If only professors knew India?

Like all developing countries, India needs to develop its infrastructure which will cost $4.5 trillion by 2040. But how? The government "faces two challenges: an incentive problem and a budget problem," wrote Prof R Hausmann. "The incentive problem stems from the fact that when governments procure a road project, the winning contractor may cut corners, because he gets to pocket the savings.The budget problem stems from the fact that there is only so much that a government can safely borrow, because it will have to raise future taxes to pay the debt." So, the solution would be to give the project to a private company which will build a high class road, to save money on maintenance, and then collect toll for a number of years, known as the Build-Operate-Transfer, or BOT, system. The problem with this is that future toll collections are unpredictable so banks charge a high rate of interest on loans making the projects much more expensive. But India is unique. Here auctions were held so that companies could bid how much they would pay the government to be awarded a particular project. Companies borrowed heavily to pay for the projects and when economic growth became weaker they were unable to repay their loans, leading to an accumulation of non-performing assets in banks. In 2014, the National Highways Authority allowed "deferment of payments" "spread over the next 12 years" but did not cancel the debt. The government has an insatiable appetite for taxes to pay for all the social schemes it announces on whim. Jaypee Group built the Buddh International Circuit for Formula 1 races along the Delhi-Agra highway but after 3 years races have stopped because the government demanded back taxes at 40%, with interest. The Supreme Court upheld the extortionate demand and Formula 1 stopped coming to India, leaving Jaypee with huge bad loans at banks. With so much bad debt on their books banks stopped lending for new projects so the government is to spend over Rs 2 trillion of taxpayer money to recapitalize banks. So, what is the solution? "The best option may be for the government to build the road and sell the concession for operation and maintenance. This allows the government to cash out and reinvest resources in pre-investment and EPC (engineering, procurement and construction)...," wrote Hausmann. That is exactly what the government has done by selling some roads to an Australian company, Macquarie group on TOT, which means 'Toll, Operate, Transfer', for Rs 96.81 billion. What if the company wants to raise toll levels for falling profits or if the government is unhappy with the amount of tax being paid? The fun is yet to come.