Target-driven approach to infra building important enabler for growth

The Centre's mega-infrastructure plan may founder on a poor enabling environment as much as the availability of finance

It is widely recognised that the Rs 102 trillion National Infrastructure Portfolio (NIP), announced by Finance Minister Nirmala Sitharaman on the last day of the decade, is a necessary precondition for Prime Minister Narendra Modi’s ambition for India becoming a $5 trillion economy by 2025. In a slowing economy, a target-driven approach to infrastructure building is, admittedly, an important enabler for growth. A realistic assessment, however, does not present a particularly optimistic scenario in the near future.

The doubts have as much to do with fund mobilisation, which has been discussed threadbare, as the need for a clear enabling reform path. The NIP is based on the report of a task force that identified “technically feasible and financially/economically viable infrastructure projects” that can be initiated in fiscal 2020 through 2025. Though the exercise involved estimates of investments and capital costs, the most important part of the report reflected policy-makers’ understanding of the need for a clearly identified reform path beyond road-shows or tax breaks.

The NIP envisions a 22 per cent private sector share in the identified projects, but the remaining 39 per cent each in the Centre’s and the state kitties, too, will need execution by private entities. It is in this context that the task force’s six-point reform path needs to be viewed.

Much of the task force’s reform programme sets out key measures recommended by earlier committees on infrastructure, an indication that the National Democratic Alliance has not addressed these in its five-and-a-half years in power.

For instance, outlining financial sector reforms, the task force has talked about enabling long-term financing by strengthening banking institutions, particularly the State Bank of India and the India Infrastructure Finance Company. Alongside, it suggested regulatory reforms for enabling and attracting private sector domestic financing institutions.

The important issue here is the problems in the financial sector itself. According to an ICRA report released this week, the trajectory of infrastructure credit from banks and infrastructure finance non-bank companies flattened in the first half of FY2020. “While the infrastructure credit witnessed 19 per cent growth in FY2019 to Rs 21.1 trillion, it increased marginally to Rs 21.2 trillion in H1 FY2020,” the report said.

The ICRA report points out that credit costs have eased during the past 18 months but the profitability of public sector infrastructure finance companies (IFCs) remains lower. “Overall, recoveries from stressed assets remain critical for sustained improvement in profitability of IFCs. In this regard, progress on resolution of stressed assets and developments in the renewable energy sector remain key issues,” says Manushree Saggar, vice-president and head — financial sector ratings, ICRA.

Source: National Infrastructure Pipeline

Even before the issue of financing comes into play, the crucial determinants will be improving project preparation and enhancing private sector capabilities, according to the task force. Optimal risk taking has been emphasised by adopting international contract standards and undertaking project bidding only after fulfiling precedent conditions such as land acquisition, but the trickier part is honouring contracts.

Here, it would be an understatement to say India’s record has not been good. The latest example is the Andhra Pradesh government annulling contracts signed by its predecessor regime for various infrastructure projects, and refusing to honour power purchase agreements with renewable energy companies on grounds that the agreed tariffs are too high.  

All that the NIP reform path says is that repudiation of contracts should be “restricted only to situations to be clearly defined in the contract” and that there should be safeguards that quantify termination payments. These features are built into all contracts but the Andhra example shows there is nothing to stop political leaderships reneging on binding contracts to live up to political rhetoric.

When it comes to dispute resolution, the task force quotes amendments made to relevant central laws and how investment in institutions under it could “deliver sound results in enabling speedy resolutions in the next few years”. The fact that disputes drag on even when initiated under arbitration has not changed.

The latest case is of Reliance Industries Ltd (RIL) and its partners, currently locked in a court battle with the government over a $4.5 billion arbitration award relating to the Panna, Mukta and Tapti oil and gas fields.

Though these fields have been returned to the government nominee and are no longer in private hands, the dispute relating to them is threatening another RIL deal involving the purchase of 20 per cent of its downstream business by Saudi Aramco.

The task force has recommended ministry-level committees as mediation mechanisms to resolve complex contractual disputes. This may not amount to much since state governments are often party to the disputes. Even if a dispute involves the central government, officials may be reluctant to take a call unless there is a stamp of some impartial body.

According to ICRA, the construction sector, especially, is likely to be a major beneficiary of this increased investment. Typically, infrastructure projects have a construction intensity of 60-80 per cent, which could result in order inflows of Rs 60 trillion over the next five years, it noted in an earlier report.

According to Shubham Jain, senior vice-president and group-head, Corporate Ratings, ICRA, achieving the government’s target is achievable but it would require state government and the private sector support. “Reducing bottlenecks and resolving issues that have resulted in significant cost and time overruns will also be vital,” he adds. Given that these have plagued infrastructure projects for decades, NIP’s target looks challenging even before it has begun.