Judging the ability of management to influence policy

Policy, and ways of changing policy, are especially important in the infrastructure space. Since infra directly affects almost everything except perhaps FMCG and pharma, this is a vast chunk of the economy

India's licence raj is uneven in scope and impact. Policy in some industries is consistent. It might not be good, but the operating environment doesn't change randomly. In other industries, policy changes at the drop of a hat.

Companies in the space with fungible policy have to manage arbitrary changes in environment and, not unnaturally, they develop mechanisms for influencing such changes. This involves getting close to the politicians and bureaucrats who matter.

This is perhaps the most important difference between investing in the First World and in the Second World (the countries of the former Soviet bloc), and the Third World. While companies try to influence policy is prevalent in all three 'Worlds', the policy making is more opaque and more liable to abuse in the Second World and the Third World.

Corporates aren't saints. As one titan of industry declared, decades ago, "I am not Mother Teresa". When a company manages to develop leverage with the babu-neta nexus, it tries to change the operating environment in ways to maximise its own profits.

Sometimes, that leads to policy changes burdening consumers, or damage the environment or cripple competition. When the manipulation is egregious, there is controversy, protests and sometimes litigation. Then, policy might change again, or get stuck in a 'Groundhog Day' loop.

Certain companies have become experts at "managing" the policy environment. This gives them a competitive advantage. It also drags them into a controversy every so often. This ability to manage the policy environment smoothly must be factored in when taking investment decisions. It is one skill to be considered in the qualitative assessment of management quality.

Policy, and ways of changing policy, are especially important in the infrastructure space. Since infra directly affects almost everything except perhaps FMCG and pharmaceuticals, this is a vast chunk of the economy.

It is impossible to maintain a broadly diversified portfolio without significant exposure to infra-related sectors. So, there's no help for it; if you are going to take long-term positions, you need to take infra-exposure and that means you need to assess corporates' ability to influence policy.

Power, oil and gas, renewable energy, mining, metals, aviation, shipping, road networks, telecom, urban water, sewage and transport -that is a long list of sectors where companies with policy-management capability have a competitive edge. Then, there's financing, construction, and capital equipment, - all of which derive revenues from activity in infra. You cannot really stay out of all these areas and maintain a diversified portfolio.

I cannot think of any business in these sectors which have been consistently successful without developing an ability to influence babus and netas. Some do it more crudely than others but they all do it, by fair means or foul. As an investor, you must be able to judge how efficiently a company can do this.

The author is an equity and technical analyst