed to invest side-by-side with the CIC, as well.

Better transport… alternatives could take business away from direct competitors.  Better rail links, for example, might be bad for commuter airlines or for delivery trucks.

On the other hand, better overall infrastructure support could lure industrial or service businesses from elsewhere in the EU.

So far, however, we don’t have enough information to act on.