with the entrepreneurs and do not have a formal interest in which parks or states perform better (though the potential for informal collusion is dealt with below). Their intermediation between the central ministry and local entrepreneurs has benefits both practical and political: it enables the ministry to oversee a large number of parks by monitoring a small number of PMCs; it overcomes potential distrust between private sector and government; and creates distance, so the government does not negotiate directly with individual entrepreneurs receiving grants.

Overall this means PMCs are key to the potential for the scheme to learn about itself, and to foster learning among the firms in parks. On the former, the PMCs observe the scheme’s performance in a wide variety of contexts, and, by competing among each other, are incentivized to innovate within the existing scheme design. This has resulted, for example, in a number of the financing innovations described above. When the scheme design is refreshed, as is occurring at the time of writing, the knowledge gained by the PMCs can be rapidly consolidated. This does of course raise risks of capture and distortion by the PMCs. The ministry’s ability to balance these risks and benefits will be critical to the ability of the scheme to improve its results, or conversely, to drop in performance.

The PMCs also enhance the ability of firms themselves to learn, acting as transmission mechanisms for knowledge between widely separate firms across India. It is not clear to what extent this potential is being actively exploited at present; the potential to do so more actively would clearly form part of any more general initiative to exploit the social infrastructure built by the scheme, in this case doing so across parks as well as within them.

That brings attention back to the entrepreneurs themselves. The scheme distinguishes itself by leaving the initiative and ultimate decision-making to them. The first advantage is that entrepreneurs represent the “demand” for the park and therefore are naturally best placed (in terms of incentives) to decide on an appropriate location: convenient for entrepreneurs in the SPV, for backward and forward linkages and so that the price of land does not make it prohibitive. Similarly, dimensioning of the parks is naturally best discussed with those who will be occupying them, i.e. SPV members, with technical advice from the PMC. Demand and dimensioning are thus subject to verification by the ultimate users in a way costly to themselves, i.e., in a more reliable means than by the signing of an ‘expression of interest’ or ‘MoU’, or by the completion of a “demand study” (whose point estimates of the future will almost always be wrong).<sup>55</sup> Infrastructure design and procurement are then left under the flexible discretion of the entrepreneurs themselves, subject to monitoring and other means to control fraud (discussed further below). In contrast, for example, previous policies such as APES fragmented the grants into many portions to be used for specific purposes: Rs. 10 crores for infrastructure facilities, Rs. 5 crores for effluent treatment plants, Rs. 2 crores for training facilities and so forth.

# _Grant size, structure and collusion risk_

Turning from the division of roles to the grants themselves, we first note their size. The cap on the central grant of Rs. 40 crore and 40% of total cost in effect limits parks to an investment cost of around Rs. 100 crore ($20m), corresponding in India to a size of around 100 acres.<sup>56</sup> The policy originally had a target of at least 50 entrepreneurs per park, but has subsequently introduced flexibility conditional on a floor on investment commitments: the aggregate minimum investment in land, factory buildings and plant & machinery in the park is Rs. 100 crores if there are more than 50

> 55 Neufville, R., & Scholtes, S. (2011). Flexibility in Engineering Design. The MIT Press.

> 56 Since the grant is 40% of project costs, the cap of Rs. 40 crore grant is reached for a Rs. 100 crore. Since larger projects will typically generate larger scale economies, it is optimal to design a Rs. 100 crore park.

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