Infrastructure - Laying a strong foundation to ascend the recovery curve

India’s march towards the target USD 5 Trillion economy by 2030 has been abruptly slowed down by COVID-19 pandemic. The current pandemic has brought to forefront the fundamental question of how the country solves the catastrophic risk of such an extraordinary and unpredictable ‘black swan’ event? India needs a sustainable strategy to avert and mitigate such pandemics, and the response to India’s problem partly lies in elevating the public and private spend in Infrastructure sector through PPP.

ADB, in its report ‘Meeting Asia’s Infrastructure Needs’ has highlighted that a whopping USD 4.36 Trillion is required to resolve India’s infrastructure demand by 2030, and that would entail deployment from both the private and public coffers. The reality however is that both the public and private sector are coming to grips with the economic situation which has just begun its journey towards stabilisation. Unprecedented situations like the present one require unprecedented solutions, and the time is right for the government to head back to the drawing board to put in place a progressive plan for the PPPs to kickstart with a whole new DNA.

The successful implementation of PPPs in India with a new genetic code would require addressing some core issues that have plagued the infrastructure sector for quite long. To begin with, the PPP model has been exposed to inadequacy of a stout contractual framework to effectively address the consequences of events like COVID-19. Typically, an event such as COVID-19 is categorised as ‘Force Majeure’ under the PPP contracts, however, the extent of relief is not uniform across various PPP contracts. To supplement the gravity of the problem, even when governmental actions to tackle COVID-19 could be categorised as a ‘Change in Law’, PPP contracts are divided on this approach vis a vis the determination itself and the relief. There is a dire need to relook at the PPP contracts to make them self-sufficient, and to address the concerns of the stakeholders with appropriate risk allocation. Issues like capital availability, bankability, technological innovations, market conditions, and commensurate relief availability need to be stressed upon and incorporated in the PPP contracts. Government needs to reconsider the positions under the procurement guidelines that do not favour bilateral renegotiations of PPP contracts to address the extent of vulnerability COVID-19 has demonstrated, that was neither foreseen nor envisaged. In essence, put in place mechanisms that derisk the private sector if the risks are beyond their control.

PPP employs high leverage in terms of debt funding needed by the private stakeholders. The rising NPA position in India, has brought to forefront structural issues that need to be factored in and resolved for ensuring bankability of PPP Projects. Stout financial and technical plans, with a risk allocation structure appropriate for the nature of the PPP project, and the interests of the lenders, involving an acceptable credit risk is the need of the hour to ensure PPP is a success story and enough liquidity is maintained within the banking system. The Kelkar Committee has stressed on these aspects, and if the aim is to drive PPPs with large scale private investment without burdening the banking system further, then the rules of game must be redefined.

Private sector participation will only be relevant if the government steps in and increases public expenditure. Central government needs to consider a centralised program for revival of economy including the infrastructure sector in India, somewhat on the lines of TARP (Troubled Asset Relief Program) deployed by US to stimulate economic revival in the wake of 2008 financial crisis. Official development programmes and development agencies in India need to step up and forge innovative alliances with MDBs, Sovereign Wealth Funds and DFIs to ensure flow of capital in the country for growth of infrastructure sector. To bolster investor confidence including the private equity players, a robust pipeline of bankable projects is required, and the first step towards it in the form of National Infrastructure Pipeline (NIP) has already been taken. Now the NIP needs to be supported by revolutionary funding models, financial products and resolve of both the public and private sector.

Last but not the least, rapid growth of infrastructure including the PPPs requires high level of expertise, and in the absence of many sector specific regulators, probably a central legislation (on the lines of Act on Private Participation in Infrastructure, 1998, as adopted by South Korea) and even a separate ministry to deal with infrastructure sector, the problem of slow ‘decision-making’ will keep on haunting the growth of PPPs in India. There is a need to reboot the PPP framework, but this time with newer models, and on procedural side, with emphasis on project planning and regulatory framework, to enhance the viability of PPP projects in India.

What emerges out of this history defining moment is anyone’s guess but for PPPs to survive and thrive, prompt decisions, informed commitments, and ability to navigate swiftly will be the defining factors. There is a calling for an increased spending on certain priorities such as digitisation, healthcare, public services and infrastructure. Our country will have to deliver on these priorities to attract international businesses and organisations to switch over their facilities to India, and to achieve goal of being a USD 5 Trillion economy by 2030.

(Cyril Shroff is the managing partner of Cyril Amarchand Mangaldas. Ajay Sawhney is a partner at the firm. The author is speaking at a webinar here.)