Need independent regulator to revamp PPP, says Feedback Infra

-Renegotiation

As these aspects were pointing in the wrong direction, PPP in the infra space faced a setback, he said.

He pointed out that the Kelkar committee report has effectively addressed all these issues in order to revitalize PPP.

The report had suggested a re-allocation of the risk portfolio and asked for an independent regulatory body along with a framework for renegotiation, efficiently tackling the 3 R’s mentioned by him.

If these factors are addressed by the government in the Budget or outside of it there will be a strong PPP comeback, he added.Stating his expectations from this Budget, he said that there should a 0.2 percent relaxation on the fiscal deficit target to enable more public expenditure which will boost infrastructure growth along with the economy.Below is the verbatim transcript of Vinayak Chatterjee’s interview with Anuj Singhal, Latha Venkatesh and Guest Editor Nirmal Jain, Chairman of IIFL on CNBC-TV18. Nirmal: You have been very bullish and very optimistic on flow of investment in infrastructure in last two years. When you look back, are you happy or there are some segments that have really disappointed you or some segments where you think that growth or the investment flow has been satisfactory? A: Infrastructure runs on two engines, it runs on public expenditure and it runs on private capital which is often referred to as PPP. So as all of us from the last two years of the UPA, say from 2012 onwards, PPP has virtually crashed. So, effectively it has been extremely disappointing for people because the PPP momentum had built up from 1997 to 2012 in a very robust manner. Forget the problems for a minute because we always focus on the negatives, but if you see the assets on the ground, thousands of kilometers of national highways, airports, power plant, there was a fair amount of very good work on infrastructure capital building in the country and the PPP model was powering ahead and then it crashed. Nirmal: What do you think are the reasons for this and what can government do to revive it? A: It is very simple, people will say it is complicated topic, it isn\\'t. The private capital, PPP in infrastructure rests on three ‘Rs’, risk allocation framework, regulation which is independent regulation and renegotiation. All these three ‘Rs’ were pointing in the wrong direction. So, if I might go a little more positive now, if you see the bulk of the key recommendations of the Kelkar Committee report on PPP revitalisation, he has effectively addressed these ‘Rs’. He has asked for a reallocation of the risk portfolio. While it sounds like jargon let me give you some examples. In the earlier example, NHAI was floating all the road PPP projects on BOT. Now it is floating these contracts on the hybrid annuity. The simple point is hybrid annuity at one stroke takes away the risk of toll collection and traffic from the private sector. Now, this is what is called rebalancing the risk. In the new ultra mega power plant (UMPP) bids that you will soon see, for imported coal, the price of imported coal has been made a pass through. It was not the case earlier. So, one of ‘Rs’, the risk allocation framework is being reset. The second ‘R’ is independent regulation. I am one who has firmly believed from the mid 90s that you can’t have the card before the horse. The horse is independent regulation; it creates a neutral and level playing field. Do not ask for PPP if you do not have independent regulation. Kelkar Committee has asked for independent regulation. The word independent is very important, not just having any regulator. The third ‘R’ is renegotiation. The World Bank and many other institutional bodies have clearly pointed out that more than 50 percent of PPP projects all over the world come up for renegotiation because it is impossible to predict all the black swan events that may hit both the partners of the PPP, the public and the private. So, it is necessary that in the life of the projects which are very long, 30 years, 60 years in the case of airports, something will happen which will make all parties sit around the table and renegotiate the terms of the contract. Now, this is not crony capitalism. The point that every time you recognise a black swan event which is not recognised in the original contract, it can’t be crony capitalism because public money is involved, public equity, public debt, public utilities, public service. So, the Kelkar Committee has actually asked for a framework for renegotiation. Now, if these three ‘Rs’ are addressed by the government in the Budget or outside the Budget you will see a strong PPP comeback. Nirmal: What do you think about the public investment and the budgetary allocation, what kind of increase would you like to see in this Budget and what kind of other measures you would like government to take for revival of investment in this? A: I think the first debate among economists is whether the government or Finance Minister is going to relax the fiscal discipline or not. I would place my personal bet on the fact that you are possibly going to see a 2 percent relaxation on the fiscal deficit discipline or the fiscal deficit target. He will relax it by 0.2 percent to enable a greater degree of public expenditure to kickstart not only infrastructure but the related economy. So, I will certainly place my bets on the fact that you will see a half way house, not going the full hog on saying let us abandon fiscal conservatism but a little relaxation to enable more public expenditure. The second point is public expenditure is not just done only from the Budget, public expenditure happens by creation of these new aged institutions like the National Investment and Infrastructure Fund (NIIF) which take Rs 20,000 crore from the Budget and is able to leverage funds of up to Rs 4 lakh by adding another Rs 20,000 equity and you will understand this Rs 20,000 from the government and Rs 20,000 from other sources outside the Budget, Rs 40,000 crore equity leveraged 10 times, Rs 4 lakh crore. This is typical of Budget financing. Many ministries are doing it. Gadkari is planning to escrow NHAI tolls, Suresh Prabhu is trying to get funds from World Bank and LIC. So, the whole direction setting is that public expenditure need not only happen from the consolidated fund of India. There are many options which are called off Budget funding which can aid and power public investments. This is what I am looking forward to.Nirmal: Some slippage on fiscal deficit maybe called for in an environment like this but that can result in delay in the rate cut and a higher interest rate regime continuing for a longer time. What is the impact of that on investment and its viability? A: Public sector, if in the short-term you agree with me that in the next two to three years, we are going to see a public expenditure engine that is going to power infrastructure development, both budgetary and off budgetary, I am not so sure that the interest rate reduction by 1 percent is going to matter hugely in decisions to invest or not to invest. As the PPP momentum keeps coming back and I would place a medium-term bet on it saying two to three years for PPP to come back full stride after Kelkar Committee recommendations are brought on broad, institutions are crested, etc, at that point of time the interest rate will once again become a sensitive and a crucial issue. However, in the short-term for the infrastructure sector, I don’t think the interest rate is relevant to the discussion. Nirmal: What is your view on Ujwal DISCOM Assurance Yojana (UDAY), in fact what are the challenges and how optimistic are you on the implementation of the UDAY scheme and it solving the problems of state electricity boards (SEBs)?A: I am one of the people who run a distribution business on the ground. One of our subsidiaries distributes electricity across 10,000 square kilometers in Odisha and I have seen the pressure that the UDAY scheme has put on state government to actually wake up and do something on the ground which they have not being doing for decades which is clean up the entire last mile distribution mess. So, in a positive note, the fact that UDAY mandates that AT&C losses have to come down to 15 percent by 2019 puts enormous pressure on state governments to push reforms and restructuring in the last mile distribution area which this country surely needed. So, I think it has been a good step. The other reason it has been good is also because potentially a tsunami of Rs 3 lakh crore was set to hit the banking system because of NPAs arising out of India’s 53 discoms, not all of them but the bulk of them. So, in some senses the UDAY scheme has actually mitigated that drastic eventuality that if we did nothing, if Piyush Goyal did nothing, you would have a bunch of NPAs already hitting the banking sector which is on its knees. That has been prevented by transferring the debt to state governments. Of course the state government fiscal goes up but simultaneously enormous pressure on state governments to do something about bleeding discoms. Nirmal: Just one question on the Ganga river clean up, the Ganges clean up which was supposed to generate lot of opportunity and investment, how do you see progress there? We hear very little about it. A: I have just noticed progress if you ask in the last few days because the problem with Ganga is not that we just throw plastic bags into the Ganga or stuff like that, the problem with the Ganga is that 74 towns and cities on the banks of the Ganga right from the Himalaya Terai region down to Sundarbans, 74 big towns and cities, Kanpur, Allahabad, Patna, they dump their entire untreated sewage into the Ganga. So, the problem of removing pollution in the Ganga is to attack the problem of solid waste and effluent treatment in Municipal Corporations of these cities. For the first time I have seen an ad last week calling for a major conference in Vigyan Bhavan I believe in the next few days or early March 8 or something for a hybrid annuity model to setup modern effluent treatment plants across the towns and cities that line the Ganga. The solution lies there. So, if you ask me I am now seeing the beginnings of the system, bureaucratic political system attacking the root cause rather than just saying clean the Ganga. Ganga can’t be cleaned just by hanging around the Ganga, you have got to clean the 74 towns and cities and then Ganga will be clean. So, I am beginning to see very strident action there and it will also be backed by significant budgetary allocations. (Interview transcribed by Priyanka Deshpande)