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Where’s the money?

Business

That’s what infrastructure projects are asking as funding dries up. Niranjan Mudholkar takes a hard look at the sector’s behaviour in the wake of the ongoing global slowdown

The rising demand for infrastructure presents enormous opportunities and challenges in the form of policies, manpower, planning, execution and, of course, funding.

Funding, particularly, is interlinked with all aspects of a project. Infrastructure development is an ongoing process of any developed country. But going by the current financial doldrums the global economy is in, will any of India’s dream infrastructure projects take off?

Although the Finance Ministry and Reserve Bank of India (RBI) have taken measures to alleviate the fiscal problem, it is for the infrastructure sector that a panacea is needed.

In April this year, the Union finance minister P Chidambaram was addressing a session on infrastructure, growth and inflation. He had then (almost prophetically) disclosed the government’s plan of working at maintaining the growth momentum and controlling inflation in an age of financial turbulence.

The same session had seen Montek Singh Ahluwalia, deputy chairman, Planning Commission, praising the government’s efforts towards ensuring adequate long-term rupee debt finance for infrastructure projects. His remarks have an uncanny relevance in the context of the ongoing economic predicament.

Ahluwalia had pointed out the government’s significant agenda for infrastructure so that investments made in this sector could play a counter-cyclical role to offset any impact of an economic slowdown.

“There has been a degree of serious neglect over the last 15 to 20 years and any efforts to improve this situation would  take a good 10 years to show results. But a beginning had been made,” Ahluwalia had said.

Slow but steady

The government’s decision to raise the overseas borrowing limit through External Commercial Borrowings (ECB) by five times for infrastructure companies is quite in line with Ahluwalia’s speech six months ago.

This is likely to open up easier access to long-term debt for Indian infrastructure firms in the international market. Under the new guidelines, Indian infrastructure companies can borrow up to US$500 million (Rs260 crore) from overseas markets for domestic projects.

After a recent review last month, it has been decided that infrastructure also come to involve mining, exploration and refineries in the country, so as to expand the purpose of ECB.

The new infrastructure sector in the ECB policy will have (i) power, (ii) telecommunications, (iii) railways, (iv) roads (including bridges)(v) sea port and airport (vi) industrial parks (vii) urban infrastructure (water supply, sanitation and sewage projects) and (viii) mining, exploration and refining.

There will be no change in the other aspects of ECB policy such as eligible borrower, recognised lender, end-use of foreign currency expenditure for import of capital goods and overseas investments, average maturity period, prepayment, refinancing of existing ECB and reporting arrangements.

These amendments will come into force on the date of Notification of Regulations/directions issued by the RBI in this regard under the Foreign Exchange Management Act, 1999.

Although overseas finance will come on costlier terms, it augurs well for an industry that’s going through a liquidity crunch.

Thankfully, experts do not expect the ongoing financial crisis and the global slowdown to have a major impact on the overall infrastructure developments in the country, except may be on Special Economic Zones (SEZs). It’s good news because if India is to bridge the gap between being a developing country and coming closer to a developed nation, there’s no substitute for infrastructure development.

The government does realise the significance of developing urban infrastructure.

“The process of urbanisation, a global phenomenon that has gained momentum in the latter half of last century, is irreversible. In India only 30% of the population lives in urban areas as against the global average of 50% and so there is a greater potential for the process to continue. The government is sensitive to the need of creating urban infrastructure, reflected in the Jawaharlal Nehru National Urban Renewal Mission (JNNURM),” says Union urban development minister S. Jaipal Reddy at the Confederation of Indian Industry’s (CII) infrastructure summit, Suminfra 2008. In the last four years, the government has cleared 330 projects in 53 cities. A recent estimate put the cost for restructuring and expanding the country’s urban infrastructure at US$56 billion (Rs29,180 crore) over the next ten years. The estimate has doubled since last taken in 2005.
 

The CII has suggested that the JNNURM needs to be monitored to understand the status on projects being implemented under the scheme. The scheme needs to be expanded by leveraging the funds given by the central government by encouraging public private partnerships (PPPs) under this mission. Further, urban local bodies should be transformed into vibrant institutions that could address the local and grassroots concerns.

PPP is indeed likely to play a key role with regards to financing infrastructure projects  with the government expecting the private sector to shoulder a major part of the investment. The government envisages a colossal investment of US$1.5 trillion (Rs78 lakh crore) in the XIIth Five-year plan (the investment in the XIth Five-year plan is US$500 billion (Rs26 lakh crore).

“The huge investments offer good potential for PPPs. We are expecting at least 30% of the proposed investment to come from private sector through the PPP mode,” says the urban development minister. The minister further adds that the private sector must rise to meet this challenge. The minister has identified public transport projects as well as water supply projects as key opportunities for entrepreneurs indicating emerging areas for PPPs.

The PPP model has worked out successfully to a great extent not just on the funding front but also in terms of timely delivery. The recent PPP projects in the state of Andhra Pradesh are very good examples. The Hyderabad International Airport and the Krishnapatnam Port are two projects that were executed in very short periods through PPPs.

Encouraged by the success of the airport and sea port projects, the Andhra Pradesh government has now adopted the PPP model for its Metro Rail Transport System in Hyderabad. A consortium comprising Navabharat Ventures Limited, Maytas Infra Limited, Ital Thai Development Public Company Limited and Infrastructure Leasing and Financial Services Limited (‘NMII Consortium’) has received a Letter of Award (LoA) from government of Andhra Pradesh.

“Our thrust on PPP model would continue and more sea ports will be offered for development very soon. Besides, Andhra Pradesh provides opportunities for PPPs in the areas of drinking water, waste water treatment and infrastructure projects in pharma, agro-processing residential enclaves etc,” says Dr YS Rajasekhara Reddy, the chief minister of Andhra Pradesh at Suminfra 2008.

The Andhra example has shown that infrastructure development triggers private investment in other areas and thus contributes to economic growth and increased tax revenues for the state. “Last year, for instance, Andhra Pradesh recorded a double digit growth rate, much higher than the national average and revenues for the State government also soared,” informs the chief minister.

This is no surprise since a strong focus on infrastructure development is likely to translate in growth for agriculture, manufacturing and service industries.

Keeping in view the significance of the PPP model, the CII has suggested that a Centre for Excellence in PPP needs to be established. This centre will play a key role in developing capacity for faster conception, development and implementation of PPPs in the infrastructure space. This would indeed be a welcome move.

It has also been suggested that a special envoy be nominated to co-ordinate across the concerned ministries and state governments for getting clearances and approvals and to monitor the implementation of some key infrastructure projects. The government needs to monitor the infrastructure projects more rigorously, keep a tab on the status and bring in corrective measures in case of delays right through conception, planning, implementation and execution stages. Delay in any project translates in extra cost that can certainly be avoided.

We need to learn our lessons,  and fast. India’s glorious rural infrastructure programme, Bharat Nirman (a four year time bound plan to improve rural infrastructure) has been facing serious delays in almost every state, with a massive backlog of almost 90% in the important regions. One can only imagine the pressure this delay will exert on the financing system.

Getting funds is essential but that’s just the beginning. The need of the hour is to have better and far more efficient project structuring, management and execution. At the same time, implementation of the right policies followed by proper (and independent) economic regulation will be equally important.

As it readies itself for transition into an economic super power, India simply cannot afford delays in its infrastructure projects. Funds will definitely flow in. However, fair and constructive generation and channelisation of public as well as private finance will be a key to success.

ADB assistance encourages PPP

The Asian Development Bank (ADB) is assisting India in the development of infrastructure projects that can attract private sector investment through the modality of Public-Private Partnerships (PPPs). The Japan Special Fund, through ADB, will provide a US$2 million (Rs one crore) technical assistance grant to help government agencies in India develop a number of pilot PPP projects. These pilot projects can eventually serve as models for future projects. The sectors covered under this initiative include urban development, transport, water, health and education.

ADB’s technical assistance would include all aspects of project structuring including institutional, financial, commercial, legal, social, environmental, and technical structuring leading to a competitive bid process to attract private sector participation.

The India Infrastructure Project Development Fund (IIPDF), a facility of the Government of India, will complement ADB’s technical assistance. This is expected to have a wider impact. “The ADB-IIPDF partnership will play a crucial role in actually demonstrating the benefits of PPPs through setting forth replicable PPP models with well-balanced risk and bankability structures,” said Anouj Mehta, senior infrastructure finance specialist (PPPs) at ADB’s Indian Resident Mission.

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