Indian infrastructure has been reeling under a creditworthiness contagion due to an increase in stressed loans and the large sum owed by financially crippled loss-making state-owned utilities. The resultant twin balance sheet problem with stranded investments and a stalled pipeline of public-private projects (PPPs) arose due to regulatory lag and slow judicial process, exacerbated by state government interference in regulation and operations.
There were instances of discriminatory treatment in favour of state enterprises in procurement, resource allocation and the granting and pricing of open access to bottleneck infrastructure. Regulators and grantors of concessions have lacked the willingness to charge economically viable tariffs while failing to release subsidies, crippling the finances of utilities. Governance in state-controlled utilities stood compromised by being irrationally populist.
In this backdrop, the past 5 years saw some significant structural reforms for infrastructure. To recount a few –
Right steps To improve contract enforcement, the Arbitration and Conciliation Act, 1996 was amended in 2015 to enable speedy completion and timely enforcement of awards while restricting court interference. Regrettably, the 2018 Amendment seeks to limit the benefits to arbitrations and awards post 2015. Recognising the twin balance sheet problem plaguing investment flows and the accumulation of stressed and bad loans (non-performing assets – NPAs), the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted. It provided for a speedy debt resolution and bankruptcy process that recognised the time value of money (TVM) concept. Challenges abound though some early resolutions indicated a strong potential for reviving good quality operating assets at attractive values unlocking value, after cleaning the accumulated default capital/interest froth. An expert committee chaired by Dr Vijay Kelkar evaluated and proposed solutions to problems in the PPP model for infrastructure development, to submit a comprehensive report four years ago. The government has enacted some laws and made budgetary announcements to implement though most recommendations await action. The Specific Relief Act, 1963 amended on October 1, 2018 seeks to protect infrastructure projects from protracted disputes in courts and injunctions, providing for time-bound resolution by special courts empowered to use expert testimony. The Budget (July 2019) laid emphasis on certain sources to finance the ambitious infrastructure targets, including innovative instruments – Infrastructure Investment Trusts (InVITs) and Real Estate Investment Trusts (REITs). PPP has received a fillip as the declared mechanism to finance major projects in railways and logistics modernisation. Recognising potential of locked-in value in land banks and brownfield assets, it is now a declared policy to monetise them to garner funds.
The recent Economic Survey of India and the Budget contain indicators of the expected reforms to attain an ambitious government investment target of Rs100 lakh crore (around $1.5 trillion) in infrastructure.
Stressed balance sheets
Yet, budgetary resources are severely constrained, balance sheets for banks and the private sector are stressed, the risk-reward allocation in the extant PPP model has no takers, commercial viability is the major concern, and many infrastructure sectors remain outside the ambit of the PPP model. In such sectors, major reforms are necessary to induce private capital. For example, the power sector continues to be in a mess. UDAY did not work. State procurers are routinely dragging their feet on paying their dues in a timely manner including contractually agreed compensation for impact of changes in law. Some states are reneging on their contractual commitments -- cancelling signed contracts, refusing to award contracts to successful bidders and seeking to renegotiate contracts under the Damocles sword of threat of termination. Until the distribution end of the system is fixed, there can be no economically viable investment in generation and transmission.
Take another sector: coal. Why should coal remain nationalised 46 years later? India has huge coal resources and yet imports more than 200 million tonnes annually. Unless such issues are tackled frontally it is plain unrealistic to expect flows of private capital into such sectors.
It is possible to attract private investment in infra outside the PPP model. But, all private investment is profit-driven. In many sectors such investment has all but dried up because of stranded assets and large commercial losses. A portion of the Rs. 176,000 crore available from RBI besides the Rs 100,000 crore with banks including NHB can offer a way out of this logjam by creative credit enhancement and transition financing till the structured reforms kick in.
In the face of the economic slowdown and slack aggregate demand, there is an unprecedented urgency to introduce structural reforms to revive consumption, investment and exports. The government does not have the resources to fund a huge public investment drive. The private sector sees no incentive to invest – neither in infra nor elsewhere (because of excess capacity). The only way out of this economic thicket is major reforms evolved as a bi-partisan national plan, front-loaded when political capital is available.
In the past, governments with smaller electoral mandate have brought about major reforms -- in 1991, 1996-97 and 2001. Time to take a leaf out of Atal Bihari Vajpayee-led chief ministers’ conferences to develop a national consensus for structural reforms.
Amit Kapur is Joint Managing Partner of J. Sagar Associates. The views are personal.