Learning from past infrastructure projects has swelled into a large set of dos and don’ts, but operational problems are routinely taken up by the country’s chief executive. A decade after PPP projects became the norm, is infrastructure really on its way to operating on autopilot? Will infrastructure get a fresh lease of life as Prime Minister Manmohan Singh is back as Finance Minister? The most important way to realise the true potential of PPP may be, as has been projected in the DMIC project, that the government should play the incubator to boost private participation and land value, says Shashidhar Nanjundaiah.
The Sirohi-Andara-Reodar-Mandar road upto the state border at Beawar in Rajasthan is one of the few public-private partnership (PPP) projects in India whose status now is “reversed to publicâ€, which means that the concession period is completed and the project has been handed back to the government. The Sirohi-Mandar road, a 27 km brownfield (improvement and strenÂgtÂhening) project, was developed by little known Vadodara-based Nila Bauart Engineering on a concession period of less than five years. After several attempts, this company was not availÂable on their listed telephone numbers. (See table “PPP projects reversed to public so farâ€.)
More projects—typically the smaller ones with briefer concession periods—that were commissioned in the late 1990s and early 2000s will start maturing this year. As this cycle continues, it is interesting to take note of what the government and the private sector have learnt over the years.
What is the one factor commonly missing in the implementation of infrastructure in India? This factor is a ball that is thrown around effortlessly and for the most part, with a great sense of relief and nonchalance. It is the pivot that we were hoping against hope would successfully draw itself out in the Budget this year. It did. But not in the way it should.
But then, accountability never did have it easy in the Indian context, and the recent policies entailing PPP and other forms of private involvement are the newest kids on Convenience Street. When all else fails, blame the other guys. In this article, we examine whether this is the single most important thread that is responsible for ongoing and (especially) brewing failure of our infrastruÂcture sectors.
Waking up to slumber
Delhi International Airport’s Terminal 3 and the Delhi Metro are two highly publicised big-ticket infrastructure projects in recent times. The two are very different in their modes delivery (one is on PPP while the other is on EPC—except for the Airport Express, consiÂdered more viable), yet they are similar in the almost-clinical efficiency and the passion in execution. These, alas, are rare examples. The sectors have missed the point and by and large failed the litmus tests of replicability and financeability. Routinely, projects are delayed and their costs under-projected, rendering them high-risk. For the most part, the efficiÂency and delivery of infrastructure projects depend not on the systems but on personalities. Project leaders on both the public and private sides only need to follow a stringently outlined execution plan, but each has ended up blaming the other.
No wonder most rating agencies categorise infrastructure projects in India as high-risk, deterring many investors. Recently, Fitch Ratings has downgraded the outlook for Indian infrastructure (including power) sectors to “negativeâ€, driven by “a range of sector-specific issues and macro-economic factors with varyÂing degrees of impact on different assetsâ€. While the sector continues to benefit from strong fundamental demand for energy and transportation, Fitch says, the projects themÂselves are exposed to various risks. The sovÂereign credit rating has a fair chance of getting downgraded, the agency says.
Maplecroft, another rating agency, meaÂsured the ability of countries to cope with the impacts of a major event, and said that emerging economies have been all the rage and buzz in recent years partly on stagnant growth in the OECD countries. But in times of uncertainty, investors tend to put stability above other considerations: “Right now, the US still offers relatively stable outlook (albeit with a gloomy near-term GDP growth projecÂtion) than most of other regions in the world.â€
More recently, Standard & Poor’s cautioÂned that India might become the first BRIC country to lose its investment-grade rating unless groÂwth issues were addressed immediaÂtely, and attributed the slowdown largely to the poliÂtical environment. The fact that the Prime Minister is not an elected (but nomiÂnated) represenÂtative, the report says, means that he has a weak influence in the Parliament because of which critical reforms were taking a back seat.
The factors are well-documented in this magazine and elsewhere: the media-created term “policy paralysis†in recent months, enviÂronmental roadblocks and changes in impleÂmentation of policies, lack of government initiative in clearing projects at a good pace, dearth of high-quality contractors, availability of finance, and above all, lack of a clear understanding of profitability and the modes of implementation (often including shoddy documentation).
The government has watered down the complex philosophy of reform to a convenient blame game, where accountability can now be passed on to the private sector. In sectors such as power, water, airports and urban tranÂsportation, where stringent price ceilings are warranted because of the social nature of the projects, the results are brewing.
On the other hand, politics raises its unwanted head to stymie any sincere effort is made. The 2G verdict has suddenly awoken the ministries and their bureaucracies into inaction for the fear of being challenged for process. The heart of the matter is that there is diminishing confidence among our policyÂmakers in the foolproof implementation of their own reform policies. Given the opposiÂtion parties’ (and often allies’) machinations to raucously shout down or thwart any action through Anna Hazare-like protests, it appears as though the government has decided to turn benchwarmers for the remaining length of its term—whatever that may be. This is a dangerous political game that is holding the nation to ransom—FDI in retail, the NCTC, and other examples have emerged.
However, infrastructure will be one of the worst sufferers. Take the historic Railway Budget 2012-13 debacle, for examÂple, where the then Union Railway Minister Dinesh Trivedi turned the graph from popuÂlist to progressive. It reflected the merit and brain power of policymakers while acting relatively independent of political pressures. Alas, the pressure came from his high-strung party boss Mamata Banerjee, whose regional patriotism and incomprehensible economics has seen the ebb of railway policymaking. Now she would like to perpetuate the process. This will have a snowballing effect, setting a preÂcedent for other sectors in a coalition era.
PPP: Assumed universally applicable?
One of the questions we routinely ask experts in the public and private space is: Is the scope of PPP in infrastructure limited? Unfortunately, the answers either miss the point or they are carefully packaged to ensure the survival of PPP.
“If you look at most infrastructure showÂpieces,†laments Sanjay Sachdev, President and CEO, Tata Asset Management, “it has taken a lot more time and effort than necessary. If the government has encouraged investment, projects should be executed much faster with the support of the government.†Sachdev conÂcurs with the thought that the government may have adopted across the board models of delivery that are not applicable across the board. “That is where the issue is,†he says.
Roads and highways: While the scope of PPP has been excitedly discussed both in public and private circles, its limitations are hardly ever heard. Can infrastructure survive the test that PPP is? The success of a few projects may have spurred the model well.
On the other hand, the recent competitive bidding in highways, attracting astronomical premiums, have been under the scanner for possibly being unrealistically high. How can anyone make projections for 26 years —and commitments based on them—with certainty? The financial onus is now completely on the private sector while the government continues to flip-flop on policies. Can PPP stand the test of time? Can the government guarantee policy stability on factors affecting PPP? Meanwhile, the Rural Development Ministry would also like PPP on its roads.
With the qualitatively superior and well-exeÂcuted rural roads under PMGSY, the govÂernment has proved its capability in contracÂting out, procuring, monitoring and planning projects. While the private sector has been unwilling to enter the rural segment overall, the Ministry is banking on it for the success of its current favourite, the rejuvenated Provision of Urban Amenities in Rural Areas (PURA). The hope is to rope in the larger developers, but the size of these projects is too small to fascinate the biggies.
Urban transport: Then there is the viaÂbiÂlity question. In April, Planning Commission working group headed by Metro Man E Sreedharan has rejected the idea of PPP in urban transport—a high-cost, low-returns proposition. As someone who had never ceaÂsed to critique the model—it was the biggest ideological difference he had on the Delhi Airport Express Metro line, a PPP project with Reliance Infra in the lead—Sreedharan points out that PPP was not a widely accepted model around the world. No city anywhere in the world, except the failed experiment of Star Putra Metro rail in Malaysia, has attemÂpted provisioning of full city Metro transit through PPP, the report says.
Smaller airports: The private sector has either exited or refrained from entering some of the other sectors: water, airports and SEZs are examples. The non-metropolitan greenfield airports are a particularly symbolic case of why infrastructure is so closely linked to govÂernment involvement.
Infrastructure typically precedes developÂment, except in India where unplanned growth is followed by hasty and cumbersome addition of infrastructure. In the smaller airport segÂment, the Airports Authority of India (AAI) plans greenfield and brownfield airports in Tier II and III cities, where the market has by no means reached an inflection point whereby a private operator can start raking in the moolah from day one. The private sector knows it needs courage—and plenty of musÂcle—to enter the smaller airports segment on PPP and enter a long-term waiting game in an uncertain market.
Fuel linkages and power financeability: A year ago, BHEL was vociferous in its protest against the extant law that imposes no duty on imported power equipment. On the one hand, it had so many orders that the turnÂaround time was sometimes not acceptable to some of the developers. Today, the outlook on BHEL is negative, thanks to competition and slowing orders. Yet there was no announÂcement in the Budget on imposing duty on imported power equipment (although a policy is already under discussion and could deterÂmine a duty between 17 and 29 per cent).
The Budget now provides for zero customs duty on import of fuel (down from 5.1 per cent). Upon implementation, it is expected that the relaxation would substantially marÂginally improve power generation only if there is some parity between Indian and interÂnational coal prices—the difference at present is as much as 40 per cent. (For example, Indonesia spot coal prices, lower than most European coal by almost half, are currently around $65 per tonne while domestic coal prices are at $32-34 per tonne.)
However, power-related and other infraÂstructure stocks have gained since the Budget announcement, and if it is any indication, it is that of confidence. Private companies will soon be able to form JVs with PSUs, and this is a move that is welcomed by the community.
Fuel linkages have been a big cause of unÂcertainty in coal- and gas-fired power plants. The government has been stuck between two of its own policies: Go and No Go. The environment ministry’s infamous decision has limited the availability of coal, and until recÂently it seemed as though linkages would be the nemesis of power generation. Additionally, liberalisation of external commercial borrowÂing (ECB) for power companies to finance their debt will help: withholding tax on ECBs is reduced from 20 per cent to 5 per cent.
The attempt to make the power sector more financeable is evident, but perhaps leads to another indication to a growing dependence on the private sector to make things work.
Railways in time warp: Contrary to some of the other sectors, the application of PPP is least felt in the railway sector, and this cannot be anything but ironic. Although the process has all but stood still, the political manifesto of the Trinamool Congress, the ruling party’s ally that has held this portfolio, does not match the government’s. As a result, PPP is stuck in a limbo.
Commission after dismayed commiÂssion has reiterated the need for the sector to invite private participation. The latest are the Modernisation and the Safety Commissions, chaired by Sam Pitroda and Anil Kakodkar respectively.
Adoption of technology by Railways is stuck after the successful online reservation system. Even technology developed by the Railways’ own CRIS has yet to find 100 per cent application, or is in extreme slow motion. For example, the online freight management system (beyond tracking) still lacks universal application. We need to see streamlining of freight train scheduling to begin with, and this seems a long way off.
Lack of systemised inter-ministerial coordination
A Cabinet Committee on Infrastructure is already in place. Yet why are ministries not coordinated enough? When a project is awarded, uncertainty persists. In an interview to this magazine in November last year, Planning Commission’s Deputy Chairman Montek Singh Ahluwalia told this publication that ministries often work towards divergent goals. If the coal and the environment miniÂstries want diametrically opposite things accÂomplished, what can the Cabinet Committee do? Yet Ahluwalia did not believe a separate ministry for infrastructure was feasible. Perhaps the answer lies elsewhere.
The classic case of such gap between two departments is the dispute between power and coal ministries. As a result of such divÂergence, the industry has started approaching the Prime Minister’s Office (PMO) directly. The PMO, too, has been more proactive than necessary in intervention. In May, after a tussle between Coal India Limited (CIL) and power producers over the fuel supply issues, the Power Ministry promptly petitioned the PMO to intervene and settle the issue pertaining to signing of new fuel supply agreements (FSAs) and some controversial clauses in it.
The same kind of situation arose between the power ministry and the heavy industry ministry over import duty of power equipment. Thanks to heavily underpriced Chinese equiÂpment, domestic manufacturers—led by BHEL and the manufacturers’ largest association, IEEMA lobbied hard, leading to an agreement to impose duty.
Without a proper inter-ministerial body to intervene and arbitrate, the interdisciplinary nature of infrastructure has languished at
the hands of conflicts of interest and of divergent perspective of the same activity. If the PMO, under the recently appointed Principal Secretary Pulok Chatterjee, intends to be this arbitrator, this must be expressly clear to both public and private parties. If not, a new Coordinating Department needs to be estaÂblished, perhaps under the supervision of the Deputy Chairman of the Planning Commission to begin with. This Department could both coordinate and arbitrate between ministries. After all, the Planning Commission should assume some responsibility in seeing its plans through.
Government as incubator
The new punching bag for the government is, ironically, the private sector. New and rather arbitrary-seeming policy changes in
land acquisition—the first key to smooth proÂject execution—may let the government off the hook on delays and cost overruns. A new parliamentary panel headed by BJP leader Sumitra Mahajan purports to make norms of land acquisition even more difficult and cumbersome for the industry. Her panel says the government should wash its hands of any private land acquisition—including for PPP projects, whether it is for the defined “public purpose†(including most infrastructure projects) or not. Further, it wants to limit, not expand as the industry has been clamouring for, the definition of “public purposeâ€.
Yet we know this is not arbitrary. If all land acquisition is in the hands of the private sector, the following will stand heavily jeoÂpardised and compromised:
a) Interest among private developers to parÂtner with the government in infrastructure projects;
b) Faith among foreign investors and operaÂtors in India’s shifting-goalpost policyÂmakÂing process;
c) Clarity on “public purposeâ€: This has a dirÂect relationship with how seriously the land owner takes the buyer (the Bangalore-Mysore Expressway experience, where farÂmers have simply refused to part with their land to NICE—the private owner of the project, should have been one of the biggÂest learning experiences in this regard);
d) Cost of land and time of execution.
Above all, this would be a very convenient way for the government to play a classic blame game: Not participating in land acquisition will allow the government to impose one-sided penalty clauses and otherwise place the blame for any delays and cost escalations squarely on the private partner in the project.
Instead, the government should be playing the incubator of projects. In the Middle East, the government acquires the land, gets clearÂances done, then gets the projects ready for private participation. Investors can then pick the projects and run with the ball. This model can work perfectly if the government realises and acts upon its best strength—its entity as elected authority.
The DMIC model
In India, too, the Delhi-Mumbai Industrial Corridor has been modelled on similar lines, and its Managing Director Amitabh Kant says this is a result of the years of learning from infrastructure projects. For the seven cities along the Corridor, government-appointed DMIC will undertake to laying the groundwork before bidding out, making it more lucrative and more certain to private players to bid. The government owns the asset, bids out parts, then opens it up to public shareholding.
These cities are built with Special Purpose Vehicles (SPVs) between the Centre and the states, with the state facilitating the land, the Centre providing the trunk infrastructure money, and then throwing it open to PPP. “States often find it difficult to implement large projects, given lack of resources,†Kant says, “so the central government will put in money for trunk infrastructure, including land levelÂling, internal roads, sewage, drainage water supply, and utility corridors.†This means that about 35 per cent of the expenditure goes into non-viable activities. This is the central government’s share—to the tune of
Rs 2,500-3,000 crore.
“That is the stage when we can truly monetise the land values,†Kant observes. “It is at this stage that the government can award the remaining 65 per cent of the projects on a public-private partnership (PPP).â€
Having this model in place under its very nose, the government would do well to adopt this “incubation†model across the infrastrucÂture sectors.
“I don’t consider infrastructure as a busiÂness, but a social model,†says Rajeev Uberoi, General Counsel and Group Head—Legal & Compliance, IDFC. “The government had a social objective and found smart [private] people whose primary objective was to make it a business through profit. Now, the government too has gone into a profit mindset without realÂising that this profit is not for them to keep, but is for [public] trust. The objective should be that the profits the government earns from infÂrastructure projects should be ploughed back religiously into the next projects.â€
All said and done, the problems and thereÂfore the solutions may lie in politics. As Ajay Banga, President of the US-India Business Council (USIBC), said recently, “They are caused by the political circumstances … What worries me is that along the way of those bumps, if they pick up a degree of convincing investors overseas that the predictability of the Indian business environment is changing under their feet, that would be complicated.†Indeed, such apprehensions—ably fuelled by business and mainstream media—have already made their impact in the US and Canada, where business leaders are taking a second opiÂnion before investing in India’s infrastructure.
Finance Minister Pranab Mukherjee’s reacÂtive leadership style and pre-reforms outlook, the Anna Hazare movement and the opposiÂtion parties, ably supported by the exposed and unexposed scams, have succeeded in scarÂing government agencies into a virtual standÂstill—forcing the industry to run to the Prime Minister to intervene at the drop of a hat. With Mukherjee kicked upstairs as the country’s President, quick and proactive policy measures are on their way to being back in town, thanks to the Prime Minister himself back as Finance Minister—the best news we’ve had on the political front this year.
Perhaps it is time the government’s think tanks—which pulled the country up to stagÂgering growth figures in its last term—get
their heads togetÂher and emerge with answers to the high-pitched media trials. And this may have started to happen: An industry-friendly land acquiÂsition formula, whereby the government would acquire land even for private enterprises subÂject to 80 per cent landowners’ agreement, is a brilliant start. Frequent, harmonised public expressions of confidence from the Prime Minister and other senior cabinet colleagues should ease the nervousness and uncertainty among the bureaucracy.
Learning: In its bureaucratic form, PPP has spiralled into a convenient way of shifting accountability from government to private.
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