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Infrastructure and the Mirage of Money

Private money is not exactly gushing into our infrastructure sectors. If we see the trend, the decline of private investment in infra projects is dramatic and sharp, over the last few years. According to a World Bank report, India has recorded a 10-year low point in Public Private Investments, in the year 2015. This indicates there is apathy amongst private players towards this sector. Somehow we are not yet able to get our act together, to make our infrastructure projects bankable.

How much money do we need to build our infrastructure? How much of that can the government afford to spend, and how much has to come from private developers and investors? These questions have many diverse answers. According to our Finance Minister, India needs $1.5 trillion to close its infrastructure gap, in the next 10 years, a reasonably authentic estimate. The government would also ideally love to have bulk of this money to come from private sources, so that scarce public funds can be focused on priority areas, but this does not seem to be happening.

A lot has been done by successive governments to attract private money into the infra projects. Foreign investments in automatic approval route have been allowed in a wide range of areas like greenfield airports, construction & maintenance of infrastructure like ports, harbours, roads and highways, power generation, transmission and distribution and power trading, mass rapid transport systems, townships, housing and built-up infrastructure and construction-development projects. Several improvements have been initiated in dispute resolution processes, and new or tweaked models like Hybrid Annuity have been launched to make things more investor friendly, the National Investment and Infrastructure Fund (NIIF) has been set up, the concept of ReIT/InVIT has been rolled out including framing of rules, and last but not the least (because this holds promises for the future), the much-awaited Vijay Kelkar Committee´s report on how to facilitate PPPs has been received and is currently under active review.

More importantly, we seem to be having today a government which is fully alive to the potential role of private entrepreneurs in building public infrastructure. If India has to develop at the kind of pace that is expected, and provide bare necessities to its people by 2022, then clearly the PPP model is unavoidable, so said the Power Minister Piyush Goyal.

In spite of all these positive thoughts, interventions and policy changes, it is a matter of great concern that private finance remains a kind of ¨mirage¨ that continues to elude our infrastructure sector, perhaps with the small exceptions of renewables and roads. This cannot simply be explained away by saying the developers are highly leveraged, or banks are scared to take on new projects in this sector. There must be deeper maladies afflicting the sector, which has to do with inherent mismatch around expectations of risk-return profiles of these projects, and their viability. This merits investigation, and we are sure this is happening, as we speak. However, at the fundamental level, this situation will only go away when three imperatives will be settled; firstly – the users of our infrastructure assets (ourselves, the citizens) have to be mentally willing AND financially able to pay appropriate user fees which would be adequate to service the capital invested, and secondly – the enterprises for building an infra asset and that for running it, are segregated and bid for separately, with special attention to innovative financing of capital intensive assets through tools like Value Capture Financing, etc.

And, lastly, we have to develop an ecosystem of financing products, models, investors, and frameworks, which collectively will be amenable to the longer gestation periods involved in infrastructure businesses. Meanwhile, news came that India has moved up one whole notch in the ranking order of ¨Ease of Doing Business¨, and is now 130th among 190 countries. This shows that things are progressing, albeit slowly, but this also shows that other nations are not sitting idle, and that the global competition for inviting investments is intensifying.

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