Building a road to disaster? - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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26 JULY 2010


Recently we have heard the government give us this wonderful view of an India where over USD 1 trillion, or Rs 50,00,000 crore will be spent on infrastructure projects.

At a conference I attended in New Delhi in March, 2010, I heard every Union Minister who mattered speak about what his department and secretariat plan to do on the infrastructure side. The program was inaugurated by Prime Minister Manmohan Singh, overseen by Deputy Planning Commissioner Montek Singh Ahluwalia, with a glimpse from the Finance Minister on how it all was to be funded.

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Indian was open for business and meant business.
The USD 1 trillion spend was our answer to the China infrastructure miracle.
Jai Ho!

Slippery oil
The infrastructure plan itself is, as such, not a plan in the grand sense of the word.
Every department had its plans to spend - that was true.
But was anyone thinking about which department really needed more money? Or which department deserved more money in the overall "where is India heading" sense?

For example, there was no discussion on whether all the road building of 20 km / day being adopted with great gusto would ever be matched with the mundane - but eventually critical - need for more petrol to fuel the cars that will be driven on the roads.

I have not heard the Ministry of Petroleum raise any objections or concerns on this ambitious road-building plan. But here are some numbers with some quick assumptions. I am sure the members of the Planning Commission - accused of sitting on armchairs by the road builders - have more hard data than my 5-minute check list, but here goes:

Table 1: Following the US model of building roadways
kms driven on average each year by an Indian car 10,000
Fuel efficiency of a typical city-driven car (km/litre) 10
litres needed every year for each car 1,000
number of new cars every year (millions) 1
litres required for the new cars (millions) 1,000
litres in 1 barrel of oil 159
barrels of oil required (millions) 6.3
price per barrel, refined and landed in India, USD 85
new money spent every year on oil for cars (USD mn) 535

A car in India on average is probably used for about 10,000 kms of driving every year.
Assuming that a typical car delivers 10 kms for 1 litre of petrol, this suggests the car needs 1,000 litres every year.

And assume that, because the roads are being built and car ownership is being encouraged, Indians buy 1 million additional cars every year, that means we need 1 billion litres of extra petrol every year to fuel those extra 1 million new cars.
Since there are about 159 litres in a barrel of oil, this works out to about 50 million barrels of refined and finished petrol - new demand created every year.

A barrel of crude oil sells for USD 75, add transportation and refining costs and we get to maybe USD 85 per barrel.
So we need to buy USD 535 million worth of crude oil for the extra 1 million cars.

But what if the price of crude oil increases? Not so long ago, we saw crude oil prices at USD 150 per barrel. Maybe those high oil prices will come back to haunt us in the next few years.

Building a USA, or a Europe
Should the road minister be working with the railway minister on a plan to build railway tracks in between the roads that can allow trains to ferry passengers and cars? Should there be a system that allows a person going from Bombay to Pune to reach a parking lot at a train station at the start of the Bombay expressway, park his car, alight a express train to Pune, get off at the other end, rent a car or taxi, finish his work and - on the reverse commute - pick up his car and head home?

Is a plan to link the two growing metropolitan regions like Bombay and Pune feasible?

I don't know but maybe the Ministers with all their information gathering powers could figure that out.

The point is, when a build-out for infrastructure is being built out, shouldn't this be the main area of discussion? Are we building a country like USA where the automobile is the centre of all activity or are we building a Europe where public transportation is encouraged? People do own cars in Europe, but they use them a lot less than in the US.

Given the fact that we are already importing over 70% of our energy needs, which model should we be working towards?

China has, in some sense, made a mistake. They have gone the US route of building roads to encourage the production and sale of cars. China has now surpassed the US as the largest consumer of energy in the world due to its car policy and also due to its reliance on manufacturing.

Don't get me wrong - our roads are abysmal and we definitely need roads. But, don't we also need a viable public transportation system?

Building roads and bridges in every city for cars will only lead to the purchase of more cars - adding to traffic, pollution, and to our vulnerability to swings in oil prices.

No, this is not an argument to head back to the bullock cart age. It is a doubt about the true future costs of what we are doing today.

Neither the armchair economists in the Planning Commission nor the Ministers running the various sectors may be really planning for the future. They seem to be more focused on how to get a quick solution for the pathetic state of India's infrastructure.
To show that India can spend.
To show that India can "catch up" with China and USA.

Ten years from now, those highways they are building and financing with our savings will be crowded and they will again dig up those roads to build a high-speed railway line. Just as they are busy digging up roads in New Delhi, Bombay, and Bangalore to build rail links to decongest the roads.

There is no 20 year vision.
There is no real planning.
Each ministry has got their mantra: build and improve infrastructure.
So, each ministry is doing it.
After all, which Minister in his right mind would say "I suggest we build less roads or airports, and wish to allocate my money to the railways ministry"?

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Letting Goldman run the book
A small incident at the Conference.
The entrance was a mess.
Passes were to be mailed to us, but never got to us.
So we stood there in the first line to ensure that we were invited.
After having that cross checked and verified, we had to move to another line to pick up the actual entry badge.
In that chaos, most of us missed the inaugural speech of the Prime Minister. We were shunted into a side room to watch him on a large TV screen and then allowed access to the main hall once he had left.

But, in the melee outside, a point worth noting.
While I was waiting in line - like many others - the book in which we had to sign was picked up from the table, taken to a group standing on the side, duly signed by this group, they their badges and were whisked in to the hear the PM speak.
Not the kind of person to keep quiet, I asked one of the Indian gentlemen helping in this book-building process: Which firm are you with?

"Goldman", he replied.

"Aha", I said, "not only do you run the book, you also get it delivered to you."
What a show of power.


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Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt. Ltd and Quantum Asset Management Company Pvt. Ltd. The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site. To write to Ajit, please click here.


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30 Responses to "Building a road to disaster?"

Kannan

Aug 24, 2010

Dear Ajit,

Well said, instead of mindlessly building roads, Govt, should try enhance and harness the existing infrastructure - using Rail and Sea routs for goods transport can save lots of diesel that is burnt on Trucks. As Ajit rightly said, roads in the city and high ways are already being rebuilt with multilevel roads / metro tracks etc. - Hosur road in Bangalore was widended less than 10 years ago, again it is congested and the solution - elevated express highway over the existing road. What can be done after 10 years from now for this road ? Mera Bharath Mahan !!

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ramaraom3

Aug 1, 2010

what is the role of the "THINKTANK", if this kind of haphazard planning is resorted to by incompetent ministers and their babus? what is the much applauded primeminister`s role?where is the 2020 vision plan for transportation sector ROAD ,RAIL and inland waterway as well as coastal transportation? nothing moves in this country unless there is a public campaign! i second the thoughts of mr.dayal

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Jayant

Jul 30, 2010

Hi Ajit

You mention in your blog about using cheaper public transport like the railwys, but u know that is not practical as i am sure u like travelling in your car too.
Jayant P

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Lakshman Pardhanani

Jul 29, 2010

Dear Mr.Dayal,
I alresdy commented I think last week, about how India disappoints me. But here is a morsel of information that your readers may like to be reminded of: In England where I have spent most of my life, a project of the size that you describe for upgrading the roads would never get the nod unless all the implications upon other forms of transport and fuel consumption etc., were carefully loked into. If this has not been done in India,where we need to shepherd our resources with care, this would be very regrettable.
Shortermism exists in the UK and in the West,leaders including Obama have one eye on the polls(read my comment in the NYTimes to Maureen Dowd's article on blacks)but such a flagrant misapplication of resources can only happen in a corrupt and directionless country that India is threatening to become.
RE:Goldman Sachs: Are you surprised at your treatment?
We have become a ruthlessly material society,with an inferiority complex to match when it comes to dealing with foreigners and foreign firms. You must come to Goa sometime where I live, to see how our Indian gentry have been willing to prostitute themselves, by surrendering their self respect and large swathes of their land/property to people from the West who use them for purposes India cannot be proud of.





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Brij Kumar Singh

Jul 29, 2010

Dear sir
A very good analysis of the things to come.What we eed is far sighted planning as was done by Britishers and earstwhile rulers of Indian States. The examples are NEW DELHI and JAIPUR cities and buildings being President House,IMA & FRI DEHRADUN.An excellent public transportation system,coupled with withdrawl of Govt.vehicles alloted to big and small BABUS of Indian governance will make it work.The expresways being constructed will become as crowded as the current highways due to the future development being done along the future highways.The best example is Pilkhua township along DELHI-Moradabad toll road.
It is much better to invest in mass transportation system rather than individual transportation system.
LONG LIVE INDIA-MY MOTHER LAND

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S.K.DAMANI

Jul 28, 2010

Dear Mr. Ajit Dayal,
All your arguments are logical and correct. But than how will the 'babus' and their minister, build huge 'perosnal reserves", so that their next seven genrations would live a lavish life. Consider the amount they will make @ of today's "my pound of flesh"
Thanks

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Satyajeet Sharma

Jul 27, 2010

I think we all have to look this issue seriously,but why cant our young generation politician may read same,no one knows the future,if they start using these research would be helpful for .5% of generation,Thanks for bringing out a new dimension to this drastic problem..

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Ravindra Kumar

Jul 27, 2010

You are very right in your observations, but the problem is that the persons concerned have no concern for the country and/ or its future. They are concerned about their today.

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k balesan

Jul 27, 2010

the road to disaster has already been built. in the ministry of central and state govts. you can easily count the number of persons who really think of the future. others will never allow these handful of people to implement any good scheme. due to wrong policies and no application of mind, the future generation will suffer.

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Adi Daruwalla

Jul 27, 2010

Ajit Dayal is right, there is no "quick fix" solution to Indias Infrastructure problems. The planning is in place but the execution is downright poor. The execution with an efficiency of 99.9% is going to be the order of the day. 98% efficiency is not acceptable. India should take a page out of South Koreas infrastructure development. The ministers responsible should be shown South Koreas development and feel ashamed for blowing their trumpets after achieving little or bugger all. Target was 20kms of road for National highways per day, we are at just about 13kms of road per day. (We dont know if that is also true or not.)

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