Roads to Prosperity

Stephen DeAngelis

February 15, 2010

Roads have enjoyed an important metaphorical (as well as actual) place in man’s history. Roads characterized the greatness of the Roman Empire (e.g., “all roads lead to Rome”). Roads remind us that we have important life choices to make (e.g., “There are only two mistakes one can make along the road to truth; not going all the way, and not starting.” — Buddha). And roads have almost universally represented progress (e.g., “All you have to do is look straight and see the road, and when you see it, don’t sit looking at it – walk.” — Ayn Rand). Even the Munchkins knew that if you wanted to get to the Emerald City, you had to “follow the yellow brick road.”

Although roads have played such a critical role in the history of humankind, they haven’t always been welcomed additions to the landscape. Environmentalists continually protest the construction of logging roads cut into old growth forests and anthropologists rant against roads that cut ever deeper into tropical forests threatening to disrupt the lives of indigenous tribes. Even when a road is seen as an important milestone to progress (another metaphor taken from the importance of roads), not everyone is happy about it. One such case is happening in Indonesia [“The Faceoff over Land in Rural Indonesia,” by Daniel Ten Kate and Achmad Sukarsono, BusinessWeek, 1 February 2010 print issue]. Kate and Sukarsono report:

“Construction on the six-lane highway meant to span Java, Indonesia’s most populous island, comes to an end 200 yards from Nur Salim’s rice paddy. While bulldozers claw through woodland and level the red earth nearby, they can’t go farther until Salim agrees to sell a patch of land the size of a tennis court. ‘We’re going to fight to the end,’ Salim says in the wooden, single-story home where he and his wife raised their five daughters. ‘We have no deadline.’ The dispute highlights the obstacles facing President Susilo Bambang Yudhoyono as he tries to fix the country’s roads, ports, and railways.”

While campaigning for office, President Yudhoyono “pledged to double spending on infrastructure, to $140 billion over the next five years.” One could argue that he had some catching up to do. “During Yudhoyono’s first five-year term, Indonesia built only 78 miles of expressways.” The president would like to double Indonesia’s economic growth rate, but he understands that to accomplish that he needs to improve the country’s infrastructure. The Trans-Java Expressway was supposed to speed progress, but Kate and Sukarsono claim it “might as well be called the Trans-Java Speedbump.” They explain:

“The project began in 1988, but the government has yet to obtain more than half the land for the highway, which will stretch some 740 miles. Only about a quarter of it has been built, in more than 20 sections separated by miles of potholed, two-lane roads. The problem isn’t just with highways. Jakarta’s Tanjung Priok port, the largest of the country’s 2,000-plus seaports, will soon reach capacity. Although an expansion is due by 2013, that will do little to ease congestion once goods leave the quays. Container trucks often need a day to move the seven miles to the nearest highway. The railway from Bandung, Java’s third-largest city, stops a half-mile short of the main port, so goods must be transferred to trucks to make a train connection. As a result, produce from the Indonesian island of Borneo can cost more than double that from China, says Zaldy Ilham Masita, chairman of the Indonesia Logistics Assn. ‘Companies come here because they see a huge market, but they don’t intend to make Indonesia a production center because of the high logistics costs,’ Masita says.”

Since a portion of Enterra Solutions’ business involves helping makes ports and intermodal transportation more efficient and cost effective, I know how important getting the infrastructure right can be. It’s hard to imagine a government starting a major highway program over 20 years ago without having a way to gain title to the necessary right of ways. Although I understand Mr. Salim’s personal desire to get a good deal for his land, I find it hard to believe that a fair settlement can’t be reached with the government. An improvement in the lives of millions of people depends on the completion of the project. Kate and Sukarsono continue:

“Plenty of companies want to help. Siemens and Alstom are interested in building a $200 million rail link from central Jakarta to its airport. General Electric sees ‘huge potential’ for its power plants, locomotives, jet engines, and more, says David Utama, GE’s Indonesia head. Potential doesn’t matter when you can’t build. A 1961 law allows the president to seize land from those who refuse to sell, but no president has done that. ‘Can you imagine the president revoking the land of a poor owner?’ asks Frans Sunito, president director of Jasa Marga, which is building the section of highway near Salim’s home. A proposed law would shift the onus of seizures to the Public Works Ministry. While owners could appeal the ministry’s decision, the land would be immediately transferred to the government. The measure would force Salim to sell—which he says he would do for some $38 per square meter. That’s about 15% higher than his neighbors received, so officials are reluctant to make the deal.”

My first inclination is to say, “Pay the man.” I’m sure the government is thinking, however, that doing so automatically increases the cost of finishing the project by millions of dollars — money it doesn’t have. The fact that so many companies want to help is a good sign. The Trans-Java Expressway (if it’s ever completed) could be the cornerstone of greatly improved transportation system in Indonesia. Working together, the government and the private sector could probably speed completion along. That is what India hopes to do as it tackles the improvement of its highway system [“Indian Road Plan Gathers Funding,” by Amol Sharma, Wall Street Journal, 22 January 2010]. Sharma reports:

“India’s highways minister expects $5 billion in private capital to flow into the country’s road projects by June, but said his ambitious plans are running several months behind schedule. Private-equity funds, global investment banks and pension funds have expressed interest in providing financing for India’s road projects, said Kamal Nath, minister of road transport and highways, who embarked last year on a global roadshow to court investors. ‘Money is the least of my headaches,’ Mr. Nath said in an interview. ‘India is a good investment destination and roads are a good investment.’ Mr. Nath is pushing a massive road-building program that he says will require $70 billion in financing over the next several years. He is targeting $40 billion to $45 billion in private-sector capital, one-third of which would come from foreign investors.”

In countries like India and Indonesia where the potential for economic growth is enormous, attracting private capital to help build infrastructure is a viable strategy. India’s infrastructure certainly needs a facelift. Sharma continues:

“India’s woeful road infrastructure is a drag on national productivity. In cities such as Mumbai, New Delhi and Bangalore, commuters often spend hours to go short distances on traffic-clogged roads. Key arteries are too narrow, and bridges and expressways too few. The booming auto sector is making matters worse, adding nearly 10 million vehicles to the nation’s roads last year alone. In rural areas, crumbling one-lane roads make it difficult to get agricultural products to market. Mr. Nath’s goal is to build 4,350 miles of roads per year, which means speeding up the current pace of construction 10-fold, to 12.4 miles a day. By June, he hopes that $20 billion in projects, covering 6,835 miles, will be out for bid to road developers. So far this year, about 2,485 miles of projects have been auctioned, he said.”

No one could accuse Mr. Nath of not being ambitious. One can almost sense the urgency he feels. His frustrations undoubtedly increased as investors grew wary as a result of the current recession. To ease their concerns, “he says he changed policies to make it easier for them to exit investments and for groups of investors to bid without violating conflict-of-interest rules.” Another constant frustration for Mr. Nath, and a concern for investors, is the fact the Indian government has been unable to acquire land for the road projects as quickly as it would like.

“Mr. Nath said the problem is mostly ‘procedural,’ and says he can bring the average acquisition time down to eight months from 18 months. Mr. Nath says private-equity firms are interested in backing road developers and construction firms, while longer-term investors like pension funds will opt for annuity programs where they make their money back from tolls over time. ‘There’s no risk, because in India we’re not short of traffic,’ he said. For the balance of the financing, Mr. Nath expects about $5 billion to come from the World Bank over two years. He is also considering floating foreign-exchange infrastructure bonds. Some of the financing will come directly from the Highways Ministry, whose budget increased 23% last year to $4 billion.”

Although the Indian government is expected to undergo some “belt tightening” this year as a result of global economic conditions, Mr. Nath doesn’t anticipate his budget being cut. “This is an economic stimulus,” he said. “We’re creating economic activity in rural areas.” Impoverished Indians in rural areas are counting on Mr. Nath’s predictions of economic growth to come true [“New highway stirs changes and aspirations in Indian villages,” by Rama Lakshmi, Washington Post, 28 January 2010]. Lakshmi begins his report in Karori Village:

“The old, potholed road was a source of endless traffic jams and accidents. It did not have a median or lights. Trucks, tractors and camels frequently collided at night. Like most interstates in India, the road that ran through this village was characterized by chaos and cacophony. On both sides, vendors and laborers congregated at fix-it shops, while educated villagers read newspapers to the less fortunate, sipping hot tea and pontificating on politics. The atmosphere resembled a town square. Last year, though, the road was replaced. In came a four-lane, 130-mile expressway that ran between the cities of Jaipur and Agra and cut the drive time between the two in half. With its lights, median and bright-green signs, the expressway has changed the pace of life for those who gather along it and stirred aspirations in the sleepy villages and small towns nearby. In many ways, the new road is a shining emblem of India’s efforts to create economic momentum by upgrading its infrastructure. In an Eisenhower-like mission, the road transport and highway minister, Kamal Nath, recently announced that he wants to add 12 miles of highway across India every day beginning in April. The biggest hole in the country’s economic growth, he said, is a lack of good highways that can bring farms and factories closer.”

With new roads, local residents are seeing possibilities that seemed impossible in the past. Some residents hope that new factories will be attracted to rural areas because of the highway. Factories mean jobs and jobs mean a better life. Some changes are already taking place. Lakshmi continues:

“Thanks to better access because of the road, a new engineering college opened last August in the town of Dausa. Waiting for a bus outside the school to take him home, 20-year-old Sudha Agarwal said it has ‘become easy for girls like me to get an engineering degree now, because the new college is just one hour away from my village.’ Her parents had agreed readily, she said. Farmers from 150 villages will soon be able to take their vegetables directly to a new tomato trading center, cutting out expensive middlemen.”

As with any change, however, not everyone is pleased with the new highway. Those whose old routines have been disrupted are not happy.

“The speeding traffic has driven out the hawkers who dotted both sides selling nuts, fruit, freshly cut coconut, cucumbers and radishes. ‘Earlier, we had a small road, and there were constant jams. But that helped hawkers. People got bored waiting in their vehicles and bought things to munch,’ said Bhure Lal, 29, a groundnut trader who lay in the winter sun atop jute sacks of nuts near the expressway. ‘The highway may be good for speed, but it has destroyed many small livelihoods.'”

Knowing how industrious, intelligent, and innovative Indian people can be, I’m guessing that those who have been displaced will quickly adjust to their new circumstances. Lakshmi reports, however, that some things never seem to change.

“The old ‘anything-goes’ lifestyle stubbornly refuses to adjust to all the new rules of the road. On a recent day, a tractor appeared heading the wrong direction, and the speeding traffic screeched and swirled around to make way. Villagers made death-defying sprints back and forth across the highway, chasing their goats and children. ‘The traffic moves too fast now. People used to fracture their limbs in the accidents earlier, but now . . . an accident means death,’ said Ramkishan Sharma, 56-year-old tea shop owner. ‘We want the freedom to cross by foot to reach the other side whenever needed.’ Villagers have broken the median at many spots so they can cut across on motorcycles. Motorists take short detours on village routes to avoid the toll plaza. In a concession to the old ways, the highway has cattle-crossing underpasses and lanes for slow-moving camel carts. Managing the new Indian highway has perhaps been as challenging as building it. Brahm Dutt Kaushik, a manager of the Malaysian company that built and manages the highway, maintains a fat file of police complaints against villagers accused of stealing the new aluminum highway signboards, solar-paneled emergency phone boxes and strips of pedestrian railing. ‘They sell these as scrap in the local market,’ he said. ‘It has become a nuisance.’ But businessmen in the handicrafts town of Sikandra, known for stone-carving, say the new road will have a positive effect on development, tourism and commerce. ‘Big people will come on this highway and see our handicrafts now,’ said Hiralal Saini, 35, who sells sandstone-carved gazebos, lamps and garden accessories, which he exports to the United States and Belgium. ‘When a big road comes up, bigger things follow.'”

India will eventually fall into a routine as the highway system is completed. I predict that one day the new system will be as historically important for India as the Eisenhower interstate system has been for the United States. India should study the U.S. system and draw lessons from it. If India’s system is constructed correctly, the highway system should be accompanied by mass transit and electric transmission lines that share the same right of ways. The system should be built with the future in mind. It should improve the quality of peoples’ lives and not simply add to the congestion and pollution that are too often the companions of growth. Of course, predicting the future is not for the faint of heart. The late business guru Peter Drucker, using a road analogy, once said, “Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.” The only thing we know for sure is that infrastructure is important for sustained economic development.