Rationally short-sighted

When property rights are uncertain, owners of long-lived assets will naturally want to get their profits out as soon as possible. That principle helps explain the latest corporate-political scandal in India.

In a recent report, the government’s auditors have described how the consortium in charge of the modernisation of the New Delhi airport, one of India’s more notable construction achievements since the Taj Mahal, got virtually free commercial land worth 10 times its equity. A levy from passengers was allowed to cover a substantial part of the project cost. Other bidders for the 60-year-long management contract weren’t told they could tax travellers. GMR Infrastructure, the Indian company that leads the consortium, has denied allegations of favouritism but its share price has slid 10 per cent since the audit note became public.

Such tales spark outrage in India over home-grown robber barons, spiritual descendents of the men who cornered much of the wealth in 19th-century America. This latest example of brazen corporate behaviour seems to fit the narrative.

It’s all scandalous, certainly, but consider how often a windfall from the Indian government turns into a corporate downfall. Enron had a power plant in western India expropriated. The licence of the cellular-phone service that Norway’s Telenor runs in India has been revoked. An inter-state road project in western India, supposed to begin collecting tolls soon, is still waiting to get the land for a stretch passing through a forest and a bird sanctuary. The delay raises the risk of a recast of project terms, Fitch Ratings notes.

The likelihood of a private company earning steady profits from a utility asset over the lifespan of 12 full-term governments in India is indeed very small. Less-well-known investors, like GMR, are placing a hefty discount on an uncertain future. No wonder they want their returns to be front-loaded.

Back in 2005, Singapore’s Changi Airport dropped out of the race to remake the New Delhi and Mumbai airports. At the time, it was criticised for being too timid. In hindsight, the city-state’s airport operator acted wisely. Without side payments from the government, the risks in doing this sort of business are unacceptably large. That’s the real outrage.