Building roads and bridges to nowhere

If there is one Union minister who should be paying close attention to what Reserve Bank of India (RBI) governor Raghuram Rajan says, it has to be Nitin Gadkari.

Rajan has warned that non-performing assets (NPAs) of Indian banks are yet to peak and will rise to 4.5% of total assets at the end of March 2015. Infrastructure is among the six troubled sectors that have contributed to the banking mess. A number of problems plague this sector, ranging from a breakdown in the public private partnership (PPP) model to trouble in land acquisition. Unless all this is fixed, awarding more infrastructure projects will lead to throwing money to the wind.

Yet, this is what the minister for road transport and highways plans. In an interview to Business Standard, Gadkari said he plans to award projects worth ₹ 3 trillion in the next six months. These projects will be awarded through the PPP and engineering, procurement and construction (EPC) routes. The government also has a plan for a char dham yatra (four centre pilgrimage) project that will cost ₹ 11,000 crore. Gadkari made two additional points that are salient. One, the PPP route will not be abandoned. He said that, “the government does not have adequate capacity, from a technology and capital investment point of view.” Two, the Union cabinet may be approached for a scheme for rehabilitating projects that are stuck due to financial problems. One solution that Gadkari advocated in the interview was that of government bringing in equity and then reaching an agreement with banks.

This will not solve the problem that plagues infrastructure creation and may even create perverse incentives for companies with stuck projects to seek the government’s helping hand. It is doubtful if this will help the sector. But it is sure to create more trouble for the banks. The problem is never-ending now. In the past years, banks have restructured huge volumes of these loans. If that were not enough, RBI introduced a term-loan facility for such projects under which these loans can be restructured every five years. Dubbed the 5/25 scheme (for example, a 25-year loan being reset every five years), this measure is now masking bad debts on banks’ books. The rating agency Crisil estimated that close to ₹ 80,000 crore worth of bad loans from infrastructure companies may be masked in 2015-16. This is no longer a road building problem but a spot of trouble that can badly hurt the banking sector as a whole. Analysts now openly speak about these bad loans potentially hurting India’s sovereign rating.

Awarding more projects when already existing projects have created such a mess is a dangerous idea. It is no one’s contention that India does not need roads, bridges, ports and better rail connectivity.

The issue is one of ensuring that private companies undertake a share of the risk that surely must fall on them. India’s PPP model, as it stands now, is in need of urgent overhaul at the minimum. Ideally, it should be junked and a more transparent and dynamic model of risk-sharing in large projects built before more projects are awarded by the government.

In the late 1990s, when the first clutch of PPP projects were awarded, the assumptions motivating them were conservative and debt-equity ratio appropriate.

After 2004, PPP projects became a gold mine for private companies and builders. Projects were awarded recklessly and soon, financial troubles and land acquisition problems hit the sector with a vengeance. Many of the impaired projects date from that period. The level of accountability in the administration of PPP projects was never given adequate attention. It was one thing to prevent vexatious inquiries meant to derail projects but something else to make the entire sector opaque.

Minister Gadkari needs to sort these badly tangled problems before he sends bulldozers to build roads to nowhere.

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