Mumbai: The public-private-partnership (PPP) model that has been driving infrastructure growth in India can gather momentum only if the government decides to play a more dynamic role as a facilitator and follows the rules of the game transparently, without compromising on the key issue of governance.
This was the consensus reached at the Mint Clarity Through Debate Conclave on Infrastructure Challenges, held in Mumbai on Wednesday.
Rajiv Lall, managing director and chief executive of Infrastructure Development and Finance Co. Ltd; Y.M. Deosthalee, chief financial officer of Larsen and Toubro Ltd; Sanjay Ubale, managing director and chief executive of Tata Realty and Infrastructure Ltd; Subba Rao Amarthaluru, group chief financial officer of GMR Group; Sonjoy Chatterjee, executive director of ICICI Bank Ltd and M.D. Mallya, chairman and managing director of Bank of Baroda participated in the panel discussion, which was moderated by Tamal Bandyopadhyay, deputy managing editor of Mint.
The panellists agreed that there has been a lot of growth in the power sector, roads and ports, and infrastructure spending is rising, but things can move faster. The lack of dispute resolution mechanism, archaic land acquisition norms, a not-so-transparent bidding process and state level intervention, among other things, are slowing the pace of change.
While the government needs to play a proactive role, the private sector too should tone down its expectations and look for “reasonable” rather than “extraordinary” returns from their investments.
According to the panellists, the Indian infrastructure story, which kicked off with telecom projects years ago, has reached the second level with the action shifting to the power sector.
Time for action: (from left) Subba Rao Amarthaluru, group CFO, GMR Group; M.D. Mallya, CMD, Bank of Baroda; Rajiv B. Lall, MD and CEO, IDFC; Tamal Bandyopadhyay, deputy managing editor, Mint; Y.M. Deosthalee, CFO, Larsen and Toubro; Sanjoy Chatterjee, executive director, ICICI Bank; and Sanjay G. Ubale, MD and CEO, Tata Realty and Infrastructure, participate in the Mint Clarity Through Debate Conclave on Infrastructure Challenges held in Mumbai on Wednesday. Abhijit Bhatlekar/Mint
None of them sees any “bubble” as Indian corporations rush to set up power projects, but they caution the investors in this segment as success will depend on how well the projects are executed.
Deosthalee set the tone of the discussion, saying there have been a lot of activities in road and power projects but the question is of pace.
“While things are happening, it is possible (that) we can expedite a lot of things and there are challenges on that front…in the tendering space, in the execution space and, of course, in the funding space. We need an integrated comprehensive approach in infrastructure development,” L&T’s CFO said.
According to Ubale, sectors such as power are witnessing development, but many other sectors remain neglected, especially at the local level.
“There are certain vested interest which prevent them from happening,” said Ubale, a former bureaucrat in the Maharashtra government, without elaborating.
Lall said infrastructure spending had increased to 7-8% of India’s gross domestic product (GDP) in 2009 from just 3% of GDP in 2003, mainly due to the private sector.
“I don’t think there is any country in the world...in which the participation of the private sector in developing infrastructure has been comparable to what is happening in India. Of the 8% of GDP that we are spending on infrastructure, 30-40% is being led by the private sector...that is extraordinary,” he said.
But Lall added that a lot of good work done by the private sector had been brought to nothing because of issues related to governance or government oversight.
For example, the container handling capacity of ports has quadrupled and the share of private companies has gone from 35% to over 75%, improving the efficiency of the port sector dramatically.
“But what is ironic is that over the same period that we are seeing these efficiency gains, ship turnaround time has actually been deteriorating because the moment you get out of the port and go into the hinterland it’s a complete mess—there is no planning, no coordination, no systematic anticipation on the type of issues that are required to be handled for this capacity to come up,” Lall said.
The PPP model
The PPP model, in which private companies build a project in association with the government, is unique to India, but the panel discussion revealed a feeling in the private sector that the government is using the model to abandon its responsibilities.
Absence of a regulator in infrastructure projects also creates confusion. Ubale pointed out that the National Highway Authority of India often fails to resolve disputes because it is a party to a contract.
“These disputes have to be settled in the courts. So, a strong dispute resolution is extremely important. Conflict of interest is another issue because of the tremendous amount of opaqueness in terms of the bidding process,” he said.
Amarthaluru of the GMR Group said that it is important for the government to think that it is ultimately the owner of the project even if it is built by a private company.
Amarthaluru did not agree with Ubale on the lack of transparency in the bidding process. “Sometime there could be accidents, but by and large it’s a transparent process,” he said.
Ubale retorted: “A whole lot of people are trying to make it transparent, but if the accidents happen too frequently then it is a matter of concern.”
Deosthalee of L&T said, “One year ago, there were very few accidents but since we had elections there have been far too many accidents.”
Amarthaluru said, “The government has to take more responsibility to ensure that these projects are delivered on time... To set up a greenfield project, we are taking about six-seven years. Land acquisition alone is taking two-three years. What is the role of the government in facilitating land acquisition? The proactive role has to come from the government.”
Mallya of Bank of Baroda said the PPP model had to evolve over a period of time. “The challenges are in the nature of land acquisition and dispute resolution. In the 11th Plan period, almost Rs20 trillion investment is planned, covering all segments. It cannot happen without the participation of the private sector. The government may not have the resources and execution capabilities. So PPP is relevant as a business model,” he said.
Chatterjee of ICICI Bank said challenges on land, environment and funding had to be addressed and the government would have to play an important role.
“We are talking about issues in Orissa and Jharkhand, the states that are richer under the ground are some of the poorest above ground. Then, environment is going to be a big challenge. That’s where the government has a key role to play,” he said.
Mining, according to Chatterjee, would pose the biggest challenge. “We are talking about 60,000MW (of power generation) in the next three years...and to me the biggest challenge is coal. If you look at requirement of coal five to 10 years from now, we are looking at a gap anywhere between 200-400 million tonnes. I don’t believe that this can be imported,” he said.
“There has to be a lot of cohesive work by the government and private sector to make sure environmental clearances are available; it’s built in a sustainable way and there is an inclusive process,” he added.
Lall of IDFC said acquisitions should depend on what projects are coming up on the land. “If the land needs to be acquired to build a road then there is a public purpose and the government would want to acquire the land...but if the location is for power generation, I don’t know why the government would (want to) acquire the land. It should let the private party that wins the concession acquire the land,” he said.
“The land law goes back to imperial times. It was an imperial government that would take away land for a higher purpose and get away with providing compensation at rates that were not questioned. But now we are what is being characterised as a rowdy democracy and it is a fundamental question, under what circumstances can the government acquire the land,” Lall said.
Another critical factor that has bearing on infrastructure projects is availability of long-term money. Mallya said funds flow to the infrastructure sector, which was 1% of banking assets at the beginning of the century, has gone up to 10% now. But since banks do not have long-term money, they may not be able to sustain the pace.
He also pointed out that by taking exposure to infrastructure projects, banks run the risk of asset-liability mismatches and interest rate mismatches. Besides, they cannot lend too much as there are prudential limits to what extent a bank can lend to a company or a group.
Chatterjee of ICICI Bank said once the corporate bond market was developed, funding issues could be taken care of.
Mallya wants takeout financing to be made more attractive and banks to be allowed to issue bonds which are long term in nature by giving appropriate sops in terms of relaxation in cash reserve ratio and statutory liquidity ratio. He also favours making use of pension and provident fund money for infrastructure financing.
Ubale expects two things from the government and one from the private sector. “One is the overall governance framework. Within this, private sector has incentives to do things. But what drives the government? How do you arrive at incentives for governance? Second is technology. I think there has to be emphasis on technology. Finally, we keep on talking about government but the private sector should also get more transparent and open,” he said.
Lall said the government has to be more practical in what it does and what it intends while inviting private sector to invest in infrastructure.
The government should not over-regulate, at least “until we have severe surplus capacity” and it “must focus on reinvesting in development of infrastructure.” Finally, “linking fuel availability should be taken as absolute priority”, he said.
Deosthalee’s priority is “speedy decision making and planned approach”.
“Nobody is taking a comprehensive approach...Someone has to play a facilitating role to bring a holistic approach. And finally, we demand governance from the government,” he said.