Interview with V. Chatterjee: “Rationally, commercial banks and infrastructure funding are not meant for each other.”

“Rationally, commercial banks and infrastructure funding are not meant for each other.”

India’s infrastructure growth story has been marked by a number of turning points. A shift away from the reliance on public funds, deepening of the public-private partnership (PPP) fervour, pitfalls in project implementation, rise in contract renegotiations, surge in the number of stressed assets, removal of policy barriers and launch of big-ticket programmes are some of the elements that emerged through this journey. Vinayak Chatterjee, chairman, Feedback Infra Group shares his perspective on the journey of infrastructure sectors in the past 20 years…

What has been the progress in infrastructure sectors in the past 20 years? Which sectors have witnessed the maximum progress?

As far as the infrastructure sector is concerned, the year 1997 was an important milestone in the economic history of India. First, it was the first budget when the then Finance Minister used the word “infrastructure”. Second, the Rakesh Mohan Committee submitted The India Infrastructure Report around that time which advocated that a large portion of the country’s infrastructure should be built with private capital and positioned public-private partnerships (PPPs) as the economic mantra going forward. The year 1997 also marked the setting up of IDFC and the National Highways Authority of India.

How has the journey of PPPs been across the sectors? What were the failures and successes?

The past 20 years have witnessed learning and un-learning of the PPP model for the infrastructure sector as a whole. The PPP model was started with acceptance from all political parties that it was the way forward for the infrastructure sector. There was a general agreement that PPP should be the driving agenda for sectors where private capital could earn a market rate of return based on user pay charges, while public expenditure could meet the residual investment requirements. There was a resurgence of interest among the political class, bureaucrats and investors (both domestic and foreign) in the country’s PPP programme. Besides, supporting institutions, including the World Bank and the Asian Development Bank, encouraged this initiative. Thus, a huge amount of creative energy was spent on developing intellectual capacity on the PPP framework, concession agreement and how PPPs should operate.

However, looking back now, there were some major failures. First, the intellectual capacity of moving ahead with PPP was far ahead of the institutional capacity. Most of the ministries and state governments did not have the mindset to deal with PPP. Second, there was an absence of an independent regulatory authority for dispute resolution and renegotiation of PPP projects. This gave rise to misunderstandings due to which many PPP projects fell by the wayside. Third, globally, major infrastructure investments were met through long-term capital. To this end, India lacked a long-term capital market such as long-term infrastructure bonds, and insurance and pension funds. The country relied heavily on commercial banks, which were ill-suited to fund long-gestation infrastructure projects owing to a lack of understanding of such projects and the problem of asset-liability mismatch. In a bid to revive interest in the PPP space, the current government created a corpus of Rs 5 billion for 3P India as soon as it came to power in 2014. In addition, the Kelkar Committee submitted an excellent recommendation on revitalising the PPP model.

What were the key policy developments in the past 20 years which shaped the infrastructure sector?

On the policy front, the biggest mover has been the highways sector where the policy has moved in a combination of the build-operate-transfer, hybrid annuity and toll-operate-transfer (TOT) models. Another major policy initiative was taken in the power sector, with the enactment of the Electricity Act, 2003. Though criticised on many grounds, the act changed the way the power sector operated. More recently, the new Metro Rail Policy, encompassing the setting up of Urban Metropolitan Transport Authority, is clearly a major policy intervention which must be taken seriously. Historically, the urban infrastructure segment did not receive the attention that it deserved. However, the Smart Cities Mission has led to an awakening among both the mayors as well as urban populations to take city development seriously. Renewable energy has also received a big push from the government with the aim to reduce the dependence on hydrocarbons and thereby the carbon footprint.

How have regulators performed over the past 20 years? Does the country need an overall transport regulator?

There has always been a lot of debate regarding the role of regulatory authorities in the development of infrastructure. The country has a long history of progressive independent regulators, including the Reserve Bank of India for banks and the Securities and Exchange Board of India for capital markets. In addition, the Insurance Regulatory and Development Authority has also done a decent job in regulating the insurance market in the country. However, the presence of regulators has been long sought in various sectors such as roads, coal, railways, etc. In particular, Rakesh Mohan’s National Transport Development Committee Report, has stridently asked for a transport regulator in the country. There is an urgent requirement for regulators in sectors which don’t have one, coupled with a completely different architecture wherein the regulators report directly to Parliament instead of just acting in the capacity of the extended arms of the union/state governments. In addition, the principles of independent regulations need to be reworked in order to rebuild the interest in PPP.

Has the role of commercial banks evolved?

Commercial banks are not the foremost runners for funding long-term infrastructure. Any major infrastructure project takes between three and seven years to get into the operations phase. Operations are difficult in the initial few years and the next 20-25 years are spent on capital earnings. Rationally, commercial banks and infrastructure funding are not meant for each other. With respect to funding of private capital, commercial banks should come into the picture to the extent of providing working capital during the period of construction, for mining equipment and other short-term requirements. For long-term investment in infrastructure, there is a need to nurture and create capital market options. On the whole, a completely different architecture is required for allowing long-term funds to come into long-term infrastructure projects.

What, according to you, are the biggest unsolved challenges in the sector and what are the strategies that need to be adopted for overcoming them?

An infrastructure project goes through three broad stages in its life – development, construction and operation. It has been observed that the private sector has shown interest in operating brownfield utilities rather than taking up greenfield projects for providing long-term funding. The reason for this hesitance is that the risk-reward ratio is still considered to be pretty adverse in the first two stages. Once a project has crossed the first two stages, interest shown by private players is quite visible. Therefore, the need of the hour is to ensure that projects be bid out after the risks in the development and construction stages are minimised to the maximum extent possible, that is, all land is acquired, permissions are in place, utilities have been removed, etc. However, in order to accomplish this, restructuring is needed. In the immediate future, there is a need to focus on the principle of asset recycling. In line with the philosophy of minimum government, maximum governance, there is no reason for the central or the state governments to own power plants, ports, airports, etc. All these brownfield assets have huge embedded value and must be sold. Once the money comes in, rather than putting it into the Consolidated Fund of India, it must be put into a National Infrastructure Fund. Over the next decade, India needs to adopt a strategy which is rooted in asset recycling. As the risks entailed in the first two stages of the project are removed, the government gets much higher returns in comparison to greenfield projects. Therefore, in the long term, the risk entailed in the first two stages of infrastructure projects needs to be reduced in order to mitigate against the fear and high risk perception of domestic and foreign investors. Therefore, steps have to be taken to make PPP projects possible.

What are the key steps required to be taken across infrastructure sectors?

One of the major steps which needs to be taken is the creation of a national power distribution company. In my view, it is the distribution segment which is holding the power sector to ransom. There are four links in the power chain – fuel, generation, transmission and distribution. For the first three, central government intervention is present. However, the situation is not the same for the distribution segment, which has always been treated as a state subject. However, power distribution forms a part of the concurrent list and needs to be worked upon through the creation of a national power distribution company. This national company can pick up the surplus capacities of all power plants which are idling today at 59-60 per cent plant load factor. The surplus capacity can then be sold to the entities owned by the central government, as these are the largest users of electricity. Any agency – even state distribution companies and urban local bodies – must be free to buy power from this national power distribution company.

With regard to the transport sector, a united metropolitan transport authority must be given the seriousness it deserves, with at least the top 10 cities having one. For the railway sector, two areas need prioritisation, the first being creation of capacity at choke points and the second being track renewal for safety reasons. These have also been clearly laid out in the Union Budget. Finally, there is a need to have a land bank corporation which will first inventorise and digitise all the holdings of the central government. It will then offload some of this land to the market or have a term planning kind of situation for specific projects such as the creation of an educational city, special economic zone, manufacturing hub, etc.