Despite a number of risks and challenges, the infrastructure sector has remained at the helm of affairs for the government. Models such as hybrid annuity and toll, operate and transfer (TOT) are being tested. Further, steps are being taken to improve the health of the banking sector. Industry-wide, the importance of new financing instruments is being acknowledged for recycling capital. At the India Infrastructure Forum 2018, Amitabh Kant, chief executive officer, NITI Aayog, shared his views on the performance of the infrastructure sector, suggested ways to address the lingering issues and highlighted the need for alternative sources of financing…
In the past four years, the Indian economy has been growing at a rate of 7.5 per cent per annum. The key to growing at a higher rate lies in the ability to create world-class infrastructure. Significant investment is required in the infrastructure sector for the country to leapfrog and become a Rs 1 trillion economy.
In light of past experiences, the reasons behind under-investment in the infrastructure sector are the collapse of the public-private partnership (PPP) model, stressed balance sheets of private companies, land acquisition issues, delays in securing environmental clearances (though this has been speeded up to a great extent), etc. One of the main challenges in this regard is enhancing the speed of gross fixed capital formation.
There are high expectations from the present government in terms of the creation of top-class infrastructure and the quality of associated services. The government, in the past three years, has taken several measures to strengthen infrastructure, particularly the PPP framework. The recent success of the monetisation of nine publicly funded highway projects under the TOT model and the construction and expansion of over 90 highway projects under the hybrid annuity model are examples.
Other than the conventional infrastructure sectors, the government is trying to push the implementation of several projects in new areas of growth including affordable housing, sports stadiums, micro irrigation, agricultural value chains and solid waste management. One such example is the construction of a world-class convention centre in Dwarka. In addition, tourism has been identified as another area of growth. A noteworthy step taken in this direction is with respect to the opening up of islands. Several sites (13 in the Andaman & Nicobar Islands and 12 in the Lakshadweep Islands) have been shortlisted for eco-tourism projects wherein private investment can be sought. These are areas in which the government can play the role of a facilitator at best and growth can be driven by the private sector alone. The key to success is to build the requisite capacity in all the states to facilitate the preparation of top-class model documents. In order to have a win-win situation, there is a need to create a model in which the risks are well apportioned and well shared between the government and the private sector.
There is an urgent need to reboot the entire existing PPP framework in India. The Kelkar Committee Report, submitted in December 2015, recommends that the dispute resolution mechanism needs to be strengthened, and the operations and maintenance (O&M) of public commissioned projects and assets looked at. Viability gap funding has helped in the promotion of the PPP model by providing the much needed financial support. However, it is time to have a relook at it for incorporating provisions such as deemed shadow fees, state support during construction as funded work, etc., which can enable us to attract more PPP projects. The award of PPP projects also needs to be streamlined for which a comprehensive procedure has been laid down.
Addressing various challenges
Carrying out greenfield projects in India is a very complex process due to issues such as acquiring land and securing the requisite approvals. For this, the government should form a special purpose vehicle (SPV) for the project, get all the approvals in place and bid out the SPV to capture maximum value. The government needs to set up a number of SPVs primarily for project development works. This will enable projects to meet the investor’s investment capacity, thereby leading to a conducive environment where greenfield investments are de-risked to match the investor’s risk tolerance. Third, there needs to be a predictable regulatory framework under which the investors can earn a moderate rate of return over a long gestation period.
Besides, in case of constructed projects, the strategy that has been adopted by the government such as TOT in the road sector should be adopted in other areas including airports. This is one of other key challenges. The government needs to get out of the O&M of projects and make way for the private sector. However, challenges such as the poor health of the banking system need immediate attention. Economic growth has been impacted due to the twin balance sheet problem. The government introduced the Insolvency and Bankruptcy Code, which is playing a pivotal role in dealing with the problem of non-performing assets (NPAs) in the banking sector.
Some failure is inherent in the system, but we should be able to deal with it and move forward. The public sector needs to perform or else it will perish. Therefore, if we are not able to restructure the public sector quickly, there will be creeping acquisition, they will just burn themselves out and the private sector will take that space. Therefore, it also becomes important for the public sector banks to perform during this period, irrespective of the constraints. At present, there is a huge amount of private sector banking, with the public sector losing its share gradually. However, if the public sector banks do not pull up their socks, they will end up losing market share at a far more rapid pace.
The way forward
There is a need for alternative sources of financing. While the banking system continues to be the most important source of formal credit, there is inadequacy in infrastructure financing, particularly of long-term financing. The government has taken several initiatives in this regard. One of these is setting up the National Infrastructure and Investment Fund, with many sovereign wealth funds and pension funds showing interest in participating in the fund. Further, the government has also updated the policy framework for financing instruments such as infrastructure investment trusts and infrastructure debt funds, which have been implemented in the recent past and the government will continue to move forward in this regard.
Further, there is a need for some radical decision-making and good project development. We still face several challenges such as the very high cost of logistics, lack of coordination due to the involvement of multiple stakeholders in the infrastructure sector, lengthy document processing time, etc. We need a more seamless movement of goods. A huge opportunity exists in the warehousing and logistics sectors, where Container Corporation of India Limited has a monopoly, which needs to be broken by the private sector. There is a huge need for competition in some of these areas, so that India becomes a far more efficient player. Further, the dedicated freight corridor project, which aims to increase the share of Indian Railways in freight movement, was envisaged to be completed in 2016. However, it has been delayed and needs to be expedited.
Therefore, first, we need a far better structuring of projects in a vast range of areas. There is a lot of homework which needs to be done by government agencies. The government needs to create SPVs to solely undertake project development and get all the approvals in place. By doing so, 35-40 per cent of the value capturing of a project is achieved. Second, in the power sector, we were able to sort out problems related to steel as the country was able to create demand for steel, which, in turn, was possible due to several progressive measures taken by the government. The NPA problem in the power sector will worsen if immediate steps to contain the same are not taken. Further, polluting cities in the country must ban the use of petro coke and furnace oil. Also, power plants which are over 25 years old and fail to conform to environmental norms must be shut down. These are some of the hard measures required to be taken to clean the cities, without which sustainable growth in the country cannot be ensured. With firm action being taken, the demand for power will start increasing.
Infrastructure is an area where there lies huge opportunity which can be tapped by developing projects based on the hybrid annuity model, ensuring that the government exits those projects where it has finished construction, and implementing critical government measures.