India’s infrastructure sector requires about $1 trillion worth of investments in the years to come. To attract investments of this order is seen as a major challenge. It is therefore imperative to create an environment where the most efficient organisation develops a given project. Different formats for project awards also need to be explored in this context.
India Infrastructure Finance Company Limited (IIFCL) held a summit on January 5, 2016 to mark 10 years of its existence. The summit was chaired by Arun Jaitley, Minister of Finance, Corporate Affairs, and Information and Broadcasting.
Highlights from the session on “Future Strategies for Infrastructure Development”…
- Primary financing, which pertains to the construction phase of a project, involves risk investment and thus, private players demand a higher return for it. Most financing solutions and innovations address the secondary financing part of a project (that is, when the project is operational), thereby making primary financing a major challenge. As a result, the lending fraternity is currently passive in its approach to fund growth capital.
- Land acquisition is a serious concern. It continues to impact timely, cost-effective implementation of projects across all infrastructure sectors. Other key issues faced by infrastructure sectors include the lack of coordination between the Centre and the state governments, poor quality of detailed project reports, utility shifting, etc. The power sector in particular suffers from a paradoxical situation. Generation capacity exists but distribution utilities resort to load shedding. Mismanagement in distribution has been the major reason for the power sector’s woes.
- Public-private partnership (PPP) has lost its momentum. Private players face financing stresses that make it hard for them to subscribe to equity and there is limited capability to churn equity. Most equity infusions are stuck. Besides this, risk allocation is asymmetric in the PPP model. There is an absence of a sound regulatory and institutional structure. Most PPP models prevalent in India work on a client-developer relationship.
- The government interface needs to be developed to deal with construction risks associated with projects. Besides this, unwanted escalations in project costs must also be curtailed. Such escalations are primarily due to disputes arising from ambiguous contracts. These ambiguities need to be removed. Further, contract enforcement is a very important aspect.
- Infrastructure development strategies for the future should focus on three core areas: who funds the project, who develops it, and who implements the project.
- Project viability needs to be ensured to attract investments in infrastructure. In the case of the power sector, the absence of fuel linkages and of proper transportation facilities renders projects unviable. Hence, there is a need for overall, comprehensive planning. Unified, coordinated planning with a long-term perspective is required among various ministries.
- The government needs to ensure transparency in bidding procedures as well as curtail aggressive bidding. Methods for outlier elimination need to be adopted, so that irrational bids can be weeded out. In addition, a mechanism to penalise aggressive bids through the confiscation of bid guarantees should be adopted.
- Revisiting the model concession agreements to resolve interpretation-related issues will help invigorate project implementation on the PPP models. There is a need to revamp the mechanism and modify the 3R’s – risk allocation, renegotiation and regulation. However, all this will take time. Hence, in the interim, public expenditure must be boosted. Government interface needs to be developed to deal with construction risks. A reverse build-operate-transfer model should be adopted wherein the infrastructure is built with government expenditure and sold to private players once operational.
- In the long run, growth will be driven by a combination of public expenditure and private capital. Towards this end, it is required that sufficient funds be diverted from the government without escalating the fiscal deficit. In addition to budgetary sources, off-budgetary financing is equally important along with the creation of professional and managerial capacities through special purpose vehicles. Meanwhile, pre-construction activities such as land acquisition and obtaining clearances should be handled by the government.
- Overseas investments must be attracted. All along, there should be a focus on saving resources as that is tantamount to the creation of resources. Steps must be taken towards “ease of doing business”. Besides this, contractual enforcement must be backed by robust institutional capacity at the judicial level. A transparent policy framework will be immensely useful.
- Financial innovation and deepening of markets is important. Financial intermediation is here to stay. A forward-looking approach to identify the future cash flow generating capacity of a given project will aid in project financing. A uniform methodology for project appraisals should not be adopted as different sectors have different dynamics and issues.
- A number of developers are struggling with bad assets in their loan books. It is strongly recommended that they follow an asset-light strategy to vacate locked-in equity. This will create fresh head room and more appetite to take up new projects in future.
- There has to be a market maker for credit default swaps. Towards this, existing regulators (such as the Reserve Bank of India and the Securities and Exchange Board of India) must come together. The government should raise Rs 2 trillion-Rs 3 trillion through tax-free/infrastructure bonds in the next three months and deploy these funds in projects.
Remarks by Arun Jaitley, Minister of Finance, Corporate Affairs, and Information and Broadcasting
The infrastructure sector had been resource starved in the initial years of our economic management. The world is currently passing through a phase of volatility. There is not an easy day. The global economies are going to throw up challenges for the Indian economy. It is upon us to ensure how to make best use of some of these challenges. Lower oil and mineral prices, which is troublesome for many foreign economies, is an opportunity for us.
Analysing the roadmap ahead, we can find out ways to move forward. At the same time, we must have an intellectual honesty to analyse the shortcomings so as to rectify them.
If we look back to a few years ago, some of the key infrastructure segments had slowed down. The opportunity provided to us by lower oil prices has enabled the government to channelise a large part of savings into several areas of infrastructure.
Investment has gone up in national highways and rural roads. We can see the results of investments into the sector – several stalled projects in the highways sector are now moving. With enhanced public investment, even private players – who had disputes with the highway authority – have started to re-enter the field. A positive response is clearly visible. In rural roads, there is still a need to mobilise larger resources and a lot of gap still has to be bridged.
Indian Railways (IR) has now come, at least directionally, on the right track. We have invited private investment, including foreign players, into the sector. Recently, two major foreign investments were launched by Alstom and General Electric in manufacturing locomotives in Bihar. Very shortly, IR will come out with proposed bids for development of 400 stations in the country. The budget has provided extra resources and collected money from tax-free bonds. IR also intends to mobilise internal investment, and the Life Insurance Corporation has also provided long-term funds to IR. This step needs to be expedited.
The power sector has been probably one of the most difficult and challenging sectors. A lot of investment has come in in the last year and generation has increased significantly. There was a problem of plenty as there were not many takers. As manufacturing picks ups, the uptake of electricity will increase. The last mile has been clogged largely due to the health of some of the distribution companies. The power ministry, in consultation with the Department of Financial Services and other concerned institutions, has come up with the Ujwal Discom Assurance Yojana (UDAY). Almost 15 states have signed MoUs with the ministry and some of the states are those where the distribution companies are ailing.
Though the private sector has shown a lot of interest in the port sector, it is the state sector ports where the structure needs a rethink. In the budget announcement last year we had highlighted the need to move towards corporatisation of the state-owned port trusts. If the major ports do not rectify their structures, they stand at a very serious risk of being overshadowed by the minor ports. In a competitive world, unless restructuring and adjustments to the environment happen, the major ports will continue to face business challenges.
The Ministry of Civil Aviation has worked on its policy as far as the airport sector is concerned. A large number of mid-level and smaller airports have been improved upon. Once these airports are modernised with large amounts of investment, they would need managerial efficiencies and therefore private participation in management is being considered in this area. The government is very clear with regard to this aspect.
The big challenge is now to mobilise funds for the infrastructure sector. Public investment was stepped up in the last fiscal and will continue to be stepped up. The National Investment and Infrastructure Fund (NIIF) has been put in place. The Ministry of Finance is in touch with large international pension and sovereign fund to become partners in the NIIF.
All funding institutions, including IIFCL, will have to play an important role. In the years and months to come, we will be looking at investors who are serious about investing in infrastructure. Investments in infrastructure, with the long gestation period, will then show much more positive results. This will help make the Indian economy a stable global force despite crisis-like situations across the world.
Remarks by S.B. Nayar, Chairman and Managing Director, IIFCL
If we look at the requirements of future infrastructure projects, what IIFCL has achieved in the past few years is not enough. The goal of IIFCL is to grow as much as it can. The company’s role will broaden going forward, as banks won’t be lending on the same scale.
IIFCL has been appointed as the interim investment adviser of the NIIF. The company hopes to announce the first investment by end-January 2016. The government is very clear that it won’t invest more than 49 per cent in the NIIF, which means that the balance of the funds will need to come from other sources, domestic or international. The NIIF is an attractive option for foreign funds which are looking for options with higher yields and longer durations. But the problem such funds face is that there is no
proper vehicle for them to enter the country. They will not invest directly in greenfield projects; rather, they will invest through proper vehicles, which have some credibility. The government is confident that it will be able to attract sovereign funds and later, maybe private funds as well. These would include insurance, banks and pension funds. More investors are attracted to the second NIIF, since the first one was more like a pilot fund. The investors are looking at this NIIF more positively and are expecting higher returns, of around 10.75 per cent.
Over the next couple of years, IIFCL’s contribution will be to deepen the bond market in India and provide last mile equity. Earlier, IIFCL acted as the lead arranger of the funds whereas in the past seven-eight months, the company has been allowed to undertake project appraisal as well. IIFCL plans to select sectors, it is more familiar with like power, renewables and roads and then start project appraisal. The company is also building the expertise to take up more sectors.
India cannot afford to have these projects fail. Projects that can be revived, should be revived because in our country, replacement costs are huge in terms of financial losses as well as time.
Remarks by Sanjeev Kaushik, Deputy Managing Director, IIFCL
If India is to grow at the rate of 7.5-8 per cent there is no alternative but to scale up the capacity of specialised infrastructure financing institutions. This is crucial especially at a time when there are capital constraints to traditional lending for the infrastructure sectors.
In the last 10 years, IIFCL has played an important role in providing specialised financing to infrastructure projects. IIFCL’s loan book stands at $8-9 billion (consolidated). However, this needs to grow substantially if it is to match up to the fund shortfalls currently faced by the infrastructure sector. In contrast, the China Development Bank has an accumulated loan book of about $1.5 trillion and the Brazilian Development Bank has a loan book of about $500 billion.
Private players cannot bear all the risks. For instance, the core competence of private players does not lie in spending time and resources in obtaining requisite clearances. Therefore, this should be handled solely by the government agencies. A case in point is the procurement process followed for the Vizhinjam port project. Following two successive rounds of unsuccessful bidding, the state-level agencies have switched to strategies that ensure a balance between risks and rewards. The risks have to be commensurate with the returns.
The Kerala government did the groundwork to make sure that all requisite clearances and land acquisitions were in place before the project award. The government also got the road connecting the national highway and the port site constructed to ensure ease of movement. The private player was then selected based on technical expertise, financial soundness and exposure to international tie-ups.
For the Make in India dream to succeed and realise its full potential, creation of world- class infrastructure is critical and this requires incorporation of dedicated resources and much larger institutions.
A thorough change in mindset is required for smooth infrastructure creation. Risks need to be allocated correctly and symmetrically. The recommendations of the Kelkar Committee should be adhered to for hassle-free implementation of PPP projects.