National champions refer to private corporations that, although technically operating as private businesses, have been granted a dominant position in the national economy through government policies.
These corporations are expected to not only pursue profit but also to promote the nation’s interests, and the government implements policies that favour them.
This approach is employed by several governments, with some sectors like defence receiving more attention than others.
However, the policy’s unfair advantage over competitors in the market promotes economic nationalism within the country and global dominance abroad, contradicting the principles of a free market.
Importance of Infrastructure:
Infrastructure in emerging economies has taken on aspects of a magic bullet. Infrastructure has seemingly become both a demonstration good and a necessity.
It simultaneously works as a:
National aspiration good
Barometer of national progress
Mechanism for job creation
Vehicle for crowding in private investment.
Constraints on infrastructure provision:
It needs to be built to a minimum scale, which makes it expensive to finance and maintain.
It often has a public good component which makes the social value of infrastructure higher than its private value to individual users. Hence, private investors tend to find such investments relatively unprofitable.
Approach to Finance Infrastructure Projects:
The traditional approach – through tax revenues or government borrowing.
Risks of vicious trap in traditional approach:
Poorer economies generate less tax revenue, which limits infrastructure investment.
This reduces returns to private investment with further spinoffs that affect the growth of the economy and keep the country poor.
Attempting to break the cycle by increasing public borrowing domestically tends to crowd out private investment.
Newer approach – incentivise private sector participation by providing targeted subsidies for infrastructure investments.
India introduced the Public-Private-Partnership (PPP) model in early 2000s.
The arrangement entailed the government facilitating acquisitions of land and primary commodities, as well as access to credit from public sector banks for infrastructure projects.
Armed with these implicit and explicit subsidies, the private sector got to construct and run the projects for a designated period of time.
Risks with PPP model:
The PPP model ended in an avalanche of non-performing assets with public sector banks, private sector bankruptcies, accusations of widespread corruption, and a change in government in 2014.
“National Champions” Model in India:
Modification of the PPP approach – “National Champions” model – where the government picks a few large conglomerates to implement its development priorities by assigning the bulk of the infrastructure provisioning for roads, ports, airports, energy, and communications to them.
Three new aspects to the national champions model.
Firstly, infrastructure ventures usually require a significant amount of time before they begin to produce modest returns. In order to motivate investments in such undertakings, it’s necessary to give control of already established projects with robust cash flows to these champions. This strategy enables conglomerates to attain their desired overall returns while still retaining less profitable ventures.
Secondly, when the champions are publicly linked with the national development policy of the government, they gain a competitive edge in securing both domestic and foreign contracts. This association also ensures a dependable cash flow for them.
Thirdly, National champions having access to cash-rich projects can utilise these projects as collateral to borrow from external credit markets, resulting in decreased financial costs for their other projects. Moreover, it also enables domestic savings to be allocated towards private investment. This innovative approach is a smart solution.
Problems associated with the “national champions” model:
First, the direct connection between these large corporations and government policies can lead to the perception that they are “too big to fail,” which in turn can result in market frenzy, delayed identification of problems, and the spreading of sector-specific issues to the wider economy, as exemplified by the recent difficulties faced by the Adani groups.
Second, such an environment of market concentration can often have negative consequences for efficiency and productivity on a national level.
Third, when it takes longer for projects to generate substantial cash flows, there may be a greater reliance on state support to provide access to additional capital, which carries the risk of turning the country into an industrial oligarchy.
Fourth, the appearance of an uneven playing field with regards to market access and selective regulatory leniency can discourage foreign investors, which would be a significant setback for India.
A deeper issue is with regard to the proposition that infrastructure provision is the solution to India’s growth aspirations. The prevailing thinking is that once the ports, roads, power, etc. are in place, private investment will follow.
India is at an inflection point in its development path. It has bet on a development model based on a domestic demand-driven production structure, powered by soft and hard infrastructure that is heavily concentrated in a few hands.