Infra investments: Getting the mojo back

What should be the policy of any new government for the infrastructure sector? Where are the gaps? And what are the reforms needed to plug those gaps?

These are deeply pressing questions today. Between 2007 and 2012, infrastructure investment rose to around 7 per cent of GDP from about 5 per cent for the previous five-year period. A key reason for this jump in infrastructure investment was the role of the private sector, whose share in infra investment rose by 15 per cent compared with the previous five-year period.

In retrospect, that growth was not sustainable because of one serious issue — the infra “boom” happened “despite” serious structural and policy deficiencies. Because of this, it was inevitable that such growth would peter out as those weaknesses — ranging from difficulties in land acquisition, skewed risk allocation, myriad regulatory clearances from multiple agencies, the dominant role that commercial banks played in infra financing, to fuel and discom drags (in the case of power) — became more and more onerous and difficult to surmount. 

Thus, after 2013, infrastructure’s investment share as percentage of GDP slipped back and remained just above 5 per cent. The private sector’s contribution to infra investments, envisaged at 48 per cent between 2013 and 2018, was nowhere close. Instead, the slack has had to be picked up by the public sector in the last few years.

Going forward, this is hardly sustainable, given the fiscal headroom now available. Both the two main national political parties have committed to big expenditures on infrastructure in the next five years, with the BJP committing Rs 1 trillion of capital investment by 2024. If such ambitious targets are to be met, as they have to be for pump-priming economic growth, the private sector has to again play a huge role. And this means, addressing those structural weaknesses that caused the private sector to withdraw in the first place.

Luckily, for any new government, there is no need to once again discover the weakness or find fresh solutions. The NDA government, in 2015, had asked Vijay Kelkar to study ways to revitalize public private partnerships in infrastructure. Many, if not all the recommendations made in his report, released in 2015, are equally relevant today.

It recommended the setting up of a PPP Project Review Committee, as well as an Infrastructure PPP Adjudicatory Tribunal (IPAT) which together would be empowered to determine whether terms of a project need to be revisited if the economic context or conditions in which projects were implemented had changed. This would address a key problem faced by many projects — the lack of a clear set of institutional processes by which contracts could be “renegotiated.” This is an especially serious problem in infrastructure where concession agreements can go up to 30 years and beyond and the context in which the agreement was signed will almost always have changed beyond recognition.

The committee made it clear that independent sector regulators were an absolute must. In sectors like railways, this is an especially serious issue given that the dominant public sector actor, the Indian Railways, is regulator, developer and policymaker rolled into one, creating serious conflicts of interest. This is also true of the roads sector. And even sectors where there are regulators, the tag of “Independent” is often questionable.

The committee sought significant amendments to the Prevention of Corruption Act 1988, so that genuine commercial errors of judgement by officials are not penalised.

The Kelkar Committee looked beyond just dispute resolution and regulatory issues. It revisited the core structure of PPPs itself. Its key recommendation in this context was the understanding that there are certain risks the private sector can bear and ones it cannot — basically, the risk-allocation matrix. The adoption of one-size-fits-all model concession agreements did not take into account project-specific and sector-specific contexts. Land acquisition for a project for instance, is not something that private sector players do in their normal course of business — such a risk should be borne by the government concerned. Bid documents need to clearly specify upfront the situations wherein renegotiations can take place transparently and fairly.

The Kelkar Committee report also acknowledged another key element of the infrastructure landscape — the fact that many projects built on an engineering, procurement and construction (EPC) basis, had actually moved past the construction stage and were now into the operations and maintenance (O&M) stage. It was critical therefore that the standard of service delivery to users and consumers be up front and transparent. The management of such O&M contracts could be bid out to private players with the experience and skills to manage such activities. This is true even when government is monetising state-owned utilities under an asset-recycling policy.

Four years on, it is clear that the Kelkar report was a practical and foundational document, and even today provides a clear roadmap on the way forward for the next few years. Certain other issues too need to be addressed — like preventing irrational bidding or allowing Swiss Challenge as a recognised format, or even pushing friendlier PPP formats like plug and play.

What is now required by a new government is the political will to implement such a PPP-revival process.

The author is chairman, Feedback Infra

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