Making sense of spending in Infrastructure

Damages from the flash floods in Mumbai on July 26 run into thousands of crores of rupees. Subsequently, a lot has been talked and written about the infrastructure in Mumbai, rather the lack of it. It would make an interesting study to compare the cost of infrastructure vis-à-vis' the cost of lack of infrastructure. For example, would a better drainage system have saved enough damage to property and business (apart from lives and livestock) so as to make an economic case for robust infrastructure?

Taking the idea further, traditionally, we decide projects on financial viability. Now, a broader concept of economic viability is picking up. This involves taking a holistic view of things by considering the life cycle costs, social externalities, etc. Concepts of carbon trading, green construction, etc. are, in fact, emanations of this only.

The hypothesis thus goes: Investing in better infrastructure has its gains in the reduced cost somewhere over the life of the asset. Just to make things a bit clearer, let's take the example of a flyover. It might not be possible (socital or practicability issues) to toll it and recover the cost expended by sponsor of the project. However, in the case when the sponsor is the Government - which incidentally also has the role of public welfare agent - it might make some sense to consider the savings in oil from the decongestion of roads, time people save and utilise it in their work thus contributing to the GDP and of course, improving the quality of life in general. Agreed, some of the conclusions are a bit far fetched, but this might not be so if we choose the example more carefully.

Now, the challenge is to devise a system that ensures that the person who saves oil from the flyover pays for it, at least partly, in some way rather than the tax payer who does not use it. It is all a matter of charging the cost to the right cost centre. If this does not happen, then it will be yet another social externality where one is paying for another's benefits.

PS: A friend once remarked, "When B-schools claim 100% placements, in reality only 20% get placed. Rest 80% get mis-placed."