Thillai Rajan & Nandita Vadali: How politics shapes infrastructure

Contrary to common perception, investing in states that have the same ruling party or ally at the Centre does not necessarily guarantee that PPP projects will be completed on time and within budget

Investments in large projects are inextricably linked to a favourable political climate. This is particularly the case for infrastructure projects, where private investors need to depend on the government for clearances and approvals, land acquisition and so on. But do political factors really affect infrastructure projects? How?

To answer these questions, we analysed a data set of 249 National Highway road public-private partnership (PPP) projects of which 77 were completed. Results showed that after accounting for other factors, political factors are indeed strongly associated with the success of PPP projects, the modus operandus of choice for infrastructure development over the past decade. But, surprisingly, not always in the way we thought it would.

An interesting feature of these projects is the substantial divergence in cost and time overruns. For example, in our data set of projects, the time overrun varied from (-)29.73 per cent to 133.33 per cent, indicating that some projects were completed ahead of schedule. Similarly, the cost overrun varied from (-)29.58 per cent to 155.40 per cent, indicating that some projects were completed within or below budget.

Our findings showed that political factors impact time overruns more than cost overruns. Cost overruns in PPPs can often lead to monetary gains for the private sector at the cost of the taxpayer, but the political set-up seems to be equipped to minimise such overruns. We are not saying that cost overruns do not occur in PPP projects, but that political factors seem to play a limited role. Our results also indicate that time overruns need not lead to cost overruns.

We considered two factors that reflected the political environment. The first was whether the ruling parties in the state government (SG) and the central government (CG) were the same or part of an alliance or whether they were different. The second was whether there has been a change in the SG during the development of the project.

 

The popular notion is that it is better to have the same party or alliance at the Centre and the state as far as investment is concerned. The average project cost in states where the SG is part of the political alliance of the CG is about 12 per cent more than that of the states where the SG and the CG belong to different political parties (Figure 1). This is easy to explain - policy congruence at the state and Centre gives private investors a lot of comfort so they are willing to invest higher amounts. However, when the SG-CG combination was the same, the unit project cost, i.e., the estimated cost to complete one lane-km, was lower by 4.3 units compared to projects for which the SG-CG was different.

But, like they say, what is gained on the swings is lost on the roundabouts. The same SG-CG combination does not seem to improve timeliness of execution. We found that when the SG-CG combination was different, the time overrun was significantly lower. An example of this is the Bijapur-Hungund project in Karnataka, which involved widening a 97-km stretch and was to be complete in 30 months, by March 2013. The state government from 2010-2013 was led by the Bharatiya Janata Party, whereas the government at the Centre was led by the Congress. The project was finished 11 months ahead of schedule. Table 1 lists projects that had faster development when the state and central governments were different.

Our results indicate that a bit of friction in governance can actually be helpful. As implausible as it may sound, to quote Sherlock Holmes, "whatever remains, however improbable, must be the truth." When both the SG-CG are from the same party or alliance, lethargy seems to set in, whereas when both of them are different it creates an environment of productive tension. Figure 2 shows the average estimated unit time for projects where the SG-CG was the same was higher by 8.5 per cent compared to projects where the SG-CG was different.

Political changes during project development, however, are often associated with significant time over-runs (Figure 3). One example is the project to strengthen and four-lane the 79 km Meerut-Muzaffarnagar stretch of the National Highway in Uttar Pradesh. The project was to be completed by March 2009. But, in the Assembly elections in May 2007, the Samajwadi Party was replaced by the Bahujan Samaj Party. Though the revenue generation started in April 2011, the project was completed in August 2011, a 29-month delay. This was considerably higher than the delays seen in similar projects where there were no changes in government. Table 2 lists projects that experienced delays because of a change in state government.

Our results show that although similar political combinations in the state and Centre help attract investment and implement cost-effective projects, political differences seem to facilitate faster implementation. Thus, different political set-ups in the Centre and state need not always result in delays in clearances and approvals. A change in the state government is strongly associated with time overruns, but not cost overruns. A change of state government during project development leads to time overruns compared to projects that are completed before the next elections. In other words, governments should focus on implementing projects in its initial years to avoid delays.

Thillai Rajan is Associate Professor, Department of Management Studies IIT Madras, email: thillair@iitm.ac.in;
Nandita Vadali is a graduate in infrastructure engineering, IIT Madras