In an exclusive conversation with Moneycontrol, officials at a World Bank arm talked about how India’s infrastructure has gained strength over the years, how to pump in more investments and why the multilateral agency continues to be bullish on Indian economy
India has been garnering attention worldwide for its headstrong approach towards reforms and stable economy. While the Narendra Modi government drew flak during the past few months for a downward trend in growth, International sentiment about India continues to remain positive.
One minister, however, has continuously garnered appreciation for his “decisive attitude” and fast-pace development. Union minister for road transport and highways, Nitin Gadkari, has, to his credit, an overwhelming record of “speedy project completion, promoting innovative ideas and quick decision making”.
While the union minister has put on track scores of stalled projects, lot of them continue to face hindrance in light of “strained land acquisitions” and dried up private investments.
In an exclusive conversation with Moneycontrol, Multilateral Investment Guarantee Agency (MIGA) – a World Bank (WB) arm promoting foreign direct investment -- representatives talked about how India’s infrastructure has gained strength over the years, how to pump in more investments and why it continues to be bullish on Indian economy. Here are the highlights of the conversation.
Mix of Public and Private Funds
Public-Private Partnership (PPP) has “crashed” with private players shying away from investing due to “uncertainty in returns” and “huge risk involved”.
“For private investments to be coming in, a project has to have a decent cash flow so that the project itself can be repaid for debt on time,” said Keiko Honda, executive vice chairman-chief executive officer, MIGA.
She suggested that fund for public infrastructure projects could be received from two sources: the ultimate beneficiary and government.
“Cash flow should come from two sources. First source is the ultimate beneficiary. For example, if it’s a subway project (then) people using the subway (should) pay some (for using it). And if the government, for some reason, decides to put the price of those tickets lower than the cost, then the government should also give little bit of subsidy to the project,” she said.
Apart from fund raising, appropriate risk allocation can also boost investment. They said that risk between government and private parties must be divided as per the suitability and their ability to bear it.
“Projects are investable when the risk allocation of project is appropriately done,” said Sarvesh Suri, director, operations, MIGA.
Honda and Suri believed that infrastructural projects needs funds from both, government as well as private parties to keep them running. They said that while efforts from the government’s side is visible to bring in private sector, small steps like appropriate risk allocation and better contractual terms could expand the investment.
He said that while government must bear risk related to land acquisition, private players must bear market risk.
“There are certain risks which the government is better suited to bear, such as land acquisition. And then there are certain risks which the private sector is expected to bear, like mkt risk and in case of highways, traffic risk,” said Suri.
“As long as the risk allocation is done appropriately and the contracting arrangements between the public and private sector are done in a transparent manner with both the parties (agreeing to) bear the risk, then the overall risk reduces for the investors”.
Suri said that once the contracts are “very well reached”, investors can have long term sustainability of the project.
“(Government must) make sure that the financing that the investors put into the projects are appropriately structured, there is less currency mismatch, the equity-debt profile of the projects is structured well, the traffic projections are done appropriately. As long as these are done, I think highway projects are win-win for government and private sector investors,” said Suri.
Be cautious with Insurance money
The WB arm said raising funds from insurance companies should be done with thorough homework as these companies could be “less experienced”.
“Infrastructure investment is typically a project finance,” said Honda adding “Insurance companies, some of them, (have) started to enter into the field. But they don’t necessarily, every single one of them, have the experience”.
“I am not saying it is bad, it’s good… but we can’t rely on them 100 percent,” she added
Union minister for roads had recently mooted the idea of raising funds through retirees and provident fund.
“The government is considering raising Rs 10 lakh crore from retirees and Provident Fund (PF) beneficiaries to fund large infrastructure projects facing shortage of bank credit,” Gadkari had told a national daily.
‘World Bank would like to invest’
Honda and Suri said that government has been working hard to attract private players to invest money in to the sector. They said that WB applauds the work done by India and would like to invest in the country.
“I think India has improved infrastructure a lot, which is wonderful,” said Honda adding, “… I am hearing from Indian government that they see some room for improvement, where we (MIGA) would like to support”.
“What we have seen globally is that, which is also the situation in India, some of the contacting terms are being relooked at. Some of the highway projects which had got stuck, government is looking at having new investors come in into those... We are seeing from the government’s side, there is effort to bring in private sector into the space,” said Suri.
They appreciated the models of financing adopted by the Indian government while suggesting another model that could be adopted.
“Indian government along with other G-20 (group 20) countries really need to leverage more on private investors where we would like to help,” she said.
Honda said that Indian government could adopt another model where the respective state government, Centre, private parties (including commercial banks) and WB would collectively finance to stabilise the projects.
“The existing models definitely work. The other that I can showcase is Public-Private-Branded-finance where the state government, World Bank, Centre and Private party fund the project,” she said.
Suri said, MIGA, under WB, could also provide insurance cover to private parties to safeguard their interest and promote private investing.
“…For Indian market, one of the options is a breach of contract insurance which WB would offer to investors. In case the government doesn’t perform its obligation, under the contract arrangement, then MIGA can come and cover that risk for investment,” said Suri.
‘India will grow a lot faster than global averages’
Honda and Suri were optimistic about the Indian growth story. They said that India’s slowdown is temporary and that the country was faring well.
“In medium to long term, everybody is forecasting that India will grow a lot faster than global averages,” said Honda adding, “compared to other countries, India’s economic growth is significantly higher than global average… You think your number for this month or last month is low, but it’s actually double (than global average) and people need to understand that you are improving”.
Suri said that while the “direction of reform” is clear, Indian government needs to focus now on “inclusion” in the society.
“Indian government must focus on inclusion. We have seen that growth is great and it has lifted a lot of people out of poverty but it has also created a bit of rift between people who are rich and not that rich,” he said.“Indian government is actually quite positive and also encouraging as they bringing private investment to bring more jobs… Of course there is execution challenge all the time but the strategy is very-very right,” said Honda.