Private capital in infra: Binding constraints

Engaging and motivating private capital to invest in India’s infrastructure faces two binding constraints.

One is the absence of an adequate pipeline of fresh projects that are sufficiently de-risked for private capital to consider investing confidently. 

Two is a “non-level playing field”, which is known to be tilted against the private sector. 

These two together have resulted in a marked reluctance of private capital to invest in infrastructure and public private partnership (PPP) projects. Let us examine each of these binding constraints.  

The table estimates the extent of private investment desirable in the next half-decade. About ₹57 trillion of private capital is required across the next five years — that is, about ₹11.4 trillion annually. Assuming that the implementation cycle of an infra project is four years, we need a “shovel-ready” pipeline of roughly ₹11.4 trillion × 4 = ₹45.6 trillion for the next half-decade in the here-and-now. Are there this many “shovel-ready” projects currently in the pipeline? Certainly not! It would thus be useful for one of these three institutions (the Ministry of Finance, the NITI Aayog or the Ministry of Statistics and Programme Implementation) to monitor and publish this figure on a half-yearly basis.  

In the absence of an adequate pipeline, where will private capital be headed to? The infrastructure sector is unique in that it is composed of long-term, regulated asset-heavy public utilities, which are often geographic monopolies. It is thus well-nigh impossible, and also inappropriate for the private sector to create such projects on its own. Private sector gets involved only after winning a bid crafted by the state. Who then, in India has the single-point responsibility for ensuring a steady stream of biddable and bankable projects? This is a crucial issue to be addressed.  

Next, let us take a look at “non-level playing field” issues. Seven remedial measures could possibly address these debilitating conditions. 

1. One, establish an impactful institution that will give PPPs attention, sanctity and durability. Such an institution was announced in Arun Jaitley's maiden Budget speech in July 2014. It was called “3P India” and had a budgetary allocation of a whopping ₹500 crore to establish it. Unfortunately, it was never implemented. A “3P India” would serve important tasks: (i) insisting that projects that could embrace private capital should not be developed with public funds (ii) vetting PPP formats to ensure that “risk allocation” between public and private players was fair and logical. 

2. Enable “renegotiations” as accepted procedure. Long PPP tenures expose concessions to “black swan” risks that eventually force renegotiation. A 2004 World Bank study of 1,000-plus Latin American PPP concessions (1985-2000) found 41.5 per cent were renegotiated; of which 85 per cent were within four years and 61 per cent were concessionaire-initiated. 

3. Legislate truly independent sector regulators. The NITI Aayog was tasked with a Regulatory Reforms Bill after the 2015 Budget, which still remains unenacted. Roads and railways alone account for 40 per cent of the infrastructure pipeline; yet neither these nor other major infrastructure sectors (like water) have an “independent regulator”. It is the reform that investors have been asking for the longest and received the least. 

4. Create a fast-track dispute resolution mechanism. Much has been written and advocated on this subject. It is high time action is taken. 

5. Insist that National Bank for Financing Infrastructure and Development (NABFID) have a core team with the capacity to deliver on the “D” part of its name. It should be able to conceive and structure bankable mega infrastructure projects on behalf of the Centre and states to continuously augment the “shovel-ready” project pipeline. 

6. Encourage and support the Swiss Challenge method where a private player is allowed to propose a project, and the project proponent (subject to conditions) allowed to match any higher bid. This method has been upheld by the Supreme Court.  

7. Use the “plug-and-play” format to park sovereign risk mitigation with the state. This entails initially forming a wholly government-owned special purpose vehicle, which secures land and all other clearances first, then sells the de-risked shell company to the highest private bidder. 

Most of the above suggestions have been made time and again, and the Vijay Kelkar Committee’s 2015 report “Revisiting and Revitalising the PPP Model of Infrastructure”, provides excellent arguments for a massive overhaul of PPP frameworks. Alas, even after a decade, it languishes while the cry for inviting private capital gets louder.  

Fix PPP. Put the institutional reforms horse before the private capital cart and watch infrastructure investments sizzle again.

 

The writer is an infrastructure expert. He is also the founder & managing trustee of The Infravision Foundation. With research inputs from Mutum Chaobisana