New study from SMU Cox Business School sheds light on Indias Infrastructure Financing Woes

SMU Cox Business School Professor of Finance Andrew Chen and co-author Jennifer Warren Kubik have proposed an innovative solution to improving Indias infrastructure that has significant implications for capital markets and development beyond the infrastructure project itself.

For India to continue growth on a sustainable path investment in infrastructure is critical. Infrastructure bottlenecks are seen as one of the leading obstacles for India in realising its economic growth potential, says the Study. Indian infrastructure development needs substantial financing. While Prime Minister Manmohan Singh estimates that a total of $320 billion would be needed for infrastructure development by 2012, Rajat Nag, managing director of the Asian Development Bank, suggest that $500 billion was needed.

Chen and Kubik suggest approaching this problem by initially raising capital through public offerings (IPOs) and securitisations globally for infrastructure projects. This approach, coupled with financial innovations, could help smooth the frictions which lay at the root of Indias infrastructure development problems, say the authors. The private sectors ability to attain efficiency in operations, management, and profitability has been needed for numerous financial and economic reasons in countries that are privatising public works assetsroadways, airports, and both power and water utilities.

Professor Chen coins the term plums problem in his study in concern with infrastructure projects. He states the plums story continues to repeat itself over and over in many an infrastructure project worldwide. According to Chen, the problem of plums arises when corporations bidding on a project have a greater knowledge about its value, the risks, and the inevitable costs in relation to the seller (government). With this privileged knowledge, the buyer (company) can easily take advantage of the situation.

Infrastructure being the foundation can lead to further economic development, increased standard of living, and enhanced participation in the global economy. India, therefore, would serve as a model country in adopting a modern approach to financing its agenda on infrastructure development, state the authors.

Andrew Chen is a Distinguished Professor of Finance at SMUs Cox School of Business. Chen is one of the most prolific finance authors. Over the 50-year period 1953 2002, based on the number of articles published in 72 finance journals, he ranks #11 in the world.

SMUs Cox School of Business based in Texas, United States offers BBA, full-time MBA, Professional MBA (PMBA), Executive MBA (EMBA), Master of Science in Management (MSM), and Executive Education. SMU Cox Business School has ties with India. School says 17 Indian nationals are currently enrolled on SMU Coxs full time MBA. The Indian School of Business (Hyderabad) is an academic partner of SMU Cox.