Infrastructure – NIP National Infrastructure Pipeline and/or Nationally Important Projects?

We have had the experience of building quite good and substantial Infrastructure over the last few decades across roads, ports, power, airports ,telecom etc. Like all other nations, developed and developing, we have had a setback on account of covid. We have an additional issue, that of providing for our 1.4 Bn people. This requires, not only regaining lost ground but also  to grow at a much faster tick than hithertofore.

 A USD 5 Tr economy for India is not an ambition but an imperative. With a population expected to reach 1.52 Bn in 2030, we shall be the most populous nation globally. The median age of our population would be 31 and the working population , between the age of 15-64, almost 1.3 Bn or 68%. USD 5 Tr by 2025 may now look as quite a stretch requiring us to grow at a CAGR of almost 18% over the next four years. If we need to catch up with China whose GDP on a PPP basis is more than 6 times larger, then our GDP would need to grow to USD 24 Bn by 2030 which appears a tall order. Even if we are to double our per capita income to USD 5000 by 2030, we would need to grow at a CAGR of 13% to reach a GDP of USD7.6 Tr. The point being made is the enormity of the task before us and the relative imperative.

Specifically in a country like India where we are loathe to borrowing and do not have the luxury of a strong and stable currency or growing tax revenues, essentially a capital scarce country, where there is also the need for taking care of a vast majority of underprivileged and aged without any social security system, we have limited headroom  in spending our way to revive and regain the lost ground in our economy. Simultaneously, while we may have embarked on a program for improving our ranking in ease of doing business, we are still some distance and time away from that. As such we may see some interest for external infusion of capital, given our huge demand potential, but this would be limited to relatively less risky sectors. Here too, each large player would be waiting for the other to take the first step, and in the meantime we shall be,mostly, seeing some fund infusion for buying existing assets at steep discounts, ,ensuring higher returns at lesser risks.

We have made several mistakes in the past, not all of them on account of our economic compulsions. We have achieved a lot, yet insufficient, and could have achieved a lot more. Huge cost and time overruns and the sub optimal returns on public sector investments in the past can only be afforded by profligate nations with an endless supply of wealth. Where did we err? If one were to single out one principal reason, it would be the lack of systemic thinking or system based approach. We have been chasing targets and not chasing outcomes and are happy if we are able to achieve a fraction of the intended – classic trickle down approach! Unfortunately, this too has also not been sustainable and appears quite minimal when you factor in the growing needs of an aspirational population. And, mind you, this is across all sectors – economic and social. The fact that only 33 of the 162 oxygen plants, planned almost a year earlier, were ready to meet the requirements in this Covid crisis should open our eyes to the fact that a job is not done till its outcome is achieved. Essentially, our delivery systems are inefficient and ineffective. The devil lies in the details and shortcuts to announce and meet targets have not had the desired outcomes in the past.

So what should we now  do differently ? Firstly, let’s not rush things up and repent at leisure or pay for it later. It’s time now to actually regroup and create the capacities, laying down the foundations for sustainable and strong systems, building capabilities – technical,  legal, and economic, making it attractive for capital – both external and internal, to be deployed in our various sectors. Remember, we shall be competing with the developed world for external capital, be it USA which has announced a USD 2.3 Tr program or Europe whose requirement is also expected to be more than Euro 1 Tr.  Additionally, the same set of investors would be most comfortable with lesser returns in their risk proven and more certain home currencies. Also, remember that our aspirational savers will also be looking to higher, stable, and predictable returns for their investments, and would not shy away from seeking these outside the country too.

Investors are quite willing to take quantifiable risks and peg their return expectations accordingly. What any investor is not comfortable with is unpredictability? Unfortunately, all our projects, in the past have suffered from various degrees of uncertainties and quite a few of them are absolutely unpredictable. These includes retroactive taxations to cancellations of approvals, quotas, allocations, clearances, awards arbitration, and protracted litigation.

The options are therefore quite limited. We need to invest and encourage investment.  People will live longer, there would be increased urbanisation and for improving the quality of life and kickstarting investments and job opportunities for our youth in the manufacturing and services sectors of our economy, we need to invest substantially in our infrastructure. Our commitment to meet sustainable development goals would require us to invest almost USD 2.5 Tr in our economy and at best we may be able to garner only USD 1 Tr internally leading  to a deficit of USD 1.5 by 2030. 

A couple of things are clear. We have an imperative to invest in infrastructure. We do not have the money. Outsiders may not be willing to take the risk. It all boils down to reducing the risk and offering appropriate returns relative to the same, competitively.

Given our situation, it is clear that we should now create demonstrable and replicable investments in the infrastructure sector, addressing the risk return matrix concerns, which would encourage private capital, internal and external, to participate in our huge  funding requirements.

This would require building independent and credible institutions and creating the enabling regulatory and legal framework to mitigate uncertainties and unpredictabilities.

First and foremost, we may need bipartisanship, politically, to avoid unnecessary and costly  oneupmanship contestations. India requires infrastructure and we should have an agreement that such projects are important nationally. There has to be a consensus notwithstanding which political party is in power, that these projects will be fast tracked. 

Infrastructure suffers from both political and economic misalignments and compulsions. Issues of equality and inequality, affordability and viability need to be addressed upfront and not revisited time and again. In the given circumstances, we need to identify 10 or 20 such large Nationally Important Projects, with consensus across political and federal divides and enact them as such. The enactment would facilitate resolution of a large number of residual issues, alignment, land acquisition and environmental clearances to begin with, at the least and to settle the structure viz annuity, grant, toll, etc. upfront. When Dwight Eisenhower had reinitiated the Federal HIghways Program in the USA, in 1955-56, incidentally, there was no opposition from the States, Counties or even the Municipalities, in fact, the program was welcomed albeit with varying degrees of enthusiasm. This upfront consensus, in our hugely democratic setup, where we have more views than facts, is most important.

Project  design and planning has been a  bane for all project delays, completion, and unviability. We need to build on our capabilities and capacities. Let’s acknowledge the experiences of others who have gone thru the process and learn from them. Let’s not be circumscribed by unnecessary rules which constrain us from comprising quality and opting for the lowest bidder, mainly on account of our imperfect bidding specifications. If  need be, we should take the help of multilateral agencies to finance and build the capacities for the same. We have suffered for far too long on account of overestimation of demand and underestimation of costs, repeatedly. These capabilities, of course, in the time available with us, cannot be built across multiple ministries and departments and therefore, such Nationally Important Projects, should be developed, with transparent bidding processes, through one single implementing and sufficiently empowered department reporting for review and guidance to one single body. More importantly, this empowered institution  should also have the capacity and capability to factor in possible future scenarios. We are still not sure of our future energy requirements, and then with Covid and digitalisation, travel would be curtailed and more virtual Interactions could be the norm,going forward. How would these impact the investment in the transportation sector, airports, airlines etc.? Remember, we have committed to sustainable development goals and investments in unsustainable projects would only vitiate and delay the fulfilment of these commitments.

Most importantly, our project execution, has been most shoddy across sectors. Time and cost overruns have been the norm. Projects have been delayed in some cases for more than 10 years, 262 out of the 758 projects for which such a data was available had been delayed between 1 to 261 months and the cost overrun for 1682 projects monitored  was more than Rs 4.00 lac crores. Part of the blame for it lies in our faulty planning but our execution skills also leave much to be desired. While we specify quality specs and also revise it periodically, the inconsistency and non uniformity in our projects leave a lot of scope for standardisation and constant updating. We have newer materials / equipment / technology available. Somewhere in our planning and execution we need to incorporate these changes if they lead to better quality, lesser costs and time. Across the three vectors of time, cost and quality, we should have clear and measurable specifications, independently verifiable and certifiable, to avoid subsequent disputes and claims. We need to build such independent institutions and, in the meantime, take the assistance of our IITs to monitor the execution, costs for which would also need to be factored in the project costs.

We have had limited players to execute large projects. We also needed to encourage more participants in the EPC sector. However, for most new entrants, capital was a constraint. Hence we increased the number of packages, for instance in road alignments, and awarded the contracts to multiple players. All very well intentioned. These newer players, barring a few, however, lacked the wherewithal to sustain uncertainties which came to be normally associated with these projects.  Delayed and disputed payments extended their working capital woes leading to shortcuts being adopted by them which led again to quality and time issues etc. As such, most of our highways suffered from inconsistent quality, even the material used in different stretches were not uniform across the entire alignment. In this uneven equation, obviously the authority had an upper hand, and perhaps, this could be one of the reasons, why smaller packets were parcelled out. We should follow the Autobahn experience and award contracts to players/consortiums with expertise and capital to handle such large projects and require them to maintain the stretches awarded to them for 25 to 30 years linking their payments not only to the portion of the toll revenues but also availability and quality of the alignments being given to them as bonuses. Instead of handling multiples smaller EPC companies directly, let these be handled by the larger companies/consortiums who in any case will have much more at stake and will ensure time, cost, and quality compliances even if they sub contract the work to the smaller EPC companies. 

We have suffered delays and NPAs in the Infrastructure sector in the past, and Banks have not only borne the brunt of these losses but burnt themselves badly in the process to dissuade any further risk appetite. Part of the reasons, apart from those mentioned in the preceding paragraphs, has been on account of a fear to take any decisions on the part of the implementing authority. Some of the projects may have been awarded opaquely but in the process even projects awarded transparently suffered as all decisions were subject to open ended review and investigations. Thankfully, these issues may have since been resolved but not institutionally. A change of guards, in the future, may trigger another round of fearful inaction. When we are showcasing Nationally Important Projects to encourage external and internal capital investments, it is necessary to have independent institutions to resolve disputes and settle claims within defined time lines.  Perhaps, there is need to restrict the number of sittings for the arbitrators to not more than three and also to reward them handsomely, though on a fixed basis. We have seen arbitration’s continuing endlessly and then awards being subjected to legal contestations before being settled eventually for a fraction of the padded claims.  Dispute resolutions have taken up to 7 years. We have seen international funds buying these claims at steep discounts to pursue recovery through legal processes. This needs to change else it will only increase the costs of the projects (such delays would in any case be factored for calculating returns) and the associated uncertainties would certainly not encourage investments for these and subsequent projects.

Which brings me to the next imperative of funding these projects. Since 2008, the country has seen an investment of approx Rs 80 lac cr in the infrastructure sectors, a major portion of which has been in the power sector, the highways and the telecom sectors. We have met with some success in each of these sectors. The highways network has certainly been expanded and improved. In the energy sector, we now have excess capacity and the average PLF has reduced from 77.5% in 2010 to almost 60% in 2020. The merchant tariff has also reduced substantially during this period from Rs 5.20 per unit to less than Rs 2.50 in 2020. Our tele density has increased manifold facilitating the digitalisation and formalisation of our economy. Much has been achieved but much more needs to be achieved.

In the process, however, we have had a few setbacks too. Our banking sector has been seriously impacted  and their NPAs in this sector had reached almost 30% of their aggregate book of almost Rs 10.00 lac cr  by 2015-16, which affected some of the other sectors like steel and cement also quite adversely in the absence of demand leading to a surge in the NPA levels of most banks. This has required capital infusion in this sector by the Government. A few of their loan assets have been successfully resolved thru IBC, some continue to languish.

Lack of experience in funding infrastructure projects as also their asset liability (ALM) mismatch have been ascribed as reasons for the stress in this sector. Most banks did not have the capacity to distinguish between corporate finance and project finance and relied on the influence of the promoters, as hithertofore, to sort out the gaps be it for fuel supply or power purchase in energy projects or for balance land acquisition or building rail over bridges (ROBs) in road projects. etc.

In these circumstances, expecting an enthusiastic participation in the funding of infrastructure projects without a calibration of the risk allocation matrix by the same banks may not be so realistic. At the same time, funding these projects through fiscal expansion alone may also not be possible and would crowd out the private sector investments going forward. 

Perhaps, the correct way to tackle this would be to separate the pre commissioning from the post commissioning risks. The pre-commissioning risks would have to be mitigated in their entirety, till the entire ecosystem stabilises. It is expected that in the implementation of the 20 odd Nationally Important Projects, the required institutions, the legal and regulatory frameworks, and the attendant systems would have been initiated and stabilised encouraging realignment of the risk reward, progressively. For the first twenty Nationally important Projects, however, it would only be a short term, 36 to 38 months, funding risks for the banks and given the surplus liquidity in the system and the lack of alternate investment opportunities in the country, funding 75 to 80% of the project requirements, will not be an issue, specially if the project design, planning,  and monitoring is attended to with greater professionalism.

Meantime, the pre commissioning risks would have to be underwritten by the Govt and post commissioning and stabilisation of revenues, say 36 to 48 months post project commencement, and once they are eligible to be rated, the debt could be refinanced thru issuance of bonds/Invits, etc till a momentum is generated encouraging part of the pre commissioning risks also to be allocated to the private player.The intervening period would also be helpful in putting in place appropriate institutions, systems and procedures, regulations and rules for the development of a bond market in the country. In a capital scarce country, we need to increase the velocity of the available capital and therefore capital recycling is most imperative. There is no reason for our bond markets to be a minuscule portion of our GDP with only 1% of the 4200 odd listed companies having AAA ratings having ease of access to this market. As the economy grows, in the absence of a  formal social security system, we may need to provide for investments in alternative assets and  the creation of an active bond market has to be viewed in that context.

The first steps in this direction have already been taken by the Government of India in announcing the National Infrastructure Pipeline (NIP) of bankable and implementable projects involving an aggregate outlay of USD 111 Bn, 40% of which comprise projects under implementation, 30% are still in conceptualisation, 20% under development and for the remaining 10% details are yet not known. We should, in my view, concentrate on the projects under conceptualisation and development and choose demonstrable quick wins for identifying our first step of Nationally Important Projects or to lessen the confusion, lets call them Nationally Important Projects, and build an ecosystem of  sustainable and credible independent institutions with the requisite legal and regulatory framework in the process to encourage further investments in the country.

Let’s regroup, reaffirm and recoup lost ground for our economy .