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BW Businessworld

‘Cities Are Poverty Reduction Engines’

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The most eye catching thing in the World Bank India chief's room is not the M. F. Hussain that has been presented to the bank by the Ford Foundation but a stunning Kali "khagra" bought by it's present country director on a trip to West Bengal for a princely sum of Rs 30.

Roberto Zagha, the Brazilian chief of the bank dresses Indian, has a room filled with Indian artefacts and in some way seems "quintessentially" Indian. He says one needs "several lifetimes" to travel extensively in India.

Zagha is a strong believer that infrastructure does more to alleviate poverty than social schemes and that urbanisation is a great engine for poverty reduction. He spoke to BW's Anjuli Bhargava on what needs to be done.

Let's begin with the main ideas on infrastructure that you'd like to share….
In many countries of the world, infrastructure and reducing poverty are not seen as being the same thing. Even the World Bank made this mistake. In the 1990s the bank moved out of infrastructure because it was focused on poverty. But if you look at what eradicates poverty, it is inherently and quintessentially related with infrastructure. It is roads that help farmers sell their products, water for irrigation is critical, storage capacity is needed for farmers as is better transportation. If you want employment, you need power and factories. You need railways. So I think this dichotomy in people's minds that you need something for infrastructure and something else for reduction in poverty is a big mistake.

You are saying they are inextricably linked?
Not only that, if you are wealthy, you can manage without all this publicly-provided infrastructure. In Delhi, for instance, people have their own water through borewells and water tanks. If you have a large factory, you may have your own power generation. But the poor cannot afford all that. People think that infrastructure is for the rich and social programmes are for the poor. This is wrong.

China is one example where they have very effectively built infrastructure and this has led to poverty reduction across the country. Urban infrastructure, roads, highways, railroads — it is mind boggling. It has been investing $100 billion just in railways every year.

Where have they got this kind of money?
Domestic savings. Their savings are over 50 per cent of GDP. But for that matter India's savings are around 35 per cent of GDP. But converting this savings into real assets in India seems to take a lot of time. If you look at the railways, according to data from the Ministry of Plan Implementation there are huge delays in almost all projects. So in India, finding the financing is less of a problem than using the financing efficiently.

Infrastructure improvements in the urban areas would be pro-rich, wouldn't they?
Urbanisation is the most powerful engine for poverty reduction known to mankind. Look at Dhaka, Kolkata, Mumbai, Delhi. Every year, millions of people migrate to these cities but every year the number of poor remain the same. Poor people go to Dhaka, they remain poor for the first year or two but those who came before them find jobs in construction, retail, etc. Cities are a fantastic poverty reduction engine. There is no society in the world that has been able to reduce poverty without rates of urbanisation of 60-70 per cent.

Second, on financing of infrastructure, we find the rate of return on infrastructure in India very high (whenever we appraise any projects here). Whenever you have infrastructure lagging behind, the rates of return are very high. However, the financing of infrastructure in India is not independent or self-contained.

Why is the financing not self-contained?
Some bad habits have crept in. For example, regulators have sometimes not acted independently. In power, for instance, justified tariff increases for those who can afford to pay should have happened but have not taken place. Perhaps politics has come in the way and financing of projects has been too easy.











(Illustration: Champak Bhattacharjee)

What do you think of India's PPP (public-private partnership) programme?
When the Planning Commission five years ago proposed financing close to 30 per cent of its needs through PPP, I was not sure it would happen. But the target has been exceeded. In fact, India today runs the largest PPP programme in the world. But PPPs are not an easy thing to manage. You can always expect that PPPs will be renegotiated. It happened with the Noida bridge here but this happens all over the world.

It works well in roads, power and water. The World Bank has a PPP project in Karnataka with 24x7 water in four cities where it is clear that people are happy to pay for good quality water.

PPP is now coming under criticism because it is felt that bidders bid unrealistically to win contracts and then hope to get conditions changed to suit themselves post bidding….
This happens everywhere — in Australia, Brazil, China, Mexico. In Mexico the roads were privatised through PPP, then went back to the public sector because it is very hard to predict and forecasting is difficult. Worldwide, almost 70 per cent of the contracts are renegotiated. If you have a PPP, you should expect it to be renegotiated. Where India could improve is making the terms of the PPP far more transparent.

Which is the biggest area of worry for India?
Power. India is behind expectations as far as progress on power goes — 40 per cent of Indian villages still remain without electricity. India has put nuclear as one of its possible power generation resources but there is resistance to this. Countries like France meet 80 per cent of their power needs through nuclear power — it can be safe, cheap and environment friendly. In the short term, however, India will be dependent on thermal power produced with coal. Solar may happen some day but just now it is a small proportion and is expensive. Hydel has seen resistance both due to environmental reasons and due to relocation issues. But again it will not be the major source of power generation in India. Another problem is that people want the power but do not want to pay for it even if thay can afford it.

A second issue is roads. India has made considerable progress over the past ten years but the challenge remains daunting.

(This story was published in Businessworld Issue Dated 12-03-2012)