Need for Public Investment In Infrastructure and Obstacles for PPP Projects

Need for Public Investment In Infrastructure and Obstacles for PPP Projects

Q. Highlight the need for public investment in infrastructure in India, and discuss the obstacles for PPP projects in the infrastructure sector?

A. Need for Public Investment

1. History Behind Rationale

Chief Economic Adviser Arvind Subramaniam: Mid Year Review of the Economy:-
He said public investment could:
• Complement
• Crowd in private investment

2. FM Endorses View

Subramaniam’s ideas were favourable to Finance Minister Arun Jaitley who said:
• Special steps to increase investment
• Spurring public spending a challenge in view of fiscal deficit; fiscal wall an obstacle
• Higher excise duties from petrol to be used for roadways and highway expansions, not CFI
• Subsidy rationalisation will occur
• GST will improve business climate
• Focus on clearing land acquisition and helping farmers get better price for land
• Committed to ease of doing business

3. Overburdened Private Investment in Infrastructure

• Over-leveraged balance sheets
• Overabundance of capacities
• Overdue of private borrowers
• Lack of corporate loans and funding for investment activities

4. Urgent Need to Boost Economic Growth

5. Need for Job Creation - infrastructure development can be a big industry

6. A Growing Population - better supporting infrastructure required

7. Welfarist Approach

• Infrastructure development is a welfare activity
• Public sector is interested in welfare and citizen convenience; has a welfarist agenda
• Oriented towards public centred approach
• Public investment to enhance public access to quality infrastructure

8. Traditional Infrastructure Not in Place; Innovations Needed

• Existing “traditional infrastructure” but basic needs not met
• Large gaps even in traditional infrastructure
• Latent demand for smart grids as well as green infrastructure can be fulfilled through public investment

9. Skill Building Infrastructure Needed

• New infrastructure that leads to high-end skills needed
• Future scope for job creation needed rather than infrastructure promoting medium skill building
• Development of human resources only possible through high-end infrastructure oriented towards skills building
• Public investment more likely to focus on this aspect

10. Public Investment To Crowd In Private Investment

• Generate large demand for capital goods; make investment in infrastructure attractive for corporates

11. Infrastructure Plus Structural Reforms

• Public investment will be reform oriented, upgrading current infrastructure
• Meet needs for deep reforms in this sector

12. Meet National Objectives

Public investment will create infrastructure for:
• Furthering development, Reviving growth
• Rebalancing demand and consumption patterns
• Facilitate back loaded demand rebalancing from public to private
• Create growth levers

B. Obstacles for PPP Model

1. Massive Gaps Between Demand and Supply Side

• Huge gap between demand and supply of infrastructure in terms of:
• Power shortages during peak demand periods
• Lack of coverage of many areas for basic infrastructural facilities and utility services
• Indian Railways infrastructure inadequate compared to nations like China, Korea
• Wagon shortages hindering industrial raw materials, minerals, coal etc
• Port container and air freight traffic at low levels compared to other Asian economies
• Weak export infrastructure in Indian ports
• Problem of congestion and inadequate bulk terminals
• Poor basic amenities especially in rural areas home to 72% of Indians

2. Legislation - Laws for land acquisition in place, but implementation a concern

3. Tariff Setting and Adjustment - Cost reflective tariffs needed

4. Lack of Good Business Climate in Many States

• Projects face bottlenecks in operational phase itself
• Private sector participation likely to help only states which are already developed (Anant and Singh, 2009) such as TN, Haryana, Gujarat.
• Poorer states, those which are inaccessible, with low connectivity or affected by left wing extremism are likely to be overlooked
• Centrally sponsored schemes and public spending needed in above areas initially till projects here become viable for private sector participation

5. Regulatory Independence Required

• Too many regulatory bodies in infrastructure sector namely:
- Telecom Regulatory Authority of India
- Central Electricity Regulatory Commission
- State Electricity Regulatory Commissions
- Tariff Authority of Major Ports
- National Highway Authority of India
- Airport Authority of India
• Risk of policy interventions due to disagreements between authorities; hampers PPP model

6. Dispute over Contractual Provision

7. Risk Sharing

• Infrastructure projects involve the following risks like that in Construction, Financial, Market, Performance, Demand, Residual value
• Time frame and investments huge; risk should be effectively allocated
• Risks should not pass on to others; can lead to unwanted litigations
• Public sector should also minimise risk to lessen burden on tax payers while maintaining a balance so private players remain in the game

8. Policies - Investor friendly policies need to be implemented

9. Transparency

• Bidding and contract awarding more transparent; yet more accountability needed
• Terms of concession should be in public interest
• Complicated policies and programmes

10. Project Appraisal

• Project should be evaluated in terms of :
- Conceptualisation
- Soundness
- Viability
- Return
• Poorly conceptualised PPPs do not reach financial closure
• These can also face litigation

11. Time and Cost Overruns

• PPP projects often face PIL/Litigations which lead to implementation time and cost overruns

12. Centre and State Tussle

• Execution of key infrastructure projects are also delayed on account of disputes over:
- Locational choice
- Cost sharing
- Political disagreement
- Policy disputes
- Inadequate cooperation

13. Government Guarantee

• Investors need government guarantee for returns
• Constant changes in procedures for government guarantees; projects stalled
• Tricky to maintain balance between encouragement for PPP and rushing headlong into pecuniary losses for instance, Dabhol power case

14. Corporate Governance

• Need for governance that provides timely and accurate disclosures
• Benchmarking corporate governance with most advanced nations vital
• Effective institutional framework needed for success of PPP model on account of :
- Complex size
- Massive investment needed
- Complicated structure
- Multiple dimensions
• Too frequent policy changes can serve as a deterrent to private investors

15. High Interest Rates

• Refusal of banks to provide loans for major infrastructure projects on account of
- High Risk, Difficulty in Execution, Uncertain Returns, Unaccounted for delays

16. Difficulty in Securing Capital

• Cost of capital too high
• Private sector still lower than public sector for investment coverage in infrastructure
• Debt capital markets not well developed
• Fall in equity capital with local sponsors

17. Public Sector Unprofitable

• Public sector needs to make profits for financing infrastructure projects
• Ease of doing business still work in progress, private sector far ahead than public for instance private sector’s role in manufacturing has risen by double since the 1990s while public sector’s role has not changed
• PSUs have massive NPAs and they are less accountable
• Corporate debt burden risen in recent times

18. Crony Capitalism Still Rampant

Characterised by:
• Partiality in legal permits and government grants
• Special tax breaks to only one firm in absence of similar benefits to competitors
• Other forms of unethical interventions

199. Low Morale of Private Investors

• Recent cancellation of power contracts in Odisha due to tepid private sector response on account of low morale

20. Clearances pose hurdles

• Case: PPP Power Projects
- Projects face problems in transmission access in the power sector-problem areas are in grids
- Use of distribution franchises would improve the situation

21. Need for Coordinated Approach

• No governing philosophy for regulators in different sectors

• No unified approach in regulation regarding:
- Powers of regulatory
- Extent of regulation
- Function of regulators
- Appointments and accountability
- Autonomy of regulators

• Numerous sectors lack independent regulators
- Roadways sector: NHAI is also the regulatory and an operator
- Indian Railways owns, operates and regulates sector all on its own

• Others which don’t do so, flourish:

• Telecom Regulatory Authority:
- Independent
- Responsible
- Managed Tariff as well as Competition Well

• Tariff Authority for Major Ports: solely responsible for fixing tariffs

• No 2 sectors alike when it comes to regulatory policies

22. Inordinate Delays due to -

- Land acquisition
- Funding shortage
- Changes in scope of project post award
- Ineffective planning and execution
- Delays in clearances: for instance Delhi-Gurgaon expressway delayed by 3 years on account of land acquisition problems
- Cost Overruns: Bandra Worli sea link estimated to cost INR 650 crore was built finally in INR 1,600 crore

23. Lack of Public Support

24. Poor Market Assessment

25. Lack of Due Diligence:

• For instance: State Highways have experienced industrial incentives which have been withdrawn leading to fall in traffic example: Vadodara Halol Toll Road leading to losses.
• Sometimes demand is also seen as lower resulting in post award changes

26. Cancellation of Projects

Example: Goa Karnataka road project

27. Lengthy Dispute Resolution Mechanism

28. Limited Institutional Capacity

• Multiple, numerous approvals
• Overextension of jurisdiction

Conclusion

• Public investment may well be the only way out for now as private companies are still aimed at de-leveraging and the business climate of the nation is steadily, but surely undergoing changes. Eventually though, PPP models should be the reality as neither sector (public nor private) can hope to meet the challenges of meeting growing infrastructure needs of the Indian population singlehandedly.
• State and Central governments also need to work in tandem for desirable modifications to the Indian growth story.

Learning from Success Stories: Lessons for Private Sector and Policy Makers

Case of telecom sector:

• Attracts huge private participation
• Sector specific policies
• Government commitment
• Increased private interest
• Greater accessibility of information
• Healthy competition
• Sustainable size of projects
• Acceptable pricing mechanisms
• Fiscal concessions
• Encouragement of developer returns