Bankers Talk

Given our policies, we are lucky to get investors in India

October 2011
Problems exist at both policy and execution levels in infrastructure sectors, making the country a high-risk investment destination as policymakers have lost out on India’s big advantage as an investment destination, Nasser Munjee, Chairman, Development Credit Bank Ltd, tells Shashidhar Nanjundaiah.

Your efforts at establishing IDFC have gone a long way in infrastructure funding. How is infrastructure financing different today from what it was in 1997?
I don’t think much has changed since then, except that things have considerably slowed down. The policy work that we did between 1997 and 2002 forms the whole infrastructure today. We were the secretariat to the government for the road building programme. Today we see the results: the Golden Quadrilateral is complete, although the North-South and East West linkages have been going slow. That said, we are going to see more vib­rancy in growth in that sector. In a few other sectors such as railways, there is almost nothing that we can talk about. We made the civil aviation policy in the late 1990s, which opened up the aviation industry and trig­gered the successful air­ports programme.

We shouted from the rooftops to the Power Ministry to emphasise distribution reform rather than focus on generation. We fought mega power projects because we believed that unless transmission and distribution wor­ked well, projects at that scale would not make much sense: the question is, when there is a financier for these mega power projects and on the purchase side there is only the State Electricity Board (SEB), who will take the power risk especially when transmission lines may not be available for alternative routing for power? Investing in smaller, more distributed projects is more sensible.In any case, going forward, as new technologies such as fuel cell technology or solar mature, we will see much more distributed power.

Over the years, we fought for new ways of funding and policies and we got through in many cases. Since 2004, however, I cannot think of a single new idea that has been on the block. New intellectual thinking on infrastructure does not exist now.

When we started, few people even knew what public-private partnership (PPP) was. Today, after 10 years, I am convinced that India has still not recogn­ised the last of the Ps: Projects still deal in public-private contract. In the case where a public and a private port co-exist, do you think the two guys even talk to each other? Even with common infrastructure, there is a huge fight whe­ther it is railway linkages, extra land for siding, evacua­tion of containers, or container freight station.
What lessons have we learned over the years?
I don’t know what we have learned though I know what we haven’t learnt. One thing that we have lear­nt from 1997 is that the private sector can play a major role. And today you can see around you, the airports or other examples tell us that there is a huge change in the way we do things. Those are the lessons learnt.

Do you think the government needs to invest more trust in private sector?
It is not a question of trust it is about frameworks. I don’t think we have understood frameworks at all. For genuine partnerships, the lesson I have learnt is that PPPs are impossible unless you have strong public institutions. And I would now argue very strongly that the government ought to straighten its own institutions in critical sectors, qualitatively to become partnership institutions with the private sector, to promote partner­ships and not just projects, and to create frameworks for these partnerships.

The real essence of government’s involvement in the economy in the next 15-20 years would be in hou­sing, cities and infrastructure. We really have to rebuild the housing stock. Urban infrastructure is appalling, and we haven’t even begun to look at that. Urban designs, the aesthetics of our towns and cities, the living condi­tions and the basic services none of it has been looked at. And the third is broad infrastructure logistics, net­work infrastructure, power, telecom, etc.

Do you see a need for integration of our urban infrastructure?
You are right. As with partnerships, the lack of inte­gration stems from our commitment to projects alone. Completing, say, a metro rail project gives us a sense of achievement, but the project stands alone: the necessary linkages to bus stations or evacuation from the stations, or transport flow design or common ticketing are missing. More cargo is transported on our roads when, really, rail transport makes more sense for longer distances.

It is all very well for the ministries, because all our infrastructure sectors belong to different ministries. I like to say that India is like a Soviet state because we have not changed the mindset of how we function. If I was the Prime Minister, I would ask myself, what is the infrastructure story for India, what are we trying to do and what is the sequencing required?

Surely, the first priority is to take an integrated app­ro­ach to what businesses and investors would see as a strong story, because infrastructure is a derived dem­and, raised for something else other than its own sake. I have to get from A to B, that’s why I need a road and a transport.

In India, we have addressed this need reactively. We have laid the infrastructure as a superstructure to som­ething that already exists. In urban infrastructure, space planning is critical, and in India, it does not exist. For example, I would have imagined that the mill areas in Mumbai is critical space. It is the historical heart of Mumbai. It also links the North with the South, East with the West. We should have done a critical space plan of how these linkages would work and how these key areas would be developed and then open it up to pri­vate investors.But what we do is, open it up, let anything happen etc, so a critical space is a mess.

In China, the government uses the demand-supply equation proactively. They actually put the infrastructure and then allow economic activity to come in. That way, you’re driving in the direction you want to go. The pla­nners work carefully.

So a way forward in these forms of integration is to establish an Infrastructure Commission, a partnership institution that includes the best minds from both the public and private sectors. Ministries can come up with their own plans, which are then integrated at the Commission. The Planning Commission then steps in to understand the story and do the sequencing so that resources are used in the right order.
Often, though, the problem is at the execution stage. Should the Infrastructure Commission you’re recommending look into areas like that which are obvious flaws like that and see how they can be implemented? Do we also need implementation body?
The Commission would not only plan how expendi­tures and sequences are going to happen but also address who is going to execute the plans and how efficiently.

We should have a three layered template for state development which we are working on.One is we need to have a regional plan which tells us what we can and cannot do the eco-sensitive zones, settlement zones, areas which could be partially or fully developed. It is critical because it lays the bottom survey plan for a state. Second, have a topographic map that depicts the hills, forests, etc. And the third is the Google map of the state which gives you the linkages. All the plans have gone to the panchayats and they have corrected every well, tree, and road on all the maps. Now those maps are digitised and available for planners. It sets out Eco Zones 1,2,3. This is why partnerships should be promoted at the grassroots levels; in Goa, where we’re implementing this model, it has been successful so far.

I chair the policy advisory group of the Mumbai- Goa region, where we are now preparing the regional, integrated logistics map. This will help us understand where the minor ports will come up, do we connect them to the mining zones, the National Highway (NH 17) and the Konkan Railway line, how the internal traffic will flow. The Goa partnership will also include a Mini IDFC, which will drive the policy framework for invest­ments, political economy and transactions with the investors.

So, in the sense, I would imagine that this three level template would be relevant for all smaller states in the country.

How do you believe urban local bodies (ULBs) can be empowered through financial restructuring, as your High Powered Expert Committee (HPEC) on urban infrastructure has recommended?
It is not through finance alone, but the whole gov­ernance structure: how they function, how and whom they are accountable to basically, establishing strong structures with accountability.

Why haven’t infrastructure funds performed well on the markets? Has the euphoria died down?
We are talking about $1 trillion worth of investments in infrastructure over the next 7-8 years and another trill­ion dollars in urban infrastructure over the next 10 years. These are huge sums of money to be invested, and we have not even made a beginning. The big pro­blem is that there is too much money chasing too few projects, and this shows the immaturity of the infrastructure sector.

By now, we should have had no shortage of projects. For example, out of the over Rs  50,000 crore that the government had set aside for JNNURM, less than Rs 7,000 crore has actually been disbursed in the last 3-4 years. This is a natural problem because the ability to actually get things done on the ground is very weak.

But this, despite that infrastructure is among the safest sectors to invest in?
Well, nobody prices risks. Project finance in power is a big problem: Banks used to be happy to provide finance at 8 percent, but now with traded power coming down to as low as Rs 1.50 to Rs 2, the power market is changing. Eight years ago, huge amounts of debt were cleared up for the SEBs, so that they could start afresh whereby losses do not recur. Today, those losses have come back. For every unit of power SEBs supply, they lose money.

SEZs are another example of this uncertainty: Look at the mess they have created. If you really want to create economic zones, I’d create just two of them: One in the Mumbai-Pune-Nashik triangle and the second in the Chennai-Bangalore-Hyderabad corridor, with proper linkages to logistics, ports, airports, etc.

So the idea that it is risk-free and investors have to just sit and count their money is wrong: The policy risk in India is huge. We do not have a tall record of consistent policies. There is no consistent long term policy. SEZ, I fought bitterly. Look at the mess they have created. It is not what India needs. And if you really want to create special economic zones, I would create two of them. The larger an SEZ is, the better the linkages will be, it will be more focused, governed; investors would have a much better understanding of what it is all about., what we are trying to do, why are we doing it.

You think the whole alleged inertia by the government in the recent months is also a reason why investors are kind of treading softly on India?
If I was an investor, the question I would ask is whe­ther the country knows what it is doing: does it have a story that I can fit into, what is the track record of con­sistency, logical building? The answer is no. So in a sense we are lucky to get investors in India. While if we did have a story which we should by now, we would have no shortage of money.

India has a great story. It is a great opportunity for this country and the investing com­munity. India should have actually used this time frame to drive its growth framework. But the RBI interest rate policy, which according to me is absolutely inapp­ropriate, is the last thing you need if you need investors to chip in $1 trillion. Interest rate hike encourages sav­ing,
not investment.

Demand has been greatly brought down. We have put our country on hold for two years at a time when we should actually be running fearlessly ahead on the back of huge excitement about India. We are doing exactly the wrong thing. 
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