India as the New Plutocracy

As India is on its way to becoming a plutocracy, what implications does it have for investors in India?

The Oxford Dictionary defines the word “Plutocracy” as a society governed by the wealthy. Accordingly, the “plutocracy” label is usually attached to countries such as present day Russia or to societies such as ancient Greece or the Republic of Venice in the 16th century. India is fast emerging as a heavyweight entrant of this club. Why do I say so and what implications does it have for investors? Let us focus on the “why” first.

Recently, the Asian Development Bank published a study (“India 2039 - an affluent society in one generation”) highlighting that that India has 50 billionaires who together control wealth equivalent to 20% of gross domestic product and 80% of stock market capitalisation. Concentration of immense wealth (and the power that goes with it) in the hands of a select few is one would think fairly commonsense criteria for entry into the plutocrats club.

Secondly, one of the features of the Indian stockmarket over the past four years has been the visibility and rising importance of realty, infrastructure and construction companies (loosely called “infrastructure” in this column). Infrastructure now constitutes nearly 20% of the BSE 500 by market cap, up from 13% five years ago. Whilst there are fundamentally sound reasons for this sector coming to fore, if there is one sector where politics and business works hand in glove to enrich each other, it is infrastructure. In our daily interactions with these companies and their financiers, we cannot but help notice how deeply embedded politicians and/or political power brokers have become in the Boardrooms of these companies.

Thirdly, there is the RIL-RNRL saga being played out in the full glare of the media. Leaving aside the vexed issue of which of the two companies is in the right, one cannot help being astonished by the sheer punch that each the Ambani brother packs in the corridors of power in Delhi. Add to that the sheer size of two Ambani empires (the Reliance companies in totality account for 14% of the BSE 100’s market cap and nearly 6% of the Indian economy) and one can safely say that we are looking at not just two of the wealthiest people who have ever lived anywhere in the world but also two of the most powerful people in India.

So if India is on its way to becoming a plutocracy, what implications does it have for investors in India? The first and obvious implication is that to be a large and successful investor in the long run, you have to have strong political connections. As a contact of ours in the Infrastructure sector says “apart from experience, political connections matter a lot in winning small to large infrastructure/ construction projects”.

Beyond winning contracts, political connections also give you powerful informational advantages as is evident from the successful “political consultancy” business that a friend of mine runs in Delhi – he specialises in helping investors stay on top of the latest thinking in high places on subjects such as the 3G licenses, Governmental infrastructure subsidies, Governmental spending plans, etc.

Secondly, if politicians are as important for investment success in India as I am making them out to be, it stands to reason that rather than being satisfied by a base fee they will want a cut of investment returns. So investors’ “carry” or upside assumptions need to be revisited accordingly.

Thirdly, since most politicians’ careers fluctuate, unless investors are able to associate themselves with politicians from across the political spectrum, their investment returns too will fluctuate in line with the fortunes of their political contacts.

Finally, to the extent that what I have described above is already part of the status quo but is not reflected in your investment strategy, you might want to dig deeper into the ownership of the subsidiaries of listed Indian companies. You might then find some very powerful non-businessmen holding large stakes in the subsidiaries of listed entities. To understand the true value of the listed entity, you could then knock off from it value of the powerful non-businessman’s sizeable minority stake in the subsidiary. If you were the person holding the regulatory keys to the biggest infrastructure contracts, I don’t think you would be attaching any sort of discount to the value of your stake in those projects. Astonishingly that is what many analysts assume when they attach attractive valuations to such infrastructure companies with undisclosed investors at the subsidiary level. So much for the efficient market hypothesis.

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Bandra Worli SeaLink

A month after the opening of the Bandra-Worli Sea Link(BWSL), one of my colleagues got a chance to travel on BWSL, knowing the fact that he stays and works in South Mumbai and not of those adventurous types. He had a proud feeling in his smile and one could notice the chuckle in his eyes as he said, ‘Yesterday I travelled on Bandra Worli SeaLink’. What is so exceptional about the BWSL, I wonder.

Main Link cost: Rs 750 crore Total cost: Rs 1,634 crore Initial cost for main link: Rs 434 crore Costs rose because fishermen complained their livelihood was being disturbed. Normally costs escalations in India range between 10-15%. But this one was exceptional project hence 30-40%.

The initial deadline was planned for December 2004 (later revised to December 2007 & December 2008) while Bridge completed April 21, 2009. All allied work completed on May 31, 2009 Delays caused by fisherfolk protests and payment disputes. Still only half of it is in operation. The other half is scheduled in 1st Quarter 2010. Going by their track record, it seems a little difficult to complete the structure on time.

It takes 35 to 38 minutes to go the 7.7-km distance between Mahim flyover and Love Grove Junction, Worli. The builders claim that travelling the 4.7-km main link will take just 6 minutes. On first day of its opening, the time took via Bandra Worli Sea-Link was an hour.

The famous Golden Gateway Bridge of San Francisco was stretched over two pillars in 1937 with length of three kilometers. It stands tall serving the purpose with its original design and colour after seventy years.

I wonder what pride we are trying to project and what we are trying to prove. That we are lethargic, we are incapable to perform our duties and activities diligently in the stipulated time. Any infrastructure project, it is blamed on the local revolt of the public, which most of the times is aroused by the local politicians. They are not ready for the change. Nobody is, we have to equip and train our mind to accept changes. These changes are happening for our betterment.

Some of you may be wondering, Why was this Bridge built et al. Especially after you read the Mumbai Mirror regularly. There was a big jam on BWSL on its opening day on 1st July 2009. One reason it was all brouhaha without substance. It failed to serve the purpose for which it is truly built. Then there are confusions and misconceptions and illiterate Indians (illiterate as most of us lack the civic sense).

As expected after completion, media and architect fraternity were lambasting the builders over the planning of the bridge. The way the bridge ends on the Worli side. The vehicle flow had to be routed through a long side to reach the main road instead of hitting it straight at the completion. The calm and serene atmosphere of Worli was destroyed as claimed by its residents due to Sea-Link. The security issues enveloped Sea-Link. The authority and the security issue was divided between State and Centre, Police and Navy. The toll collection system is not fool proof. It robs people of the time and adds to their frustration. The lovers schmoozing on the Bandra Reclamation are fumed for rummaging their place of romance as there is little space in this city to make love even.

All the leading news and societal columnists have lambasted their tryst with the Sea-Link. Every second day, the State authorities are implementing new and newer rules to ensure the effectiveness of this mammoth structure. They made it three lane for morning traffic from Bandra to Worli and vice-versa for the evening traffic. They couldn’t plan it in advance. The purpose of the Bridge was not to create another feature in the Mumbai Darshan List but to ease the traffic movement and the vehicular flow and to connect the Northern part to Southern part of Mumbai. Generally infrastructure projects should go and this one must have gone through intense detailing but still has gone horribly wrong.

Take a look at the above picture. It defines the brilliance of the work. It was constructed based on the assumption and study that, “During peak hours, around 7,000 to 8,000 cars are expected to use the sea link per hour”. One can imagine the things I have said above. We have built a marvelous Bridge and expect one car to exit every second. You have created space and utility on air and sea but it is of little help looking at the space available on mainland. There is not enough space on mainland to adjust one car exiting every second from BWSL. Therefore it keeps on building and develops a clog and stretches till the other side of BWSL.

My problem is why cant we plan a little too much?
They could have circled the Bridge around Worli to allow it to assimilate with the road and created two or three exits by building another flyover on the Worli end instead of opening the bridge perpendicular to the Worli front. Is that a rocket science or a stellar of an idea idea? Certainly not, pure common sense.

In Bandra the bridge assimilates with the road smoothly as if Reclamation was part of BWSL. But then the problem does not end there. Residents of Bandra are miffed at the way the approach to Lilavati area has been closed. The toll plaza has been created on that side. Toll is one of the most important sources of income for an infrastructure project especially in the developed economies. Wherein the developer recovers the cost from the toll collection.

The concept of toll started somewhere in 7th BC. But I feel creating toll within the cities is not a healthy idea. On highways such kind of concept is really revolutionary especially for Indians. But in clogged cities of India, the toll will only add to the woes of the commuters. In cities like Mumbai globally, the road tax, vehicle tax, parking tax, everything related to your mobility is taxed that too phenomenally high rates than the rest of the country. So the funds for the infrastructure should come out of those proceeds and not from the toll. On BWSL, it takes 30 seconds for manual payment, 20 seconds for swipe card (for monthly passes) and 10 to 12 seconds for on-board-unit electronic payment.

Critics may argue why punish all the public who may not use the Bandra Worli SeaLink. Well then those must have some other bridge/flyover built for their use in some other part of the city. We have to pay for enjoying the metropolitan life that we have chosen too.