Rakesh Mohan, Executive Director, IMF said power, telecom and ports were much more suitable for Public Private Partnership (PPP) projects. He said the government had to be clear on which areas of infrastructure needed public investment.
He said railways, road and irrigation were the priority areas for infrastructure financing.
Sinha said one of the key challenges was the reluctance of contractors to take up tenders in remote areas.
He said there was a good mix of capital flowing into the sector and that MoUs had been signed with UK, Abu Dhabi and Russia.
Rakesh Mohan, Executive Director, IMF said power, telecom and ports were much more suitable for Public Private Partnership (PPP) projects. He said the government had to be clear on which areas of infrastructure needed public investment. He said railways, roads and urban infrastructure were difficult areas for PPP.
Vitor Gaspar, Director, Fiscal Affairs Department, IMF said the biggest challenge for PPP was excess savings across the world, but very little investment in the private sector. He said that for PPP to take off, the contract complexity needed to be tackled well. He and Mohan were of the view that public investment in India acted as a catalyst for private investment.
Below are the excerpts of the panel discussion.
Q: The Indian government at least is moving towards not just dispute resolution but also moving public utilities bill which will hopefully address a lot of the issues that we have spoken about. Let me ask you this in the context of the fiscal constraints that we are faced with at this point in time, you had to make some tough choices in the quest to be able to achieve your fiscal consolidation roadmap. Governments across the world are dealing with debt burden but in India at this point in time perhaps you are also suffering from another problem which is broken private sector balance sheets. So you have a government that has to walk the path of fiscal consolidation but you have also got a private sector that is grappling with broken private balance sheets. How do you then try and push ahead, how do you then try and move forward? What is the role that the government can then play?
Sinha: That is where we have to go from theory to reality. Let me tell you about reality of some of these projects that I see in front of me all the time. In my own constituency of Hazaribagh, we have one stretch of national highway from Ranchi to Hazaribagh. It used to take us 4-5 hours to go those 120 kilometres. We are doing it now in an hour and ten minutes.
The amount of commerce, the amount of investment that is happening because we have a world class highway in that stretch is phenomenal but then we don't have a ring road around Hazaribagh itself because of contract problems. Then we have another stretch which goes from Hazaribagh to Barhi which is where GT Road comes in. We have tendered that twice to national highways, the first contractor got into a lot of trouble and had to be kicked out. The second time it has been tendered there is no contractor who has come there. There is concern about left wing extremism and the coal mafia and all kinds of real world issues that you have to deal with. So, there is tremendous amount of development risk, there is tremendous amount of capacity constraints that you have in actually getting these projects done.
So, while you can set the theory and say let's put this framework in place and so on, what you really have to do as a government is to try and solve these real world problems, on the ground issues. We are trying to come up with practical approaches to doing that. So, one of the very good approaches that is being worked on by the road authorities is to actually give the contract on a EPC basis to a developer, have them do it on a fixed price basis with some cost escalations. Once that is done, traffic volumes have stabilised, we know what the cash flow from that project is then try and bid it out to somebody who will then come in and run it and toll it and do all those other things. So, we have had to deal with that.
The other thing that we are finding is that on many of these tenders particularly in the remote areas or areas which are racked with instability is that we don't have contractors that are willing to take that on. So, we have had to make sure that our government contracting agencies like the NBCC and so on are sufficiently strengthened, have the resources to actually execute some of these contracts.
So, on a day to day basis when people say where is the road or where is the railway line that you said you had to put in place, we have to find ways of shifting the risk from the private sector to the government and having the government also step in and execute some of these contracts.
It is not so much the policy but the day to day on the ground problem solving that you do that actually moves things forward far quicker.
Q: Is this promise of foreign capital into the infrastructure segment also a bit exaggerated at this point of time. Whether it is railway minister or road minister or it is you, you have been talking about pension funds coming in for the longest time, you have been talking about sovereign wealth funds coming in for the longest time but we actually haven't started to see that money. Even as far as specific projects are concerned it is more G to G than private sector FDI if I could call it that. So, is this promise of private FDI into the infrastructure sector a tad exaggerated?
Sinha: No, I don't think it is exaggerated. There is a mix of capital coming in. There is a glut of savings around the world and to be able to harness that savings we have to create the right vehicles with the appropriate risk sharing agreements as well as the guarantee funds as the minister of finance from Indonesia is saying. So, if we can create the right kind of vehicles for example with the National Investment and Infrastructure fund (NIIF) we are in fact creating a vehicle that will be able to get long term foreign money into Indian infrastructure.
Q: Are we any closer to appointing a CEO for NIIF?
Sinha: This is government's the go through due process. So, we have in fact received 82 very high quality CVs for that and we are short listing that. We will shortlist it down to about 8 or 10 people who will then be called for interviews. We hope to have that whole process done within a few weeks but we have got very high quality people coming in and applying and of course we have been working on a two or three funds in parallel as well. In fact it is showing very good results with respect to the MoUs we have signed we have signed an MoU with the folks from Abu Dhabi. We have signed an MoU with the Russians as well as we are in discussions with our friends from United Kingdom as well. So, this is a very good example of the kind of foreign long term capital that you can bring in to an appropriate structure.
Of course you know as well that a variety of private sector players whether it is Kotak, Blackstone, Carlyle have in fact invested in infrastructure in the past and are continuing to invest in infrastructure assets as well. It is very important that as Rakesh was saying earlier that they understand which are the areas in which they can invest where there is some security of cash flows and there is policy stability and which are the areas where it is actually better to come in with either public sector bonds or some kind of public financing and where it is executed by a government agency. So, that kind of discrimination in terms of really understanding the investment opportunity and what is the right financing vehicle is key and that is why we need markets to function because markets are able to discriminate in that fashion.
Audience Q: I was advisor to Rakesh but I ran the infrastructure division in the World Bank and in Indonesia all through the 90s. We peddled two things. One was promoting PPP from 1992 to 1997, fortunately the crisis put a stop to it. Second was the thing that I feel has been totally neglected. The issue in developing countries, specially India and I can say Indonesia is not necessarily investment in new capacity. Our existing use and return from infrastructure investment is very low. That is what we did in Indonesia. The biggest contribution that World Bank made was in the urban program, the transport program was to ensure that the use of roads whether it was district roads or highways was dramatically increased through both operations maintenance and other reasons. Nobody seems to be talking. I have been working on that committee for several years, in India nobody seems to be doing it. I can tell you that our infrastructure capacity, utilisation whether it is railways or roads can be dramatically improved if we just did it right. Why are we not talking about that type of expenditure. Why are we only talking about banks and investment?
Sinha: I am not sure I would agree with the gentleman's comments because if you look at what we have been doing in the railways and certainly in the roads as well we are looking to places where we can dramatically expand capacity. So, for instance when you look at what the railways is doing with doubling and tripling lines it really is around taking the trunk routes and expanding capacity there without having to build entirely new lines as well. So, there is in fact a prioritisation of projects. So, we look at where can we get the most bang for the buck whether it is in railways and roads and so on and in doing so, obviously we recognise that our investments are going to generate higher return and the multiplier effect will be high as well. So, we are in fact taking that kind of approach of prioritisation.
Audience Q: It has been iterated in the discussion that India has not had the best of track records when it comes to PPPs. We have seen private players walk away from PPP agreements due to unviability and other reasons. So, government as a stake holder, what are the steps which the government should take to avoid this moral hazard?
Sinha: We have taken many steps. In the Budget we have outlined several things that we are doing to strengthen PPPs starting with how PPPs themselves are assessed in terms of their risks, the public utilities bill, the dispute resolution bill, the hybrid annuity models that we are doing in roads for example. Thinking very creatively about risk sharing. So, there is a whole vast set of improvements and changes that we are bringing up.
We have 1300 PPP projects in India which is more than anywhere else in the world. So, we have very rich laboratory to learn from and we are doing our best to learn from all of that.
That being said the ground reality is the execution issues are quite difficult and there is no silver bullet or no one thing that is going to solve all the complexities that we are seeing out there. So, we just have to take a multi-dimensional approach, work on all the different areas - financing, dispute resolution, better contract management, better risk sharing, more types of equity vehicles. So, all of those different things to be able to make headway on this.
Audience Q: When you talked about the innovative financing and you were talking about Budget financing through NHAI, over the next few years if you are planning to raise bonds through these agencies does the question of viability of repayment etc come into the picture? How do you think NHAI or IRFC, are they doing enough to handle that kind of financing?
Sinha: We have been very careful about amount of bonds that we allow these financing agencies to raise in the market place. We have been very careful there. We have also been very careful in the amount of tax free bonds that we put out every year because that results in crowding out as well. So, watch those limits quite carefully. However in some ways the challenge is that we are not developing our bond markets and our financing markets sufficiently because there is a significant amount of savings potential that can be further tapped by these kinds of financing vehicles.
Every time we do an infrastructure bond for instance it is widely oversubscribed. So, we think that there is significant financing potential as well. We don't want to commit too much too fast because we want to make sure that we can service the amount of debt that we are putting in the marketplace and we want to look at the overall liability that governments across all of public sector is also undertaking. However I don't think we have got to any financing limits yet.
For entire discussion watch the accompanying videos....