Sure, there was the non-negligible Rs200billion (€2.9billion; $3.2billion) National Investment and Infrastructure Fund in this speech, that reverberated far and long after in the press, and there was also the promise of tax-free infrastructure bonds for roads, rail and irrigation projects, and the Rs1trillion allocation for “ultra-mega power projects” of 4,000MW, and that is putting aside the new finance instruments which will become available to financial institutions and banks as of April this year. But the real gems in Finance Minister Arun Jaitley’s union budget proposition before the House of Representatives this weekend may not have been in the numbers.
For those who grapple with ‘on-the-ground’ issues of contract efficiency and construction risks on a daily basis, the real news, the real cause for optimism was not in the financing mechanisms that have been deployed, which are non-the-less important and very positive steps, but in cryptic in-between-the-lines fine print of the minister’s declarations of intent, deems IDFC’s infrastructure specialist, partner, Aditya Aggarwal.
“The financing gap measures have been blown out of proportion, every past government has already tried doing this. The investment cycle in India has come to a standstill not so much because of lack of financing as because of the bad experiences in the recent past around implementation and regulatory interface. So what the budget has done this time around which will make a true difference is three things, but most paramount of all is the acknowledgement from government that there has to be a real shift in risk sharing towards the public sector,” said infrastructure financier, IDFC’s Aditya Aggarwal, infrastructure partner.
For those not yet aware of the figures involved on the financing side, these comprise, on top of the above listed measures, a Rs700billion increase to the current general infrastructure budget ($11.3billion), a Rs250billion allocation to the Rural Infrastructure Development Fund created last year with only half that amount.
The main cause for Aggarwal’s palpable enthusiasm is enclosed in three short sentences, which only came fourth in the Minister’s string of ostentatious measures, and after three sets of numbers which were intended to bring people to the edge of their seats within minutes of taking the floor, and these are:
“The PPP mode of infrastructure development has to be revisited, and revitalised.
The major issue involved is rebalancing of risk.
In infrastructure projects, the sovereign will have to bear a major part of the risk without, of course, absorbing it entirely.”
According to the financier and infrastructure management specialist, the four or five past years have shown the industry that there are certain risks that the private sector is very well equipped to take on as it brings out efficiency in operations, such as the financing and revenue risks, but that it simply cannot take on most risks associated with the construction phase of these projects, as the government is better placed to obtain guarantees like rights of way, environmental approvals, and land acquisition.
The announcement of a “plug-and-play” set up for five new Ultra Mega Power Projects, each of 4000 MWs, implying that all clearances and linkages would be in place before the project is awarded by a “transparent auction system”, follows the same idea that, before the private sector is invited to come into play and disburse its first dollar, on certain types of projects, the government would have had to ensure that land is available, environmental approvals are all cleared etc.
And indeed, the government deems this measure will unlock investments up to ` 1 lakh crore (1 trillion rupees), by changing investor perspective on construction risk.
Further good news lies in that application of such plug-and-play set-ups to other infrastructure projects such as roads, ports, rail lines, airports etc. is under consideration.
Second in Aggarwal’s list of causes for optimism, is the promise of a revision of the dispute resolution system.
“[…] Disputes arising in public contracts take long to resolve, and the process is very costly too. My government proposes to introduce a Public Contracts (Resolution of Disputes) Bill to streamline the institutional arrangements for resolution of such disputes,” said Jaitley.
For Aggarwal, this is another crucial point as in recent past he has seen many projects give rise to disputes between the government and concessionaires which have led to economic diminishment of the owners, and hence diminishment of their projects’ incremental development capacity.
“There is also a need, I feel, to tackle the lack of common approach and philosophy in the regulatory arrangements prevailing even within the different sectors of infrastructure. Our Government, therefore, also proposes to introduce a regulatory reform law that will bring about a cogency of approach across various sectors of infrastructure,” declared Jaitley last Saturday.
Less red tape, more alignment across different ministries having key roles in the delivery of infrastructure projects.
When asked whether with regards to the land acquisition bill which has raised a lot of controversy recently among members of the second chamber of parliament, with allegations that it is in favour of businesses and at the detriment of farmers’ interests, there is a risk it may not pass through their scrutiny, Aggarwal replies confidently and without any hesitations that he very much doubts there will be opposition.
“I’m quite hopeful that within the next thirty days the government will come out with a solution even if the second chamber of the parliament shows reticence. The very fact that the land acquisition bill was actually introduced by the previous government and that the current government is pursuing the same goal but implement it in a slightly more practical way, is encouraging, even if some compromises have to be made,” he says.
And when confronted with the reminder that these measures may take a long time to be implemented, he retorts with the impressive judicial turnaround of a practice that had been ongoing for decades in the Supreme Court decision last September to de-allocate all coal blocks that had been allocated since 1993 in disregard of the transparency and consistency imperatives promoted by the Coal Mines (Nationalization) Act 1973 and to be safeguarded by the Central government, only authority entitled to allocate the mining blocks. The said judgment gives the 40 mines operating illegally a transition time of six months to make alternative arrangements for sustaining production before the cancellation becomes effective on the ground, overturning a practice which has been perpetuated for over 20 years.
A third cause for optimism is the new bankruptcy bill proposing a revision of the existing Sick Companies Act (SICA) in order to provide banks with speedier procedures before the courts and when attempting to recover their dues from defaulters, as currently these proceedings sometimes take a decade or more to conclude.
“If we were to have a world class bankruptcy code that would also bring a lot of flexibility in how the concessions are awarded, more transparency, and people would be more sensible in terms of leveraging the private sector. So far it’s been largely ‘if you win a project, you take bank debt with minimal skin in the game’, as has been the case in the sectors of power, roads or ports. As a result of tangible downsides to one's own capital, participation by private sector in various infrastructure auctions will become more thought through and more sustainable over the long term, rather than being driven by near term imperatives” claims Aggarwal.
“I think there is a lot of resolve, and I think the government is not flying thirty thousand feet, very distant from issues that people are grappling with, both in terms of banks and developers. But everyone is aware these issues are quite complex as they are subject not only to commercial implications but also political imperatives which they have to be sensitive to,” he concludes.