Traffic jam: India needs to improve its infrastructure to compete with China and attract international trade, but creating a new infrastructure organisation is not the way to do it.

India's government recently set up a special-purpose vehicle called the India Infrastructure Finance Company (IIFCL). This has a paid-up capital of Rs100m (1.3m [pounds sterling]), authorised capital of Rs10bn and a guaranteed borrowing limit of Rs100bn for the fiscal year 2005-06. It is free to borrow from multilateral lending agencies such as the World Bank and the Asian Development Bank. It can also raise external commercial borrowings.

This isn't the government's first attempt to tackle India's infrastructure problems. In 1997 it established the Infrastructure Development Finance Corporation (IDFC) to enhance credit provision for infrastructure projects and to extend long-term loans and guarantees that existing institutions could not provide. A decade before that, the Bank of India, UTI Bank and HDFC Bank promoted a joint venture called Infrastructure Leasing and Financial Services (ILFS). So there are now three financing companies, all promoted by the government, designed to do similar work.

When the IDFC was set up, no one adequately explained why this was necessary when the ILFS already existed. For some time both institutions even had the same chairman. Similarly, the IIFCL has been created without any explanation of its role in relation to the other two bodies. What special advantage it will have over them remains to be seen. Is it a political answer to general criticism from investors about India's infrastructural inadequacies?

According to the India Infrastructure Report, 5.5 per cent of India's GDP has been earmarked for infrastructure projects. It states that the total infrastructure requirement for the immediate future will be up to Rs4,500bn. But estimates suggest that the annual investment requirement may triple by 2007 from the current yearly outlay of Rs2,300bn. Chetan Ahya, Morgan Stanley's Mumbai-based chief economist, points out that China spent 20 per cent of its GDP on power, construction, transport, telecoms and real estate in 2002.

Over 80 per cent of international freight originating in, or destined for, developing countries (by tonnage) is transported by sea. The importance of ports in infrastructure development cannot, therefore, be overemphasised. The centre of maritime trade has shifted from Europe to the Far East and is one day likely to reach India. "For 500 years it has moved steadily west," explains Martin Stopford, managing director of Clarksons Research. "In the 15th century Venice was at the crossroads of trade, followed by Antwerp and Amsterdam in the 16th and 17th centuries and London in the 18th. By the 19th century steamships were taking it to North America and in the 20th century the growth centre of maritime commerce took another giant step west across the Pacific to Japan and South Korea. In 2003 it shifted to China."

Before it moves on to India, the country must be ready--proper strategic planning is required to reduce delays on infrastructure projects. According to the United Nations Conference on Trade and Development (UNCTAD), freight payments as a percentage of total cost, insurance and freight import value stand at 6.21 per cent globally. In developed countries the average ratio is 5.21 per cent and in developing countries it is 8.33 per cent. For India it is estimated at 11 per cent. UNCTAD cites the growing importance of feeder operations in the absence of a viable transhipment/hub port along the maritime route, insufficient facilities and the low productivity of harbour terminal equipment as factor behind India's high logistics costs.

One of the reasons for the relative efficiency of China's ports has been its emphasis on integrating their development with that of their hinterlands. Numerous links via railways, roads and waterways have been provided. In contrast, the Rs26bn bridge that would provide an expressway between Mumbai and its new port at Nhava Sheva was on the drawing board for more than a decade before at last going up for tender. This case exemplifies the country's bureaucratic inertia.

More than 90 per cent of cargo destined for India's hinterlands is transported in containers. Containerisation has paved the way for inter-modal transport, and this requires the integrated development of all areas of infrastructure, rather than random concentrations. Mumbai's delayed bridge project is not an isolated case; it one of many missing links in Indian infrastructure planning. For example, the ports at Haldia and Kolkata still need proper transport links if goods are to reach inland states such as Jharkand. The south-west and north-east monsoons recently exposed the weaknesses of the infrastructure even within major cities such as Chennai and Bangalore.

Another problem is that political meddling often means that laudable plans, such as the desalination project in Tamil Nadu never come to fruition. Too many infrastructure schemes get caught in the crossfire of political rivalry. For example, progress on the highway programme initiated by the National Democratic Alliance slowed down when the United Progressive Alliance became the governing coalition after the 2004 election.

According to Morgan Stanley, it takes six to 12 weeks on average for goods to move between India and the US, compared with two to three weeks between China and the US. The World Economic Forum also ranks India behind Malaysia and Thailand on this measure. Anyone who starts a business in India requires ten permits, compared with six in China, and it takes three times longer to start a business in India on average than it does in China. The number of governmental clearances required are so high--a project by a foreign enterprise needs 43 at national level and 57 at regional level--that it causes enormous delays and creates opportunities for corruption.

All this evidence suggests that creating more infrastructure funding vehicles is not the answer. Instead, India should take the following measures:

* Draw up a clearly defined action plan to develop international competitiveness by reducing logistics costs.

* Identify the missing links in infrastructure planning.

* Reduce the lead time for trade and review the clearances system to speed up processing. A critical analysis would find areas that could be eliminated. China has unreservedly allowed foreign direct investment in infrastructure development, so India should think about the best balance for private-sector participation. It's vital that India improves the speed and consistency of approvals for foreign investment.

* Define sectoral policies and a regulatory framework that are conducive to private investment.

* Encourage the role of regional governments in infrastructure development to attract private funding. Central and regional governments must co-ordinate to ensure balanced growth.

* Establish monitoring agencies to analyse bottlenecks and pave the way for new policy guidelines.

A 2002 research report by the Confederation of Indian Industries and the World Bank called for improvements to India's customs and bankruptcy procedures, and to its land and labour laws, to help attract foreign investment. It also recommended reforms in the financial sector to improve access to, and reduce the cost of, capital. However many infrastructure bodies are created, India will be unable to attract the requisite resources unless the factors that guide money into a long-term infrastructure programme are addressed properly.

Sundaraju Srinath is an ACMA in Chennai.