Learn From Experience
To understand why, look at the telecommunication sector. Although the bids for the cellular franchises (apart from the metros) were invited in January 1995 and the licenses awarded in December, it was only last week that one of the potentially strongest players, Birla AT&T Communications, holding the licences of Maharashtra and Gujarat was able to approach the market for funds. The reception has been tremendous and both the domestic and international debt offerings of the firm have reportedly been comfortably subscribed. Waiting to follow in the wings are several more cellular operators, including Tata Bell Canada and Reliance Telecom, all of whom are reasonably sanguine that they will be able to raise money without too much difficulty.
The reason why telecom companies are being welcomed by banks and other investors is because they are confident that a proper institutional framework has been put in place. The new telecom regulators decision to quash the department of telecommunications move to substantially hike the fixed to cellular tariff has been welcomed by players and investors alike. The finance ministrys decision to allow 50 per cent of the total project cost through foreign debt has also helped their financing.
Contrast this with other sectors like power and roads. In the power sector, spasmodic bursts of activity has not resulted in any significant increase in generation, despite the fact that it was the first sector to be opened up. Projects and their promoters are caught in an endless tangle between the state, the union government and their various clearance agencies as there is little clarity on critical issues, inlcuding returns. The road sector is no different despite yesterdays package of incentives, which includes the tax holidays promised in the budget. While all this may increase the investment in this potentially risky sector, there is much more that needs to be done to get projects to the position of financial closure. This starts from clearly defining the role of the National Highways Authority of India, which was set up to catalyse private sector investment in roads two years ago.
The assorted bureaucrats hoping to entice Americans to invest in core sector projects will do well to understand that unless a competitive framework and institutional safeguards are created, money is unlikely to flow into these sectors. The telecom experience should also show them that once these are put in place the funds will flow. Then such junkets at the taxpayers expense to woo foreign investors will no longer be necessary. It is a pity they have to fly half-way across the world to realise that.