Confusion over infrastructure

Though the government has made the right noises, much more needs to be done.

A week after the Budget, an acquaintance who works for a specialised infrastructure finance institution made an interesting point in an informal conversation: infrastructure policy has swung from being fixated on government to over-reliance on private resources.

Private players are now involved in pretty much every infrastructure sector. In itself, this is a good thing as the private sector is more efficient at capital allocation and service delivery. But all projections now revolve around the money, skills and enthusiasm of the private sector. Targets of 20 km of new roads per day, 50,000 MW of new power capacity, 3G networks, gas pipeline networks, airport infrastructure, etc, all assume strong private sector activity.

To make this happen, policy has to strike the right balance in allocating risk, rewards and balance interests of all stakeholders, including users. Policies must offer sweeteners while regulating against abuse. This is tricky. Infrastructure projects are long-gestation and capital-intensive. Developers want assurances about policy continuity and high returns. At the same time, infrastructure providers are inherently monopolistic. They can make profits, while delivering poor service and charging high rates.

Additionally, there's a "social-sector" component. There are no bidders for roads in low-traffic zones, or airline routes in the North East. Telecom rollouts in low-income rural areas have been slow. In such cases, the policy-maker must create incentives. There's been lots of experiments with PPP models, and model concession agreements. But there's still a reluctance to enter certain sectors and states. Some key problems crop up time and again.

The hassles of land acquisition, for example has held up innumerable projects across sectors. GoI and state governments need to review acquisition, rehabilitation and compensation formulae. This is at least partly responsible for widespread Maoist insurrections, as well.

Environment clearances are another mess. Bluntly, clearances take far too long even when norms are complied with. There's empirical evidence that clearances depend more on political clout than on norm-compliance. This sends terrible signals and sparks civil rights activism and litigation.

A third major issue is financing. Infrastructure financing needs large sums for long tenures at high debt equity ratios. Banks can't handle typical long tenures. Refinancing via structures like take-outs is one way. Another possibility is to ease lending norms for insurance companies and pension funds, which possess long-tenure corpus. Ideally, there should be efforts to create liquid secondary markets for debt. That would solve many problems by giving bond-holders exit options.

All these issues have to be dealt with. Most are policy dependent. What is more, they require not just policy changes, but also changes in processes and mindsets. It can be done. Many individual politicians across the spectrum stand to gain from removing these bottlenecks. A lot has a;ready been accomplished through sporadic displays of political will.

The Budget makes pious noises and indeed, raises allocations in most infra-sectors (civil aviation is the only major loser). New RBI norms for specialised infra-finance NBFCs, and support to the India Infrastructure Finance Company (IIFCL), should help resolve the financial issues. As the global credit crunch eases, funding abroad will also become less stressful. Financing and financing routes, is therefore, the most tractable of the above issues.

The non-financial bottlenecks are much more complex and intractable. Resolution of these will require well-coordinated, properly considered actions from various government committees, the Planning Commission and regulatory bodies.

UPA-II is close to complete its first year in office and there's little evidence of this happening. The market, meaning investor consensus, is now increasingly sceptical about official projections of infra creation. That's reflected in valuations for listed players in the infra-space.

Between 2005-08, the CNX Infrastructure index gained 325 per cent. It lost around 70 per cent off its peak values in the 2008-09 bear market. During the 2009-10 recovery, it has underperformed. It's still 45 per cent off its 2008 highs.

Companies that were valued at very optimistic PE multiples two years ago are now traded at realistic valuations. Part of the problem has been capital starvation. But even though liquidity is improving, valuations could remain low until policy issues are squared off.

There are two ways of seeing this. One is to shun infrastructure. It has real problems. The other approach is to hope that GoI and individual politicians have recognised the problems and see an upside in solving them. If that's turns out to be true, the current pricing represents a major investment opportunity. I'd prefer to see it that way.