Reflections on Infrastructure: Leveraging public and private sector synergies

Leveraging public and private sector synergies

Nasser M. Munjee, Chairman, DCB Bank

The transformation

The problem in 1996 essentially was to think of an alternative mechanism to build and deliver world-class infrastructure in India. The public sector was demonstrably the right solution. The Infrastructure Development Finance Company (IDFC) was created to address this issue. Beginning with a plain sheet of paper, I needed to think through what the defining principle of this institution would need to be. After much contemplation, I came up with a core principle on which this new institution would be built. It was “To lead private capital for commercially viable projects in India.”

This was a bold objective. What it said was that the need for capital was enormous and institutional financing would not be feasible. We needed to structure infrastructure projects in a manner that would make them financially viable. This required government policies that would allocate risks appropriately and provide a legal framework. In the end, we needed well- structured projects as well as the ability to mobilise finance. IDFC had to do the thinking, provide initial capital and monitor projects. In time, if we had the right framework, with known and internalised risks, we could lead the capital to fund these projects.

This set the scene for the type of institution that we needed to build. We divided the process of building the institution into two parts: the first was the policy formulation and framework building part and the second was the project finance part. We hired some of the best minds to undertake this task.

Infrastructure as we saw it at the time was almost entirely a public sector activity. The question therefore was how we could deconstruct this and introduce a new way of thinking. This was the first time that we mooted the concept of public-private partnerships (PPPs) as an organising principle that could bring about a paradigm shift in infrastructure. It arose because we knew that neither the public sector nor the private sector on its own could tackle the problem and a well-structured partnership was needed. Partnerships are only possible if the intermediating institution (IDFC in this case) commands the trust of both sides. We needed to be very careful in crafting possibilities which met the objectives of both the public and the private sector. How would you go about doing this? We needed to identify activities that had been in the public sector domain and place them in a very different structure. This could be done in three ways:

  • Sell the public sector infrastructure asset to the private sector. This was the privatisation possibility.
  • While keeping the asset under public ownership, create a mechanism for the optimisation of future investments and commercial exploitation of the asset by the private sector. This was the commercialisation possibility.
  • Consider output-based contracts, which the government would pay for on the basis of the output expected but would be invested in and operated by the private sector. This was based on the UK’s Private Financing Initiative.

Our policy framework activity was based on operationalising these three options. As it turned out, the first option of outright privatisation in a socialist country was not seen as feasible. The second two were doable. Structures such as build-operate-transfer and design-build-finance-operate were developed and became the basis on which PPP in India got off the ground. The country’s ports and airports are examples of PPPs pioneered by IDFC. A good example of the third is the annuity financing principle, which was adopted mainly for the construction of highways as well as some municipal roads.

IDFC was responsible for the first port project, the first airport, the new civil aviation policy,  and the privatisation of power distribution in New Delhi. It was instrumental in getting the Golden Quadrilateral project  off the ground. The project finance unit of IDFC put in place structured financing, especially for power, port and telecom projects. It was instrumental in the transition of the telecom sector from high licence fees to a revenue sharing regime.

The period 1996 to 2004 marked the transformation of Indian infrastructure. I have no hesitation in formally stating that this was the impact of IDFC on the system as well the Vajpayee government that oversaw this transition to the new paradigm. The quality of infrastructure now enjoyed by the citizens of India is based on the pioneering work done at the time. Over a billion mobile phones, a competitive airline industry with an annual traffic growth of about 25 per cent, modern and state-of-the-art airports, four-lane national highways and some expressways.

IDFC changed hands in 2004 and unfortunately abandoned its guiding principle. Since then, we have not seen a new idea in infrastructure. Today we are lagging severely in building integrated logistics, environment-sensitive infrastructure, urban infrastructure (especially water supply and sewerage and solid waste), and health and education infrastructure.

Looking ahead

It is always a good exercise to retrospect before looking ahead. I have always believed that to succeed in anything – as an individual, a family, a nation – we need to care. If we wish to generate a society that cares, we need to care to build for that society. The starting point in this case is for the government (the centre as well as the states) to care to put in place a structure that will deliver its goals.

When I look back at the principle of PPP that we created in 1996 and its subsequent evolution, I am struck by one huge weakness that emerged and that we misjudged at the time. It seems to me now that the last “p” did not materialise. Our structures were reduced to public-private contracting. As we look into the future and if we visualise the speed and scale of the task that lies before us, the key word is partnership. Government bodies also need to work together rather than working in artificially constructed silos to improve bureaucratic accountability.

My comments for the future can be classified into three parts: the centre, the state and the city.

The centre

I have long argued that in order to move infrastructure forward, we need to create a national infrastructure commission that would bring all infrastructure ministries under one roof (even today we have separate entities for ports, highways, airports, waterways, power, cities, and so on). Integrated logistics can improve economic efficiency and lower the costs of doing business in India. Rail, road, air and ports must have seamless infrastructure so that businesses can optimise their use. There is no use of building a port that does not have adequate road and rail connectivity.

Infrastructure is a difficult subject and needs the highest quality of intellectual resources to implement realistic solutions. The infrastructure commission would need to appoint well- trained personnel, the kind that worked with IDFC in its heyday who could put together a policy and a framework for transactions favourable for private investment. India will need not less than $1 trillion in the next five years if it wants to achieve speed and scale to close the gaps in infrastructure. Where is this capital going to come from if we do not have well-thought-through frameworks, priorities and sequencing of investments? If we expect others to believe in our investment story, we need to know what we want to do and how much we are putting behind our plans.

The state

All infrastructure is built at the state level. Typically, the states do not have the organisational ability or the execution competence to take on serious infrastructure investments in a sequential manner. At IDFC, I created two state-level entities that helped the state government using expertise drawn from IDFC. We created iDECK in Karnataka, which is doing extremely useful work in the state even after a decade, and we also created uDEC to help the newly established state of Uttarakhand get its infrastructure plans off the ground. I am not sure whether it exists in the present time.

I am of the view that as an experiment, we need to create state-level IDFCs with essentially the same goal as the original IDFC. I would begin with the small tourism-heavy states such as Kerala, Goa, Rajasthan, Himachal Pradesh, Uttarakhand and the north-eastern states. There is common ground with respect to the type and nature of infrastructure required, the scale is manageable, impacts are short-lived and learning can be quickly shared amongst the states. The National Infrastructure Commission would take the lead in setting up IDFCs in three states to start with and quickly roll them out in the others once we have a year or two of experience. In time, if the structure and operations make sense, larger states may be tempted to establish their own. Leading private capital is the name of the game and these state-level entities could put in place a plan with sequenced investment possibilities, and increase transactional ease to attract private investment.

The city

Most rapidly emerging economies have transformed their cities. China is a leading example.  India is yet to transform a city. Even emerging countries such as Vietnam, Cambodia and Malaysia have done a better job. Urban development in this country is in a truly sorry state. I was a part of the latest urban report headed by Isher Ahluwalia. The report outlines the problem and lays down the agenda for urban development in the country.  However, the report is collecting dust in some bureaucratic office. Town planning has dropped out of the “expertise” space and there are few planning schools in the country.

I would like to stress only one point on this subject after years of being engaged with it. Cities need mayors who are elected by their citizens, and are directly accountable to them.  The state governments have no role to play in their governance apart from sharing specified tax revenues. Governance is the key problem. Once this problem is taken care of, cities will compete with each other for business. This is the norm in most countries. Why are we shying away from this when we do not fail to let everyone know that we are the largest democracy in the world? We are not at this local level. We ought to be.

Conclusion

This article is a reflection on where we are and where we want to go. Seneca in the first century BC said:

“If you do not know to which port you are sailing, no wind is favourable.”

I often ask myself whether we, as a nation, really do know to which port we are sailing. If we do, the answer is not clear to many of us who have worked on these issues for most of our working lives. Is it not time that we work collaboratively and start bringing together all the expertise and goodwill we have within the country and try and piece together a coherent vision of what we are capable of? What does it take? We need to do it.

I often like to think of the problem with the three S’s – speed, scale and synergy. We cannot possibly say to ourselves that business as usual is the answer. It is not. To achieve the three S’s, we need a further two S’s – simplicity and synergy. We cannot get speed and scale unless we work together and we make the system as simple as possible. We need to use every gear at our disposal to ensure we can deliver the quality people expect. This is entirely possible if someone cares.