Developing infrastructure : Is a revival on the cards?
Amitabh Sharma (Managing Partner)
Structural reforms such as demonetization and goods and services tax along with worsening balance sheets at state-owned banks seem to have led to an economic slowdown in India. To spur economic growth and investment, the government recently announced a `2.11 trillion (US$32 billion) recapitalization package for state-owned banks and a `5.35 trillion highway-centric transportation programme, Bharatmala. With recapitalization, the stressed public sector banks could help bankroll India’s infrastructure development. Through Bharatmala, the government plans to develop 44 economic corridors, multimodal logistical parks, coastal/port connectivity roads, and expressways, covering 34,800 kilometres and connecting 550 districts.
Bharatmala has the potential to stimulate the economy through increased production of construction material and equipment as well as job creation. In the long run, efficient and cheaper logistical support and freight movement could increase manufacturers’ competitiveness. Roughly 25% of the funds for the bank recapitalization and 20% of the funds for Bharatmala are to be raised through private investment. In the past, aggressive bidding has led to financially unviable projects, resulting in sharp reductions in private investment and bank lending to the infrastructure sectors. To prevent this from happening again, a robust appraisal mechanism needs to be put in place to ensure that only worthy promoters and financially viable projects get access to public money. In the past decade, unfair risk allocation coupled with aggressive bidding by promoters led to stranded assets and incomplete projects. Steps such as fairer risk allocation and putting in place a sound infrastructure law/regulatory framework for infrastructure would boost the confidence of various stakeholders. A time-bound dispute resolution framework to deal with public-private participation projects/public contracts, as provided in the Public Contracts (Resolution of Disputes) Bill, 2015, is required. To eliminate the hurdles of dealing with a multiplicity of agencies with overlapping powers to obtain approvals and permits for a project, the government should provide a single window which would assist contractors/developers in obtaining such approvals in a time-bound manner. For Bharatmala to succeed, an efficient time-bound land acquisition process must be put in place, to avoid delays and cost overruns that result in disputes with contractors and developers. Investors are loath to take on construction risks. Allowing more private investment in public utilities and state-owned enterprises would unlock capital invested by the state and help fund infrastructure development. Bharatmala could contribute to capital recycling (with premium) by investing in highway construction and then monetizing the newly operational (highway)
assets. The toll-operate- transfer model is already available for monetizing operational road assets.
The 74 th amendment to India’s constitution paved the way for a robust and decentralized third tier of governance in urban areas, but most municipalities are struggling to provide basic urban services because of lack of budgetary support and dwindling income on account of almost static internal accruals. A task force should be created to help financially sound municipalities raise capital through municipal bond markets. Serious investors abhor uncertainties and expect market maturity. India needs to learn from mistakes of the past which pushed the infrastructure development agenda into an abyss. Rather than chest-thumping when rock-bottom tariffs/rates or higher premiums are discovered in competitive bid scenarios, the authorities should look at alternatives to awarding contracts on the basis of low cost/highest premium alone. Also, reneging on project awards – as in the case of renewable power purchase agreements (PPAs) – and electricity distribution companies not signing PPAs, or forcing independent power producers to reduce tariffs to match the price discovered in the latest round, must be stopped.
Prospective bidders expect the government to lay down a definitive project timetable so that the developer and investors can plan better. We have seen unviable tariffs in the solar and wind sectors because developers and investors were bursting with funds (because of the lack of projects being bid out) and raced to the bottom to pick up projects. It will be interesting to see how the government rises to the challenge of making the most of the bank recapitalization and Bharatmala in igniting an infrastructure growth cycle. It is indeed the time to deliver.
Original article was published here: https://www.vantageasia.com/developing-infrastructure-revival-cards/