Infrastructure: A separate reality

When the Prime Minister says, which he did in Tokyo, on Tuesday, October 21, that "financing this level of investment ($500 billion in the 11th Plan) presents a special challenge in view of the uncertainties now prevailing in capital markets of the world", infrastructure-watchers can read the message loud and clear - India is not going to meet its ambitious 11th Plan target by a wide margin.

In fact, different think-tanks are broadly consensual on the fact that we would indeed be lucky if we hit $300 billion, or roughly 60 per cent of the target. This should be seen against the spend of $215 billion in the 10th Plan period. In simple terms, investments in infrastructure would be growing at the same pace as annual growth of GDP, rather than growing much faster, as planned.

Gross Capital Formation in Infrastructure (GCFI) across the 11th Plan period is unlikely to cross the level of 5 per cent of GDP. This is against China's purported 11 per cent, and the Planning Commission's own desire to hit an average of 7.5 per cent across the 11th Plan period.

It is useful to remember that around 80 per cent is still funded by public expenditure. And the pace of implementation of public-funded projects has been lacklustre and tardy, to say the least.While addressing the Economic Editors' conference on November 30, the Planning Commission's Deputy Chairman said that power sector investment during the 11th Plan period is now expected to be $100 billion as against the original estimate of $200 billion. In the much-touted Bharat Nirman Programme, there is significant underachievement, particularly in irrigation and rural roads.

Simply put, barring a few new flashy airports, a clutch of private ports, a selectively better road network, and some high-profile improvements in city transportation, for the broad swathe of public utilities, the aam-admi must necessarily now look for the beginnings of infrastructure-salvation in the 12th Plan period, ie, between 2012 and 2017.

The Prime Minister, in Tokyo, further said, "In our world of uncertainties, investment is both an act of faith, and also an act of great adventure". While private investment in Indian infrastructure has always been a great adventure, "faith" is currently in short supply. There are clear indications of "withdrawal symptoms" from PPP/BOT projects by Indian corporates under huge fiscal stress.

The reasons for private sector shying away from PPP/BOT are easy to decipher. Consider the following:

(i)Lack of buoyancy in existing operations.

(ii)Private equity, private placements and IPOs are off-radar.

(iii)Domestic lenders have become highly circumspect in disbursing fresh loans. Scrutiny of DPRs and projects has suddenly become extremely rigorous, often detrimental. For ongoing projects, working capital limits have been reduced, and banks are even asking for a steep rate increase mid-way. [Interest rate for long-term lending is now in the range of 17 per cent to 21 per cent].

(iv)Benefits of ECB liberalisation would only be felt after the global financial situation stabilises.

(v)There is a year-long uncertainty related to elections.

(vi)Land acquisition has become an extremely sensitive issue.

(vii)Confusion prevails on bidding formats.

So, financial closure has become a "killer" apprehension; and the view amongst the biggest and best of India's infrastructure developers seem to be to get back in right earnest to good old EPC and works contracts without having to take balance-sheet risk. The "fiscal stimulus package" announced on Sunday, December 7, is considered by most infrastructure watchers as lacking in breadth, depth and imagination.

This "withdrawal symptom" from PPP/BOT projects has serious implications:

One, it sets the clock back by well over a decade of well-articulated and well-orchestrated measures to create a PPP culture. These included financial innovations like annuity, viability-gap funding, securitisations and non-recourse lending; the fine-tuning and standardisation of bid-process management and significant PPP capacity-building work at state levels.

Two, it will result in less than half of the infrastructure investments from private sector expected in the 11th Plan. An expectation of $150 billion will now be whittled-down to $75 billion or less.

Three, it will mark a move back to the "statist" model of infrastructure-development where 'Sarkar' is once again the mai-baap of public utilities provision and private sector is reduced to mere "thekedari".

Economists around the world have suggested increased government spending as a way out of the current crisis. The Indian government would do well to choose infrastructure investments over many other schemes where outlays disappear into thin air. But it is not that the "statist" model is free of difficulties.

Fiscal expansionism is a huge concern. So, it is time again to woo multilaterals like World Bank and ADB more assiduously. The World Bank is set to provide India an additional $3 billion. At the G-20 summit, the then Finance Minister P Chidambaram welcomed additional lending by agencies like the World Bank. Domestic infrastructure companies have also started approaching multilateral financial institutions like IFC and DEG. Government should also look for government-to-government collaborations like the Japanese financing of Delhi Metro, and now the proposed Delhi-Mumbai freight corridor.

Further interventions in the realm of the possible include:

* A larger, second-tranche "fiscal stimulus package" for the infrastructure-sector under the auspices of IIFCL or a finance ministry 'sector-focus window'. The package needs to be funded to the extent of around Rs 75,000 crore and to be immediately used to provide refinance-cum-interest cushioning to commercial lenders across the board for ongoing, as well as fresh projects.

* A Planning Commission list of infrastructure projects that will be funded through budgetary allocation. The idea is to have a ready list of projects that can be executed fast to boost the economy.

* Creation of new public sector delivery and implementation capacities a la NHAI, NTPC or Delhi Metro; and allowing these entities to access capital and operate professionally.

* Relaxation of provisioning and lending norms for banks for infrastructure lending.

* Allowing separate treatment to NBFCs lending to infrastructure sector.

* Honouring awards given by Dispute Resolution Boards and Arbitrators and stop challenging them in courts. This will release money wrongly locked up in unending disputes.

* Appealing to the Election Commission not to stop award of new development projects during election times.

Margaret Thatcher had a beautiful quote: "You and I come to office by road or rail; but economists travel on infrastructure." For travelling economists, there is clearly a separate reality in December 2008 than there was in December 2004.

The author is the Chairman of Feedback Ventures. He is also the Chairman of CII's National Council on Infrastructure. The views expressed here are personal.