India: on the right track

IDFC’s Aditya Aggarwal explains why tangible reforms to ease project development – on top of efforts to unlock financing – will help private investment flow towards Indian infrastructure.

There was the non-negligible Rs200billion (€2.9billion; $3.2billion) National Investment and Infrastructure Fund, and the promise of tax-free infrastructure bonds for roads, rail and irrigation projects. There was also the Rs1trillion allocation for “Ultra Mega Power Projects” of 4 gigawatts (GW), as well as new financing instruments that will become available to institutions and banks as of April this year.

But the real gems in Finance Minister Arun Jaitley’s first full-year budget, unveiled before India’s House of Representatives this week-end, 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, says Aditya Aggarwal, managing director of Indian fund manager IDFC project equity, the real cause for optimism lied in the fine print of the minister’s declarations of intent.

“The investment cycle in India has come to a standstill not so much because of a 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 […] the acknowledgement from government that there has to be a real shift in risk sharing towards the public sector.”

On top of the above listed measures, fresh financing going to infrastructure include a Rs700billion increase to the current general infrastructure budget ($11.3billion) as well as a Rs250billion allocation to the Rural Infrastructure Development Fund, which was created last year with only half that amount.

But the main cause for Aggarwal’s enthusiasm lies essentially in three short sentences – which only came fourth in the Minister’s string of measures and after several sets of attention-grabbing numbers:

“The PPP mode of infrastructure development has to be revisited, and revitalised”; “The major issue involved is rebalancing of risk”; and “In infrastructure projects, the sovereign will have to bear a major part of the risk without, of course, absorbing it entirely.”

According to Aggarwal, there are certain risks the private sector is very well equipped to take on, such as the financing and revenue risks, as part of its effort to improve efficiency of operations at the project level. But there are also some it simply shouldn’t assume. In particular, he says, the government is better placed to obtain the necessary guarantees like rights of way, environmental approvals, and land right, to mitigate construction risk.

The announcement of a “plug-and-play” set up for five large-scale power projects, each of a generating capacity of 4 gigawatts (GW), follows the same idea: before the private sector is invited to disburse its first dollar, the government has to ensure that land is available, environmental approvals are all cleared and all other permits are granted.

The government believes this measure will unlock investments of up 1 trillion rupees by changing investor sentiment towards India’s business climate. Plans are under deliberation to apply this plug-and-play set-up to other infrastructure projects such as roads, ports, rail lines and airports.

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 Bill to streamline the institutional arrangements for resolution of such disputes,” said Jaitley before the Lokh Sabah.

This is crucial, Aggarwal reckons, in a context where disputes between the government and concessionaires sometimes have a tangible economic impact on a project’s owners. Less red tape, more alignment across different ministries and a comprehensive regulatory reform bringing coherence to a fragmented arsenal of legal regimes are bound to lessen such risks.

“There is also a need 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.

When asked whether the controversial land acquisition bill risks not passing through parliament, Aggarwal replies confidently that he very much doubts there will be opposition.

“I’m quite hopeful that within the next 30 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.

True, legislation takes time to be enacted, so such measures may not be implemented overnight. But Aggarwal points to the recent case of captive coal mining, on which the Supreme Court ruled last year.

The Court decided in 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 without Central government’s stamp, only authority entitled to umpire on allocations. The move reversed a practice which had been perpetuated for more than 20 years. The 40 mines operating illegally in light of the ruling were given six months to make alternative arrangements for sustaining production before cancellation became effective.

A third cause for optimism is the new bankruptcy bill proposing a revision of the existing Sick Companies Act (SICA). The aim is to provide banks with speedier procedures before the courts when attempting to recover their dues from defaulters. Currently these proceedings sometimes take a decade or more to conclude.

“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.

“There is a lot of resolve, and the government is not flying at thirty thousand feet, being very distant from issues that banks and developers are grappling with. 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.”