Aman Hans, Consultant PPP, NITI Aayog
It is now increasingly becoming a cliché to say that post-COVID-19 will be the beginning of a new era or to debate hether economic recovery would be “V” or “U” or “wheelbarrow” shaped. All these are hypotheses and only time can reveal the actual outcomes. So, for the purpose of this article we shall mostly consider the mid- to long-term issues and assume that there exists a “silver lining”, which is expected to emerge sooner rather than later, and thereby emphasise the need and measures to revive “animal spirits” amongst potential investors. (Animal spirits is a term coined by British economist John Maynard Keynes to describe how people arrive at financial decisions in times of economic stress or uncertainty.) In order to bolster investor confidence and capitalise on emerging opportunities in the post-COVID-19 scenario, it is extremely pertinent for the nation to showcase the level of preparedness not only in terms of successfully putting a lid on the coronavirus outbreak but also building a robust pipeline of bankable projects.
Thus, just to recapitulate the short-term impact of this global health mayhem on infrastructure investments, as the world tiptoes out of a prolonged lockdown, in the infrastructure sector, a scenario has emerged whereby the execution of contracts has either become extremely difficult, or contracts have been rendered completely incapable of being executed. Also, with traffic volumes drastically collapsing and which may now take at least a year to revive to the historical normal, concessionaires are facing an excessive short-term liquidity crunch. Though much action has already been taken by the government and the Reserve Bank of India to address the overall macroeconomic risk, the key short-term challenge in infrastructure that still confronts the government is to ensure the non-failure of any public-private partnership (PPP) project. For this, the government may have to grapple with the challenge of striking the right balance between the extant procurement regulations that do not promote bilateral renegotiation of contracts and the extent of vulnerability to this force majeure risk that was neither foreseen by private investors nor by the authorities.
Now from the more important, mid- to long-term, perspective, one such vital measure by the Government of India to charm investment into the country has been the preparation of the National Infrastructure Pipeline (NIP). The NIP highlights the roadmap for over $1.5 trillion of investment in infrastructure over the next five years. For building this robust pipeline the government constituted a task force of senior members from the Ministry of Finance and NITI Aayog. The task force, in turn, held extensive deliberations with various central line ministries, key industry stakeholders, state governments, etc.
The data thus captured in the NIP has revealed that during 2020-25, about 70 per cent of the overall projected infrastructure investment in the country is expected in energy (24 per cent), roads (18 per cent), urban (17 per cent), and railways (12 per cent), and of the balance, about 17 per cent in rural and agricultural infrastructure. Also, in terms of preparedness, of the total NIP, 40 per cent worth of projects are under implementation, 30 per cent are at the conceptualisation stage and 20 per cent are under development.
In this overall investment pie, the central government (39 per cent) and the state government (40 per cent) are expected to have an almost equal share, followed by the private sector (21 per cent). The period following 2015 has seen a considerable rise in the share of the states in overall infrastructure investment in line with the recommendations of the 14th Finance Commission, giving states more fiscal autonomy. Going forward, in order to increase the contribution of the states and the private sector in infrastructure creation, it is felt that the central government could nudge the states by introducing a mandatory PPP rider for any financial assistance being given for infrastructure. Further, of the centre’s share of about 39 per cent in the NIP, about 60 per cent of the potential funding has been envisaged under extra-budgetary resources. Post-COVID-19, this source may get stressed. Thus, to mobilise funds, while ensuring minimal liability on the exchequer, it is imperative to continuously nudge even central line ministries and agencies to implement projects under suitable PPP frameworks. There are already ongoing efforts by the central government towards rebooting the PPP framework in the country; this time with increased emphasis on newer innovative models and, on the procedural side, emphasis on pre-bid project planning and structuring, with the objective of enhancing the viability and ease of construction of projects.
Recently, the successful monetisation and recycling of national highways by the National Highways Authority of India, raising about $2 billion, and of airports by the Airports Authority of India has resurrected the belief in private investment appetite for infrastructure in India. And, going forward, in order to further revitalise the economy, more such transactions, whereby the economic value of underlying assets can be transferred while retaining ownership, are being planned for new asset classes like power transmission lines, sports stadiums, passenger trains, railway stations and warehouses. These transactions are expected to not only pump in more liquidity into the economy and further boost capital expenditure, but also leverage better operations and maintenance of assets by the private sector.
Historically, major bottlenecks in implementation of infrastructure projects have stemmed from delays in land acquisition, payment of compensation, environmental concerns, time and cost overruns, procedural delays, limitation on availability of funds and inter alia due to prolonged dispute resolution. In recent years, the government has actively worked on debottlenecking projects and NITI Aayog has also been addressing these issues with various policy measures – a national policy framework for effective project management in the country, aligning it with global best practices; roll-out of initiatives to revive the construction sector including streamlining the arbitration/appeal process, paving the way for release of funds blocked on account of a protracted appeal process.
Implementing these reforms and consolidating potential infrastructure projects through the NIP should not only infuse liquidity and enhance overall credit offtake, but also provide a framework for better due diligence and stakeholder coordination. While getting out of the crisis and saving lives and livelihoods will require immense cooperation on many levels, in infrastructure we must get the base right to build on sustainably, which we have been already been doing. From here, investors will come to test whether our systems are up to the task. I would say, yes, they are; and it’s time to revive investors’ “animal spirits”. w
(The views expressed are personal.)