While the public-private partnership (PPP) model has indeed delivered if one looks at the number of build-operate-transfer (BOT) projects in segments such as roads & highways and power, several major issues have remained outstanding since the time of the United Progressive Alliance (UPA) coalition government at the centre.
Meanwhile, after coming to power in 2014, though the National Democratic Alliance (NDA) understood the enormity of the problem it decided to make do with engineering, procurement, construction (EPC) as a stop-gap measure. However, looking at the fiscal stress today, PPP must be revived on a war footing, asserts Vinayak Chatterjee, Co-Founder & Chairman, Feedback Infra. Chatterjee also calls for establishing a development financial institution (DFI) to boost infrastructure creation in the long haul.
Since 2014, when the NDA government came to power at the Centre, there has been considerable focus on infrastructure creation. Overall, how would you rate the budget proposals for the sector since then?
The last three years of the UPA saw the crash of PPP and the rise of non-performing assets (NPA)s to frightening levels in sectors such as power and roads & highways. In 2014, the NDA government was very quick to realise that a broken PPP could not be fixed overnight. So, they specifically followed the strategy of public expenditure-led growth of the infrastructure sector. To that extent, the strategy played out all right in the first five-year tenure of the NDA government. Corresponding to this strategy, the budgetary allocation for infrastructure was also at fairly high levels. And while they were doing it, they did two very interesting things, but that wasn't followed up. In the July 2014 budget, there was a Rs 5 billion allocation for an interesting institution called 3P India, which was about resetting the canvas to make PPP robust again.
Immediately after that, the government had appointed Dr. Vijay Kelkar to work on a report on PPP revival. That report by the committee headed by Dr. Kelkar is one of the finest documents that define very practical dimensions on how to revive PPP. Unfortunately, the government did not act on both. While public expenditure kept the show going pretty well, this was also the time to reset PPP. As a result, today, because of a lack of attention to PPP, you have a dearth of private sector investment in infrastructure because the confidence has not revived, new structures have not come into play and recommendations have not found their rightful place under the Sun.
As a vocal advocate of PPP do you think that there has been an attempt of creating a strong policy framework for that model of infrastructure creation?
No, that hasn't happened. And due to a lack of attention on the matter in the first five years of NDA, we are paying a price now. Although we had the window to rest PPP, we did not do it. In economic history, there is no such thing as a missed bus. You can always do it. In fact, with the stress we see in public finance today, it has become all the more critical to get the private investment back. Therefore, I look at PPP through a very simple prism. Any project that is amenable to be funded by PPP should not be allowed to go for public expenditure. The UK has a system called the National Infrastructure Commission and I would advocate that we have an institution called 3P Institute. Only when a public infrastructure project fails to cross the 3P Institute gate for funding by the private enterprise can it considered for public expenditure. Today, the reverse is happening. And like demonetisation or the FASTag now, this needs to be pushed hard. You need to emphasise that in a project that can attract private sector investment, you should not be going for public expenditure.
Public expenditure should be by default while PPP should be the norm! To achieve that, you need institutions that have been rest, independent regulatory authorities, officers taking decisions to be immune from being prosecuted in the future, permission to enter into renegotiations and a Development Financial Institution (DFI). You need a whole bundle of strong institutions and capable people to turn this vision into reality. That way you will save a lot of strain on the exchequer, which can then be translated into those sectors that have a rationale for PPP. The Rakesh Mohan committee's seminal report of 1996 on Indian infrastructure first advocated PPP and it was on that basis IDFC was created. The report very clearly said that in an economy and society, such as India, many sectors cannot attract private capital. Sectors where you can collect user charge, toll, passenger fare, etc., should be done under PPP.
The finance minister launched the Rs 104 trillion National Infrastructure Pipeline (NIP) on New Year's Eve. What is your take on the announcement?
The Rs 104-trillion investment will happen over the next seven years, not five. And that's why I have been arguing for a DFI. First, you have to find out how Rs 104 trillion is going to be funded. The implementation lifecycle of an infrastructure project is four years, which means that to spend 20 per cent of the amount, you need a working pipeline of around Rs 80 trillion. Do we have that kind of infrastructure pipeline available presently? Let us assume that God gives us a bearer's cheque of Rs 20 trillion. Where do we put that money? You not only require a large pipeline of projects but also a new burst of energy to create projects such as bullet trains, airports, ports, roads & highways, bridges, irrigation canals, river-linking system, etc. All of us are very comfortable talking about finance, but what about the hard stuff of the project pipeline? So, Rs 80 trillion worth of projects needs to be created at the central, state, municipal and rural levels!
How should the DFI be structured?
It must be completed at an arm's length to the government, yet sub-serve the development objectives of the Indian state. It should be staffed with high caliber professionals from among the practitioners, academia and bureaucracy. It should have a completely independent board. It should function something like the Central Election Commission (CEC) and Reserve Bank of India (RBI), which would listen to the government but would do the right thing. It would be critical for this country to get this right. I am not talking about a wealth fund here, but a new-age institution that serves the aspirations of the people of India. It would not be a market institution in the sense that it neither need be listed nor should its shareholders expect a market rate of return, which would differentiate it from National Investment and Infrastructure Fund (NIIF). The DFI should be able to give both debt and equity and it should be able to provide long-term financing with an outlook of 30 to 60 years. It should attract capital from countries that are friendly to India. Prime Minister Narendra Modi has done excellent work as far as the country's international outreach is concerned. It is now time that it gets monetised! We should be able to collect funds for a DFI at the global rate of interest of 2 per cent. And since they would not be taking the money back for the next few decades, we must not be worried about the rupee exchange rate. The DFI's success should be calculated across a set of parameters like how much investment it has been able to catalyse, how much policy change it has been able to influence and how many jobs it has been able to create.
When the British moved out, India was a nation starved of capital. At that time, the Planning Commission debated where all the capital available could be allocated. Eventually, Jawaharlal Nehru and Prasanta Chandra Mahalanobis decided to invest in the development of certain industries. That led to the creation of the Steel Authority of India Ltd (SAIL) and several hydroelectric projects. To help a new generation of entrepreneurs to grow, three DFIs were created: IFCI, IDBI and ICICI. Some of the biggest industrial groups that exist today are the product of the good work done by these institutions from the 1960s to the 1980s.
In a discussion that we had in 2016, you had urged the creation of a robust PPP framework towards meeting India's infrastructure development needs. Four years down the line do you think PPP has been able to achieve that?
PPP did that in its heyday. If you look at the Delhi and Mumbai airports, the number of build-operate-transfer (BOT) projects in roads & highways, power, etc., PPP has indeed delivered. But while it has delivered, we have also seen the huge issues that needed to be tackled but were ignored and that is why it has gone downwards. In the last two years of its tenure, the UPA government did not put its heads together to tackle the problems, while the NDA realised the enormity of the problem and decided to make do with engineering, procurement, construction (EPC) for the time being. Looking at the fiscal stress today, PPP must be revived on a war footing!
In your view, which segment requires an urgent redressal where infrastructure space is concerned?
There is a need to revamp the electricity distribution system. This is one sector that is poorly managed and is holding the entire country to ransom. It is the tail that is wagging the power sector dog. Every problem in the power sector can be ultimately traced to distribution. Their tariffs are whacko, cross-subsidies illogical, payments delayed and operations inefficient and corrupt. It has been so for nearly 40 years! It is indeed sad that one intermediary between the generator and customer is holding the entire Make in India programme and, in effect, Indian competitiveness, to ransom.
In terms of the country's infrastructure sector, what are some of your main expectations from the Union Budget for the 2020-21 fiscal year?
Honestly, I have more expectations from outside the budget than from the budget. At the end of the day, the Union Budget is an accounting exercise. We already know that with the decline in GST collection there is pressure on the primary source of revenue. But many steps of the kind that we just discussed on PPP need to be taken outside the budget. In my sector, I would look at the budget announcement this time to outline some very bold measures, including the DFI, resetting of the stage for PPP and a major package for infrastructure. And while all this will take time to unfold, it will sustain the momentum on public expenditure. One must not expect anything more!
- MANISH PANT